Lenders Increasingly Facing Forensic Loan Audits

Posted on February 4, 2010. Filed under: Foreclosure Defense, Loan Modification, Mortgage Audit, Mortgage Fraud, Mortgage Law, Predatory Lending, Refinance, RESPA, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , |

For the past couple of years, it has become a fairly common practice for lenders and servicers to employ forensic loan audits on pools of mortgages, with the goal of uncovering patterns of noncompliance with federal and local regulations, the presence of fraud and/or the testing of high fee violations. Unfortunately, for these same lenders, the practice of forensic loan auditing has slipped over to the consumer side of the market and is now being used against the lenders themselves.

Homeowners, many of whom are facing foreclosures, have begun hiring forensic loan auditors to review their loan documents, and if violations are found, they are hiring attorneys to bring their case against the lenders. What do they hope to gain? At the very least, the homeowners are trying to forestall a foreclosure, push for a loan modification or, at the end of continuum, try to get the loan rescinded.

“The forensic loan review as we know it today came about two years ago, when the mortgage market started to melt down,” explains Jeffrey Taylor, co-founder and managing director for Orlando-based Digital Risk LLC. “The idea of the forensic review was to look for a breach of representations and warranties so the investor or servicer could put the loan back to the originator. This is when you had all the big banks reviewing nonperforming assets to see if there was any fraud material or breaches so as to put them back to the entity that sold the loan.”

Originally, and still today, most forensic loan reviews are done by institutions on nonconforming assets. Starting in about 2008, the concept morphed into a kind of consumer protection program. Forensic loan auditing companies have since sprouted up like weeds, and many advisors are now advocating the program as a best practice and the first step before bringing a lawsuit against the lender to get a “bad” mortgage rescinded or force a loan modification.

“Every constituent along the way is looking for their own get-out-of-jail-free card,” observes Frank Pallotta, a principal with Loan Value Group LLC of Rumson, N.J. “I’ve been seeing this for the last two years. It started with banks that bought loans from small correspondents, and when those loans were going down, they would look for anything in the loan documentss to put it back to the person they bought the loan from. Fannie and Freddie are doing it, too. Now you have borrowers going to the banks to see if they have all their documents in place; they want their own get-out-of-jail-free card.”


In some regards, lenders should be worried, as a swarm of potential lawsuits could fly in their direction. These might not always be hefty lawsuits, considering they mostly represent individual loan amounts, but they are annoying and the fees to defend the institution from these efforts can mount up very quickly. In addition, if homeowners are successful in the bids to rescind a loan, the lender has to pay back all closing costs and finance charges.
The industry should also be concerned because experts in mortgage loan rescissions say it is very hard for a bank to mount an effective defense against people who can prove that their loan contained violations.

“It is extremely difficult for lenders to defend against a lawsuit when they face a bona fide rescission claim,” says Seth Leventhal, an attorney with Fafinski Mark & Johnson PA in Eden Prairie, Minn., who often works with banks.

Additionally, in this age of securitization, many banks don’t own the loans they originated, but, says Leventhal, this is not a defense. “If they don’t own the loan anymore, they are going to have to get in touch with the servicer who does,” he says.

On the other hand, the homeowner’s cost to arrange a loan audit and hire an attorney can be prohibitive, so there is some balance.
Jon Maddux, principal and founder of Carlsbad, Calif.-based You Walk Away LLC, started one of the first companies offering forensic home loan audits for homeowners back in January 2008.

“We found that about 80% of the loans we audited had some type of violation,” he says. “And we thought it was going to be a great new tactic to help the distressed homeowner.”

However, it wasn’t. Homeowners would take the audit findings to their lender or servicer, only to find themselves pretty much as ignored as they were before they made the investment in the audit.

“We found lenders weren’t really reacting to an audit,” says Maddux, adding that lenders and servicers would only react to lawsuits based on audit information.

An audit by itself is not some magical way to make everything go away; it’s just the beginning, adds Dean Mostofi, the founder of National Loan Audits in Rockville, Md.

“Borrowers who contact lenders with an audit don’t get too far,” he says. “It’s in their best interest to go in with an attorney.”

The problem is, Mostofi states, that the first point of contact is the loss mitigation department, and “those people typically have no idea what you are talking about. To get past them sometimes requires lawsuits.”

Paper chase

The forensic loan audit lets the homeowner know if the closing documents contain any violations of the Truth In Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA), or if there was any kind of fraud or misrepresentation.

“We go through the important documents – in particular, the applications – TILA disclosure, Department of Housing and Urban Development forms, the note, etc., making sure that everything was disclosed properly to the borrower and that borrowers knew what they were getting into,” says Mostofi. “We also look at the borrower’s income to see if everything was properly disclosed. If the lender didn’t care about the borrower’s income, then we look further for other signs that it might be a predatory loan.”

According to August Blass, CEO and president of Walnut Creek, Calif.-based National Loan Auditors, a forensic loan audit is a thorough risk assessment audit performed by professionals who have industry and legal qualifications to review loan documents and portfolios for potential compliance or underwriting violations, and provide an informative, accurate loan auditing report detailing errors or misrepresentations.

Some elements of a forensic loan audit, says Blass, should include: a compliance analysis report based on data from the actual file; post-closing underwriting review and analysis; and summary of applicable statutes, prevailing case law and action steps that the attorney or loss mitigation group may chose to act upon.

TILA’s statute of limitations extends back three years, so most people who end up on their lender’s doorsteps are people who financed or refinanced during the boom period of 2005 through early 2007. If serious violations are discovered, the borrower can move to have the mortgage rescinded.

Not everyone appreciates the efforts of the forensic loan auditors working the homeowner side of the business.

“It began with a bunch of entrepreneurial, ex-mortgage brokers who learned how to game the system the first time, then started offering services to consumers to teach them the game,” Digital Risk’s Taylor says.

A year ago, most people didn’t know what a forensic audit was, but “now almost everyone knows,” says Mostofi. “The problem that we are having is that the banks are coming back and telling borrowers that everyone who is offering some kind of service to help them is a crook because they are charging a fee.”

Indeed, fees for a forensic audit often fall into the $2,000 to $5,000 range – but a hefty sum for someone facing foreclosure.
This could all be a desperate attempt to get a loan rescinded, but in regard to loan rescissions, there’s bad news and good news.

“Yes, it’s tough for lenders to defend themselves,” says James Thompson, an attorney in the Chicago office of Jenner & Block LLP who represents banks and finance companies. But, he adds, there is an exception: the plaintiff in this kind of lawsuit has to essentially buy back the loan, which means the plaintive (borrower) has to get new financing.

“The borrower has to be able to repay the amount he borrowed,” explains Thompson. “If the property is underwater, as many of these are, the borrower can’t go out and get a replacement mortgage that would give him the entire amount he would need to repay the lender.”

In some court cases, as part of the initial lawsuit, the plaintiff needs to prove that he or she is capable of getting a refinancing. What happens if the court grants a rescission but the consumer can’t find financing? Oddly, no one knows, because court cases haven’t gotten that far.

“Every one of these cases gets resolved,” says Thompson. “The borrowers are struggling to get the attention of the overworked loan servicers, who are scrambling with as many loan modifications and workouts they can come up with. You can get to the head of the line sometimes if you show up with an attorney and forensic loan examination, saying, ‘Here is a TILA violation; we want to rescind.'”

“I don’t see very many of these litigating,” National Loan Auditors’ Blass concurs. “It brings the settlement offer to the table a little faster. It’s not as if the lender would not have brought an offer to the table without the audit. It just seems to fast-track the process a little bit more.”

Forensic loan audits expose mistakes and unscrupulous lending practices that will assist the borrower in negotiation efforts, Blass adds. “Federal-, state- or county-specific lending violations and the legal guidelines for remedy, can pave the way to successful and expedient modification.”

Perhaps, the bigger nightmare of all is not the lawsuits brought by individual homeowners, but the big law firms finding all these individuals and bringing them together for a class action suit.

“The plaintiff bar is as active as ever. They have these big dragnets, trying to capture all the misdeeds of mortgage bankers, going after them with class-action lawsuits,” says David Lykken, president of Mortgage Banking Solutions in Austin, Texas.

This just aggravates the situation, adds Lykken. “I have not seen one class-action lawsuit bring about any positive change. Punitive damages just drain the cash-out of already cash-strapped companies.”

Steve Bergsman is a freelance writer based in Mesa, Ariz., and author of “After The Fall: Opportunities & Strategies for Real Estate Investing in the Coming Decade,” published by John Wiley & Sons.

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TILA – What You Don’t Know Can Hurt You

Posted on February 19, 2009. Filed under: Case Law, Foreclosure Defense, Loan Modification, Mortgage Audit, Mortgage Fraud, Mortgage Law, Predatory Lending, RESPA, right to rescind, Truth in Lending Act | Tags: , , , , , , |

Pamela D. Simmons

Ten years ago, I represented the borrower in a case that stemmed from a title company’s failure to secure a loan on all of the borrower’s land. (The title company had listed only one of several parcels of land and the lender was unable to non-judicially foreclose on the property as a result.) The complaint had already been filed, and listed among the many causes of action was one entitled “Violation of Reg Z.” One day an attorney for one of the defendants asked me: “What is this Reg Z? I’ve never even heard of it.” So began my love affair with the Federal Truth in Lending Act.

Most attorneys know the Federal Truth in Lending Act (TILA) as the group of laws requiring certain disclosures about the cost of borrowing money. You have seen the disclosures every time you have received a new credit card. Many readers may also be aware that consumers who are borrowing against their homes have a three-day right to cancel the transaction—another feature of TILA. However, few real estate attorneys know that TILA’s right to cancel can last for as long as three years after the loan is made. Moreover, under certain circumstances, TILA can govern individual lenders making a first loan secured by residential property. And even fewer practitioners know that the cost of rescission to the lender is all of the interest, fees, costs, and any other charges not directly for the benefit of the borrower.

I have personally seen the loss to the lender exceed $280,000. In this article I will discuss the history of TILA, describe rescission (its most important provision), and offer some tips on avoiding its pitfalls and attorney malpractice.

TILA – What You Don’t Know Can Hurt You

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Boulware v. Crossland Mortgage Corp. (RESPA §8)

Posted on January 25, 2009. Filed under: Case Law, Mortgage Law, RESPA | Tags: , , , , |

TYNA L. BOULWARE, on behalf of

herself and all others similarly



v.No. 01-2318




Amicus Curiae.


Appeal from the United States District Court
for the District of Maryland, at Greenbelt.
Frederic N. Smalkin, Chief District Judge.

Argued: April 4, 2002

Decided: May 22, 2002

Before WILKINSON, Chief Judge, and WILLIAMS and
TRAXLER, Circuit Judges.


Affirmed by published opinion. Chief Judge Wilkinson wrote the

opinion, in which Judge Williams and Judge Traxler joined.



ARGUED: James Evan Felman, KYNES, MARKMAN & FEL-

MAN, P.A., Tampa, Florida, for Appellant. Christine N. Kohl, Appel-

late Staff, Civil Division, UNITED STATES DEPARTMENT OF

JUSTICE, Washington, D.C., for Amicus Curiae. Michael Schatzow,

VENABLE, BAETJER & HOWARD, L.L.P., Baltimore, Maryland,

for Appellee. ON BRIEF: Katherine Earle Yanes, KYNES, MARK-

MAN & FELMAN, P.A., Tampa, Florida; Andrew N. Friedman,

Gary E. Mason, Victoria S. Nugent, COHEN, MILSTEIN, HAUS-

FELD & TOLL, Washington, D.C.; Lee S. Shalov, SHALOV,

STONE & BONNER, New York, New York; Peter D. Fastow, Steven

B. Preller, TROESE, FASTOW & PRELLER, L.L.C., Annapolis,

Maryland, for Appellant. Robert D. McCallum, Jr., Assistant Attorney

General, Thomas M. DiBiagio, United States Attorney, Michel Jay

Singer, Appellate Staff, Civil Division, UNITED STATES DEPART-

MENT OF JUSTICE, Washington, D.C.; Richard A. Hauser, General

Counsel, Peter S. Race, Assistant General Counsel, Joan L. Kayagil,


DEVELOPMENT, Washington, D.C., for Amicus Curiae. Mark D.

Maneche, VENABLE, BAETJER & HOWARD, L.L.P., Baltimore,

Maryland, for Appellee.



WILKINSON, Chief Judge:

Plaintiff Tyna Boulware claims that § 8(b) of the Real Estate Set-

tlement Procedures Act (“RESPA“) is a broad price control statute

prohibiting any overcharge for real estate settlement services. Boul-

ware seeks to certify a class to challenge Crossland Mortgage Corpo-

ration’s alleged overcharge for credit reports. The district court found

that Boulware did not allege any split or kickback of the overcharge

from Crossland to a third party. It thus dismissed Boulware’s com-

plaint and denied class certification. We agree with the Seventh Cir-

cuit that § 8(b) is a prohibition on kickbacks rather than a broad price

control provision. See Echevarria v. Chi. Title & Trust Co., 256 F.3d

623 (7th Cir. 2001); Durr v. Intercounty Title Co., 14 F.3d 1183 (7th

Cir. 1994). We therefore affirm the judgment.



In November 2000, Tyna Boulware, a Maryland consumer,

obtained a federally related home mortgage loan from Crossland

Mortgage Corporation.1 In connection with this loan, Crossland pur-

chased Boulware’s credit report from a third-party credit reporting

agency. On July 18, 2001, Boulware initiated this action, alleging that

Crossland violated RESPA § 8(b), 12 U.S.C. § 2607(b) (2000), by

charging her $65 for the credit report when it cost Crossland $15 or

less to obtain it. Boulware claimed that Crossland kept the $50 over-

charge for itself without performing additional services. She did not

allege that the credit reporting agency or any other third party

received payment from Crossland beyond that owed to it for services

actually performed.2

Boulware sought civil remedies under RESPA, including treble

damages, attorneys’ fees, and costs. See 12 U.S.C. § 2607(d). In addi-

tion, she sought to certify a class of all parties who had received simi-

lar mortgages from Crossland in the past twelve months, and who had

paid Crossland for a credit report in connection with their loans.

On October 2, 2001, the district court dismissed Boulware’s com-

plaint and denied class certification. Following two Seventh Circuit

decisions, the district court held that the “plain words” of RESPA

§ 8(b) “support the proposition that the statute is only violated where

there is a charge for a real estate settlement service that is split or

kicked back, not simply where there has been an overcharge.” See

Echevarria, 256 F.3d 623; Durr, 14 F.3d 1183. The district court rec-

ognized that the Department of Housing and Urban Development was

authorized to promulgate regulations and interpretations of RESPA,

see 12 U.S.C. § 2617, and intimated that HUD’s view of the statute

was consistent with Boulware’s. However, the court refused to adopt

a construction of the statute that went beyond § 8(b)’s plain meaning,


1 On January 2, 2001, Crossland merged into Wells Fargo Home Mort-

gage, Inc. However, we follow the practice of the district court and par-

ties by referring to the defendant as Crossland.

2 Because the district court dismissed Boulware’s complaint under Fed.

R. Civ. P. 12(b)(6), we accept her allegations as true. See, e.g., Mayes

v. Rapoport, 198 F.3d 457, 460 (4th Cir. 1999).


“whether condoned by administrative agency utterances or not.” Boul-

ware appeals.



RESPA § 8(b) provides:

No person shall give and no person shall accept any por-

tion, split, or percentage of any charge made or received for

the rendering of a real estate settlement service in connec-

tion with a transaction involving a federally related mort-

gage loan other than for services actually performed.

12 U.S.C. § 2607(b). The plain language of § 8(b) makes clear that it

does not apply to every overcharge for a real estate settlement service

and that § 8(b) is not a broad price-control provision. Therefore,

§ 8(b) only prohibits overcharges when a “portion” or “percentage” of

the overcharge is kicked back to or “split” with a third party. Compen-

sating a third party for services actually performed, without giving the

third party a “portion, split, or percentage” of the overcharge, does not

violate § 8(b). By using the language “portion, split, or percentage,”

Congress was clearly aiming at a sharing arrangement rather than a

unilateral overcharge.3

Here, Crossland collected an overcharge and kept it as a “windfall”

for itself. See Durr, 14 F.3d at 1187. We therefore reject Boulware’s

argument that § 8(b) applies, and conclude that the district court cor-

rectly dismissed her complaint under Rule 12(b)(6).

This very case demonstrates the problems with concluding other-

wise. As previously noted, Boulware does not allege that Crossland’s

purported overcharge was kicked back to or split with the credit


3 An overcharge or unearned fee must be present in order for § 8(b) to

apply because the charge must be one “other than for services actually

performed.” However, the presence of an overcharge alone, without any

portion of the overcharge being kicked back to or split with a third party,

is not sufficient to fall within the purview of § 8(b).


reporting agency or any other third party. Outside of a kickback or

fee-splitting situation, there is no way to make sense of the statutory

directive that “[n]o person shall give and no person shall accept” any

portion of an unearned fee. In fact, under Boulware’s view, Boulware

herself would have to be the giver contemplated by the statute in

order for § 8(b) to apply.

It would be irrational to conclude that Congress intended consum-

ers to be potentially liable under RESPA for paying unearned fees. In

addition to civil penalties, RESPA § 8(d) establishes criminal sanc-

tions for violations, including up to one year in prison. And it makes

both the giver and the acceptor jointly and severally liable. See 12

U.S.C. § 2607(d)(1)-(2). It would be perverse to find that Congress

intended to impose such liability on consumers – the very group it

was trying to protect in enacting RESPA. See 12 U.S.C. § 2601.

Accordingly, the giver in § 8(b) must be some party in the settlement

process besides the borrower herself.

Boulware, joined by HUD as amicus curiae, contended at oral

argument that the government would not prosecute consumers. How-

ever, it is unclear whether the government would be bound by HUD’s

statement that it is “unlikely to direct any enforcement actions against

consumers for the payment of unearned fees.” RESPA Statement of

Policy 2001-1, 66 Fed. Reg. 53,052, 53,059 n.6 (October 18, 2001).

Moreover, it is insufficient for HUD to proclaim that the statute will

not be enforced against consumers. We cannot interpret § 8(b) so as

to compel the absurd conclusion that Congress drafted it to apply to

consumers in the first place. See, e.g., United States v. Wilson, 503

U.S. 329, 334 (1992) (citing United States v. Turkette, 452 U.S. 576,

580 (1981)).

Boulware cannot give a satisfactory explanation of what the phrase

“[n]o person shall give and no person shall accept” means under her

interpretation of the statute. She attempts to avoid the problem posed

by the prospect of applying § 8(b) to consumers by asserting that a

giver and acceptor do not both have to be present for the statute to

apply. Alternatively she claims that § 8(b) only applies if the giver

knows that services were not rendered. But Boulware’s arguments are

unpersuasive because these qualifications find no expression in the

plain language of the statute. The use of the conjunctive “and” indi-


cates that Congress was clearly aiming at an exchange or transaction,

not a unilateral act.

Our interpretation of § 8(b) makes sense of all of the statute’s terms

and leaves a wide variety of conduct prohibited. For example, the pro-

vision would clearly apply to situations where a mortgage lender

overcharges a consumer and splits the overcharge with a mortgage

service provider, such as a credit reporting agency. In such a case,

both the lender/giver and the credit-reporting agency/acceptor would

violate § 8(b). In addition, the statute would apply if a mortgage ser-

vice provider overcharged for its services and gave a mortgage lender

a portion of the unearned fee.

In holding that § 8(b) requires fee-splitting or a kickback, our result

is consistent with the only other federal appellate court that has

addressed the question of whether § 8(b) requires unearned fees to

pass from one settlement service provider to another. See Echevarria,

256 F.3d 623; Durr, 14 F.3d 1183; Mercado v. Calumet Fed. Sav. &

Loan Ass’n, 763 F.2d 269 (7th Cir. 1985). The Seventh Circuit has

held on three occasions that § 8(b) does not apply to all overcharges

for real estate settlement services. Instead, the court explained that

§ 8(b) “is an anti-kickback statute” which “requires at least two par-

ties to share fees.” Mercado, 763 F.2d at 270. And the court stressed

that “under RESPA’s express terms,” the broad protection of the stat-

ute “extends only over transactions where the defendant gave or

received any portion, split, or percentage of any charge to a third

party.” Durr, 14 F.3d at 1187 (internal quotation omitted). Further-

more, in both Echevarria and Durr, the Seventh Circuit confronted

facts almost identical to those in the case at bar and found no viola-

tion of § 8(b) in the absence of any allegation of a kickback to a third

party. Echevarria, 256 F.3d at 626-27; Durr, 14 F.3d at 1186-87.

Boulware contends that our interpretation of § 8(b) is incorrect

because it makes § 8(a) and § 8(b) both proscribe the same conduct.

However, a comparison of these two subsections does not affect our

conclusion. Section 8(a) states:

No person shall give and no person shall accept any fee,

kickback, or thing of value pursuant to any agreement or

understanding, oral or otherwise, that business incident to or


a part of a real estate settlement service involving a federally

related mortgage loan shall be referred to any person.

12 U.S.C. § 2607(a). It is apparent that § 8(a) is not rendered mean-

ingless by our interpretation of § 8(b). The provisions both seek to

eliminate kickbacks or referral fees paid to a third party, but they do

so by prohibiting different actions. Section 8(a) prohibits the payment

of formal kickbacks or fees for the referral of business and does not

require an overcharge to a consumer. On the other hand, § 8(b) pro-

hibits “splitting fees with anyone for anything other than services

actually performed.” Willis v. Quality Mortgage USA, Inc., 5 F. Supp.

2d 1306, 1308 (M.D. Ala. 1998) (noting the differences between

§ 8(a) and (b)). Section 8(b) therefore requires an overcharge and pro-

hibits conduct where money is moving in the same way as a kickback

or referral fee even though there is no explicit referral agreement.


In a further attempt to salvage her claim, Boulware urges us to pro-

ceed past the language of § 8(b) to HUD’s broader interpretation of

the provision. See 24 C.F.R. § 3500.14(c) (2001) (“Regulation X”); 66

Fed. Reg. at 53,057-59. Deference might well be due Regulation X

or HUD’s statement of policy if § 8(b) were ambiguous. See Chevron

U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43

(1984). But the text of the statute controls in this case. Id.; see also,

e.g., Hillman v. IRS, 263 F.3d 338, 342 (4th Cir. 2001) (citing Cami-

netti v. United States, 242 U.S. 470, 485 (1917)). Although it is true

that “RESPA is a broad statute, directed against many things that

increase the cost of real estate transactions,” it is equally true that “the

objective of a statute is not a warrant to disregard the terms of the

statute.” Mercado, 763 F.2d at 271.


Despite the textual directive of § 8(b), Boulware argues that Con-

gress’ intent in enacting § 8(b) was far broader than our reading of it,

and that her claim should accordingly not be dismissed. She maintains

that Congress intended to forbid all overcharges and markups by

mortgage lenders for every real estate settlement service they might

provide. Boulware is in effect asking us to subject all settlement ser-


vices, including, inter alia, title searches, title examinations, title

insurance, attorneys’ services, property surveys, credit reports, pest

inspections, real estate agents’ and brokers’ services, and loan pro-

cessing, to broad price regulation. In fact, under her interpretation of

the statute, HUD or the federal courts could determine what settle-

ment service fees are reasonable in the first instance, without an alle-

gation that the fees were even marked up. See 66 Fed. Reg. at 53,059

(stating that under HUD’s interpretation of § 8(b), which mirrors

Boulware’s, “[a] single service provider also may be liable under

§ 8(b) when it charges a fee that exceeds the reasonable value of

goods, facilities, or services provided”). Further, Boulware would

provide both a private right of action and potential criminal penalties

to enforce the price controls she envisions § 8(b) creating. See 12

U.S.C. § 2607(d).

If Congress had intended § 8(b) to sweep as broadly as Boulware

proposes, it could easily have written § 8(b) to state that “there shall

be no markups or overcharges for real estate settlement services.” Or

Congress could have explained that “a mortgage lender shall only

charge the consumer what is paid to a third party for a real estate set-

tlement service.” But Congress chose not to draft the statute that way.

And we have no authority to recast it. If we were to read § 8(b) in the

way Boulware suggests, every settlement fee would be the subject of

potential litigation and discovery, leading perhaps to increased costs

for real estate settlement services in the long run. Though the regula-

tion of charging practices would not be beyond the purview of Con-

gress, this was not Congress’ intent in enacting RESPA.

Instead, the view that § 8(b) only applies when there is a kickback

or split with a third party is actually the view that is consistent with

RESPA’s stated purposes. In enacting RESPA, Congress proclaimed

that “significant reforms in the real estate settlement process” were

needed to protect consumers “from unnecessarily high settlement

charges caused by certain abusive practices that ha [d] developed in

some areas of the country.” 12 U.S.C. § 2601(a). Congress went on

to explain that one of the purposes of RESPA was “to effect certain

changes in the settlement process,” which would result “in the elimi-

nation of kickbacks or referral fees that tend to increase unnecessarily

the costs of certain settlement services.” 12 U.S.C. § 2601(b)(2).


Nothing in § 2601 indicates that RESPA § 8 was intended to elimi-

nate all settlement service overcharges. Instead, its purpose was “to

prohibit all kickback and referral fee arrangements whereby any pay-

ment is made or thing of value furnished for the referral of real estate

settlement business.” Mercado, 763 F.2d at 270-71 (quoting Senate

report). And the provision was designed to prohibit “a person that ren-

ders a settlement service from giving or rebating any portion of the

charge to any other person except in return for services actually per-

formed.” Id. at 271 (quoting Senate report); see also Echevarria, 256

F.3d at 627; Durr, 14 F.3d at 1186; Duggan v. Indep. Mortgage

Corp., 670 F. Supp. 652, 654 (E.D. Va. 1987). Therefore, if we sub-

jected a settlement service provider to RESPA liability for keeping an

overcharge without requiring an allegation that the unearned fee was

shared with a third party, “we would radically, and wrongly, expand

the class of cases to which RESPA § 8(b) applies.” Echevarria, 256

F.3d at 627.4


RESPA was meant to address certain practices, not enact broad

price controls. Congress chose to leave markups and the price of real

estate settlement services to the free market by “consider[ing] and

explicitly reject[ing] a system of price control for fees.” Mercado, 763

F.2d at 271 (citing Senate report). Instead, Congress “directed § 8

against a particular kind of abuse that it believed interfered with the

operation of free markets – the splitting and kicking back of fees to

parties who did nothing in return for the portions they received.” Id.

Accordingly, we decline to extend § 8(b) beyond its text, and we

affirm the judgment.



4 In deciding whether to certify a class, a district court has “broad dis-

cretion” within the framework of Fed. R. Civ. P. 23. Lienhart v. Dryvit

Sys., Inc., 255 F.3d 138, 146 (4th Cir. 2001). Because Boulware failed

to state a claim as the purported named plaintiff, and because all other

similarly situated plaintiffs would likewise fail to state a claim, the dis-

trict court necessarily acted within its discretion in denying class certifi-


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Darling v. Indymac Bank (TILA Audit)

Posted on January 19, 2009. Filed under: Case Law, Mortgage Audit, Mortgage Law, Predatory Lending, RESPA, right to rescind, Truth in Lending Act, Yield Spread Premium | Tags: , , , , , , , , , , , , , , , , , , , , , |

Darling v. Indymac Bank, F.S.B., No. 06-123-B-W (D.Me. 12/03/2007)

[2] Civ. No. 06-123-B-W
[3] 2007.DME.0000264
[4] December 3, 2007
[6] The opinion of the court was delivered by: Margaret J. Kravchuk U.S. Magistrate Judge
[8] The plaintiffs, Joseph and Roxanne Darling, have designated TJ Henderson, a consumer advocate and self-styled “auditor” of consumer mortgage loans, to offer expert testimony to the effect that, among other things, the Darlings “are unsophisticated borrowers [who] had no idea what was taking place” with a loan issued by defendant IndyMac Bank and brokered by co-defendant Western Thrift & Loan, that the loan in question was fraudulent and predatory due to the way in which the defendants made, or failed to make, required disclosures in various closing documents and other communications, and that these circumstances give rise to “a continuing right to rescind the loan transaction.” (Aff. of TJ Henderson ¶¶ 1-3, Doc. No. 18-2.) In addition to these opinions, Mr. Henderson would testify that the defendants’ conduct violated a number of state and federal laws. (Id. ¶ 3.) The defendants ask the Court to exclude any such testimony on the grounds that the opinions impermissibly intrude upon the Court’s duty to instruct on the law, the designated expert is not qualified to testify about the standard of care that applies to mortgage lenders and brokers, the opinions impermissibly and unhelpfully characterize the plaintiffs’ mental capacity, and the designation fails to fully comply with Rule 26(a)(2)(B). (Mot. to Exclude, Doc. No. 18.) The motion is GRANTED IN PART.
[9] Background
[10] The Darlings assert that they have filed their lawsuit under the Truth in Lending Act, 15 U.S.C. §§ 1601 et seq.*fn1 (“TILA”) in order to rescind a consumer credit transaction, void the IndyMac Bank’s security interest in their home, and recover statutory damages, fees and costs based on alleged violations of the TILA and Regulation Z, 12 C.F.R. § 226. They have joined the mortgage loan broker Western Thrift & Loan as an additional defendant to pursue claims of unfair and deceptive business practices, breach of fiduciary duty, fraud, and negligent misrepresentation arising from statements allegedly made by a Western agent*fn2 in order to induce a closing on the mortgage loan. (Am. Compl., Doc. No. 3.)
[11] Discovery in this case has essentially proceeded without incident. There have been two limited extensions to date and discovery remains open until December 31 for the limited purpose of conducting certain depositions. On June 12, 2007, the Darlings timely designated TJ Henderson as an expert witness. According to Mr. Henderson’s resume, he appears to be someone who has made a career out of consumer advocacy related to the TILA. He does not appear to have a law degree, though his resume includes as relevant experience the “practice of law” in certain county courts in the State of Washington. Mr. Henderson also reports years of unspecified education in consumer protection law and recent professional experience as an auditor (presumably unlicensed as no licenses are disclosed) who has worked to combat predatory lending on behalf of companies named Co3m, Premier Mortgage Auditing, Consumer Guardian, and Advocates for Justice. Mr. Henderson identifies his current position as president for Consumer Guardian and also as someone who provides paralegal services, including mortgage auditing services. Business tools at his disposal include West Law and a consumer library made available by the National Consumer Law Center. (See TJ Henderson Resume, Doc. No. 18-2 at 4-5.)
[12] The Darlings also attached to their disclosure an affidavit prepared by TJ Henderson in support of their claims. (TJ Henderson Aff, Doc. No. 18-2 at 6-10.) The affidavit recites a number of legal conclusions or characterizations concerning the Darlings and their mortgage transaction. These include the following statements:
[13] 1. That the Darlings “are unsophisticated borrowers” (id. ¶ 2);
[14] 2. That, “based upon my audit and study of the [closing] documents . . ., the Darlings had no idea what was taking place with the loan or that they could reasonably determine what the loan cost or finance charge would consist of,” which is described as an “unreasonable tactic” (id.);
[15] 3. That the HUD-1 statement issued by IndyMac was “deceiving” because of the way it characterized a yield spread premium paid to Western as a “Broker Comp.” to be paid from the Darlings funds at closing and because of the location on the form where this reference was made (id.);
[16] 4. That a second group of disclosure forms were issued without including a new notice of the Darlings’ right to cancel (id.);
[17] 5. That these and other irregularities or misstatements give rise to “a continuing right to rescind the loan transaction” (id.);
[18] 6. That due to his training and experience TJ Henderson was able to perform a “proper audit” which disclosed the following additional violations of law:
[19] a. failure to make all disclosures required by the TILA, including a failure to disclose the existence of yield spread premium (YSP) or to explain its significance and a failure to make disclosures required by 12 C.F.R. §§ 226.17, 226.18 and 226.19;
[20] b. an overstatement of the loan’s annual percentage rate, referencing 12 C.F.R. § 226.22;
[21] c. an understatement of the loan’s finance charge, referencing 12 C.F.R. § 226.18(d)(1)(i);
[22] d. failure to inform the Darlings where to find the appropriate contract documents and clause for information about non-payment, default, and the lender’s right to accelerate payments, referencing 12 C.F.R. § 226.18(p); and
[23] e. failure to provide the required HUD booklet on loans, referencing 12 U.S.C. § 2406 et seq.
[24] (id. ¶ 3);
[25] 7. That, in his opinion, “this loan is fraudulent and consists of unjust enrichment and is predatory in nature (id. ¶ 3(i)); and, finally;
[26] 8. That these violations expose the lender to severe penalties, which he then characterizes (id. ¶ 5).
[27] Discussion
[28] Western challenges TJ Henderson’s proposed testimony on Rule 26 and Rule 702 grounds. (Mot. to Exclude, Doc. No. 18.) I address the Civil Rules issue first and then turn to the evidentiary challenge.
[29] A. Rule 26 of the Federal Rules of Evidence
[30] Western argues that Mr. Henderson’s testimony should be excluded because it “consists almost entirely of unsupported legal conclusions that merely advocate the positions of his retainers,” without articulating any industry standards or other reasons in support of his conclusions. (Mot. to Exclude at 12.) Western also notes that the Darlings failed to disclose the expert compensation they are providing to Mr. Henderson. (Id.) Rule 26 and the Court’s scheduling order require that an expert disclosure set forth a “complete statement of all opinions . . . and the basis and reasons therefor.” Fed. R. Civ. P. 26(a)(2)(B); Scheduling Order at 2, Doc. No. 13. Both the Rule and the scheduling order also call for a disclosure of, among other things, the compensation to be paid to the expert for his or her work and testimony.
[31] In regard to Mr. Henderson’s compensation, the Darlings report that they made no disclosure because they had engaged and paid Mr. Henderson to conduct an audit of their mortgage loan prior to commencing this litigation, that no fee has been requested for the Henderson affidavit that comprises Mr. Henderson’s “report” because it is just a restatement of his audit, and that the defendants have not deposed Mr. Henderson so there has been no occasion to determine what compensation he would require for services as an expert witness. (Pl.’s Opposition at 4, Doc. No. 23.) Although this manner of proceeding is unorthodox, I can discern no prejudice to the defendants from the mere fact that they do not yet know what, if any, compensation Mr. Henderson will receive for his litigation-related services. This failure of disclosure does not independently warrant the exclusion of Mr. Henderson’s opinions. The Darlings are required, however, to make a supplemental disclosure setting forth the terms of Mr. Henderson’s compensation as soon as they are established, or by the close of discovery, whichever occurs sooner.
[32] The second aspect of Western’s Rule 26 argument is that Mr. Henderson’s opinions should be excluded because the Darlings have not, in Western’s view, disclosed the basis and reasons for the opinions, only “unsupported legal conclusions.” (Mot. to Exclude at 12.) I conclude that this issue is best addressed as an evidentiary matter under Rule 702 of the Federal Rules of Evidence, rather than as a disclosure matter under Rule 26. The Darlings have made a disclosure of Mr. Henderson’s opinions and the reasons he offers for them. To the extent the Darlings are able to demonstrate that the basis and reasons they offer satisfy the standards of Rule 702 they will to that same extent meet the disclosure requirement of Rule 26.
[33] B. Rule 702 of the Federal Rules of Evidence
[34] Pursuant to Rule 702 of the Federal Rules of Evidence: If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.
[35] In Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), the Supreme Court discussed the gate-keeping role federal judges play under Rule 702 in screening unreliable expert opinion from introduction in evidence. Id. at 597. That role is “to ensure that an expert’s testimony ‘both rests on a reliable foundation and is relevant to the task at hand.'” United States v. Mooney, 315 F.3d 54, 62 (1st Cir. 2002). The proponent of the expert opinion must demonstrate its reliability, but need not prove that the opinion is correct. Id. at 63. “Once a trial judge determines the reliability of the expert’s methodology and the validity of his reasoning, the expert should be permitted to testify as to inferences and conclusions he draws from it and any flaws in his opinion may be exposed through cross-examination or competing expert testimony.” Brown v. Wal-Mart Stores, Inc., 402 F. Supp. 2d 303, 308 (D. Me. 2005). “Vigorous cross examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.” Daubert, 509 U.S. at 596. It has been said that, ultimately, the Court must determine simply whether “the testimony of the expert would be helpful to the jury in resolving a fact in issue.” Cipollone v. Yale Indus. Prods., 202 F.3d 376, 380 (1st Cir. 2000).
[36] 1. Legal conclusions cannot be countenanced, but testimony concerning regulatory compliance should be facilitated rather than barred where regulatory compliance is at the heart of the case and the plaintiffs are not independently qualified to discuss the regulatory framework.
[37] Western’s overarching theme is that the proposed opinion testimony is riddled with statements of legal standards and legal conclusions that are not really opinions at all. (Mot. to Exclude, passim.) It is the Court’s duty, naturally, to instruct the jury*fn3 concerning the applicable legal standards that govern this action. Nieves-Villanueva v. Soto-Rivera, 133 F.3d 92, 99-100 (1st Cir. 1997). It will fall to the fact witnesses to provide the jury with evidence of the facts and circumstances that gave rise to this action. The question, then, is whether Mr. Henderson, by dint of his mortgage auditing experience and any specialized knowledge he possesses, might be able to help the jury better understand the evidence to determine a fact in issue. Id. at 100. The Darlings assert in their opposition that Mr. Henderson will be able to articulate “various improprieties with the loan/mortgage transaction and documentation,” listing his observations that certain required documentation was missing and that the APR and finance charge calculations were erroneous. (Pls.’ Opposition at 1-2.) However, they acknowledge the appearance of a problem, noting, “if and to the extent that Mr. Henderson has gone beyond those factual observations and opined that same represent violation(s) of law, his testimony can be easily limited/prescribed at trial to conform to an appropriate scope.” (Id. at 2.) I fail to understand why this particular problem should not be addressed ahead of trial. Mr. Henderson should not be permitted to take the witness stand and simply state such things as “this loan is fraudulent and consists of unjust enrichment and is predatory in nature.” (TJ Henderson Aff. ¶ 3(i).) However, in fairness, it does not appear likely that that would be the extent of his testimony. Although Mr. Henderson’s affidavit is peppered with recitations of legal conclusions, his material opinions are really quite straightforward: (1) certain required TILA disclosures and/or documents were missing and (2) certain required disclosures were false. He is able to draw the first conclusion based on an audit of the closing documents. He has articulated which documents were missing. He is able to draw the second conclusion based on independent calculations. It is not difficult to conclude that the typical layperson would be unable to review a set of mortgage loan closing documents to assess whether a particular, required document was present or not. Nor is it difficult to imagine that the typical layperson would not be familiar with calculating finance charges and annual percentage rates. In other words, there does not appear to be anything inherently wrong with having an expert state that certain required documents were missing from the closing documents of a transaction or that certain calculations were erroneous, without straying into the territory of legal conclusions such as that the loan is “unjust” or “predatory,” or that it gives rise to liability or justifies any particular remedy. Thus, I conclude that the “legal conclusion” argument for exclusion does not entirely undermine Mr. Henderson’s audit or his opinions as to regulatory compliance. It does, however, call for a limitation to be placed on Mr. Henderson’s testimony. There is no reason apparent in this case why Mr. Henderson should need to tell the jury what the penalties of noncompliance are, what remedies are appropriate (such as contract rescission, which is an equitable remedy reserved to the Court, in any event), that the circumstances demonstrate unjust enrichment, predatory lending or fraud. Those particular opinions are hereby excluded on the ground that they are inappropriate legal conclusions and, as such, would not really help the jury make sense of the facts.
[38] There remains the matter of how to best address testimony to the effect that certain conduct was “in violation of TILA” or other federal or state laws and regulations. The issue of how to handle testimony concerning regulatory compliance is not as easy to resolve as either party suggests. In this case, although an expert might need to speak in terms of the TILA’s regulatory framework in order to discuss regulatory compliance, that is not necessarily the same thing as instructing the jury on issues of law or merely reciting legal conclusions. On the other hand, for testimony about noncompliance to have meaning there is a need to convey to the fact finder that there exists a regulatory framework that mandates compliance. Probably the most appropriate way to handle a situation like this one is not to preclude the testimony altogether, but to provide the jury with preliminary instructions concerning the regulatory framework and require the expert to couch his compliance testimony in terms of the Court’s instructions on the law, rather than in terms of his private characterizations of the law. See, e.g., United States v. Caputo, 382 F. Supp. 2d 1045, 1053 (N.D. Ill. 2005) (taking this approach in a criminal case involving FDA regulatory “enforcement policies”). Alternatively, the Court could leave for trial the task of drawing the “fine” distinction between proper expert testimony and legal conclusions, to avoid setting an over-exacting standard in a case that appears to turn almost entirely on regulatory compliance. See, e.g., TC Sys. Inc. v. Town of Colonie, 213 F. Supp. 2d 171, 181-82 (N.D. N.Y. 2002) (“[T]he Court is reluctant to preclude all testimony regarding FCC criteria at this early stage. If a proper foundation is laid and Kravtin can establish a nexus between the FCC criteria and the facts here, her testimony may be appropriate.”).
[39] 2. The Darlings’ expert disclosure is sufficient to qualify Mr. Henderson to testify about regulatory compliance matters, but not about the customs and practices of mortgage loan brokers and lenders.
[40] Western’s next argument is that Henderson should not be permitted to testify about any deviation from customary practice because he is not a broker with experience in mortgage lending or any professional license in that commercial practice area. (Mot. to Exclude at 9-10.) The Darlings respond that it is “premature” for the Court to conclude that Mr. Henderson lacks the qualifications “to render opinions describing the applicable yield rate, actual and stated percentage interest rates and the presence of hidden and undisclosed charges.” (Pls.’ Opposition at 3.) They say that they are not required to retain a “blue-ribbon practitioner,” quoting United States v. Malone, 453 F.3d 68, 71 (1st Cir 2006). (Id. at 3-4.) They do not expand upon the qualifications set forth in Mr. Henderson’s resume and affidavit.
[41] Based on a review of the expert disclosure materials, Mr. Henderson has been obtaining education in law and consumer protection since 1989, practiced law for five years in certain county courts in Washington, participated in at least eight seminars and workshops on the TILA between 2002 and 2006, and has been active with four “companies” in organized efforts to combat predatory lending. The companies in question are Co3m, Premier Mortgage Auditing, Advocates for Justice, and Consumer Guardian. Henderson is currently the president and owner of Consumer Guardian. Mr. Henderson’s affidavit indicates that he has been “in the mortgage auditing business for 9 years and legal industry for the past 15 years.” (TJ Henderson Aff. at 1.) Henderson’s affidavit does not otherwise elaborate on any of the qualifications sketched out in his resume, such as by better describing the work performed by the companies he has worked for or the type of legal work he used to perform in Washington.
[42] An expert’s qualifications, like other issues addressed to the admissibility of an expert’s opinions, “should be established by a preponderance of proof.” Daubert, 509 U.S. at 592 n.10. The proponent of the challenged evidence carries the burden of proof. The proponent must not assume that an evidentiary hearing will be held; the Court has the discretion to decide the motion on briefs and with reference to expert reports, depositions and affidavits on record. United States v. Diaz, 300 F.3d 66, 73-74 (1st Cir. 2002).
[43] The trouble here is that the Darlings have designated an unconventional expert and given short shrift to Western’s arguments that their designee has questionable qualifications. The fact that Mr. Henderson is an unconventional expert is not a bar in itself, but there needs to be some reassurance here that Mr. Henderson’s specific training and experience make him a suitable person to educate the jury about issues of fact. Instead, the Darlings rest on Mr. Henderson’s resume and affidavit and casually argue that the record does not in its present state prove he is not qualified, partly because Western has not deposed Mr. Henderson. (Pls.’ Opposition at 3.) I conclude on this record that Mr. Henderson’s qualifications to address the specific issue flagged here by Western, i.e., the customs and practices of mortgage lenders and brokers, are not adequately established. That does not mean, however, that Mr. Henderson is unqualified to serve as an expert witness regarding compliance with the TILA regulatory framework and related consumer law. Mr. Henderson has made a practice of educating himself on consumer law matters, including the requirements of the TILA, and he has worked for several years consulting with borrowers to determine whether the mortgage loans they have entered into have complied with that law and others. Thus, he appears to be suited to the task of helping to shepherd the Darlings’ regulatory compliance claims through the trial process, provided he does so within appropriate parameters set by the Court to prevent him from purporting to state the law to the jury.*fn4 He may not, however, speak to what is customary practice among mortgage lenders and brokers, only to what is required by the regulatory framework.
[44] 3. Mr. Henderson’s views concerning the Darlings’ relative sophistication and their understanding of the terms of the loan are unreliable and unhelpful and must be excluded.
[45] Western challenges Mr. Henderson’s basis and qualifications to offer opinions about the Darlings’ level of sophistication or their level of knowledge about the terms of the transaction they entered into. (Mot. to Exclude at 11.) The Darlings do not even attempt to preserve these facets of their expert disclosure. As there is no apparent basis to support a finding that Mr. Henderson is qualified to testify-or possesses specialized knowledge enabling him to testify-about the Darlings’ level of sophistication or their understanding of the loan’s terms, these opinions are excluded. Mr. Henderson may discuss what he considers to be noncompliant disclosures without having to opine that the Darlings were actually misled.
[46] Conclusion
[47] For the reasons stated above, Western’s motion to exclude the testimony of TJ Henderson is GRANTED, IN PART. Mr. Henderson is precluded from testifying about the penalties and remedies available in cases of regulatory noncompliance. He is also precluded from testifying that the circumstances of this case demonstrate unjust enrichment, predatory lending or fraud. Additionally, Mr. Henderson is precluded from testifying about the customary practices observed by mortgage lenders and brokers. Finally, Mr. Henderson is precluded from characterizing the Darlings’ level of sophistication or their level of knowledge about the terms of the transaction they entered into.
[49] Any objections to this Order shall be filed in accordance with Fed.R.Civ. P. 72. So Ordered.

Opinion Footnotes

[50] *fn1 Components of the Truth in Lending Act are distributed throughout the United States Code. The sections cited here, as cited by the Darlings in their pleadings, refer to the TILA’s consumer credit cost disclosure provisions.
[51] *fn2 The Darlings originally named the agent as an additional defendant but have since voluntarily dismissed the claims against him. (Voluntary Dismissal, Doc. No. 17.)
[52] *fn3 Because the Darlings’ plea for relief requests more than equitable remedies, there is a legal component to their TILA claim that is properly submitted to a jury in light of their jury demand. See Franklin v. Hartland Mortgage Ctrs., Inc., No. 01 C 2041, 2001 U.S. Dist. LEXIS 24238 (N.D. Ill. June 18, 2001) (order on motion to strike jury demand) (concluding in a TILA action that the plaintiff had the right to have his claim for statutory damages submitted to the jury and quoting Beacon Theaters, Inc. v. Westover, 359 U.S. 500, 510 (1959)) (“[W]hen legal and equitable claims are joined in one action, absent exceptional circumstances, a litigant has a right to have the issues common to the legal and equitable claims tried first to a jury”)). Additionally, the claims against Western are traditional tort claims appropriately tried to a jury.
[53] *fn4 In its reply, Western argues for the first time that Mr. Henderson’s percentage rate calculations and finance charge calculations should be excluded because there are merely factual matters for which no expert testimony is needed or which should be presented by an accountant. (Def.’s Reply at 1, Doc. No. 24.) I disagree with Western’s contentions. Mr. Henderson discloses that performing these calculations is part of his auditing function and it seems plain that the average layperson is not accustomed to computing annual percentage rates or even finance charges. Having someone other than the plaintiffs articulate the process is apt to save time at trial and prove beneficial to the jury.


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Smith v. Encore Credit Corp. (TILA/HOEPA/RESPA)

Posted on January 19, 2009. Filed under: Case Law, Foreclosure Defense, Legislation, Mortgage Law, Predatory Lending, RESPA, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , , , , , , , |

Smith v. Encore Credit Corp., No. 4:08 CV 1462 (N.D.Ohio 12/09/2008)

[2] Case No. 4:08 CV 1462
[3] 2008.NOH.0001120
[4] December 9, 2008
[6] The opinion of the court was delivered by: Judge Dan Aaron Polster
[8] After LaSalle Bank National Association (“LaSalle”) obtained a judgment entry of foreclosure on the residence of Plaintiffs Ronald J. and Nancy L. Smith in state court, the Smiths filed this action alleging four federal law claims and seven state law claims against persons and entities related to the underlying refinancing mortgage loan transaction (“the Loan”) other than LaSalle. The Smiths seek a declaration that the Loan was illegal, rescission of the Loan, an injunction against the foreclosure sale of their residence, and damages. Defendants have filed the following motions, which have been fully briefed and are ripe for review:
[9] *Motion of Defendant Bear Stearns Residential Mortgage Corporation to Dismiss Plaintiffs’ Complaint (ECF No. 11);
[10] *Motion of Defendants Motion Financial and Ellyn Klein Grober to Dismiss Plaintiffs’ Complaint (ECF No. 14);
[11] *Motion of Defendant Sand Canyon Corporation F/K/A Option One Mortgage Corporation to Dismiss Plaintiffs’ Complaint (ECF No. 16); and
[12] *Defendant Encore Credit Corporation’s Motion to Dismiss the Complaint of Donald J. Smith and Nancy L. Smith (ECF No. 19).
[13] For the reasons articulated below, the Motions are GRANTED IN PART, the federal law claims (Counts I through IV) are dismissed with prejudice, and the state law claims (Counts V through XI) are dismissed without prejudice.
[14] I.
[15] In January 2004, the Smiths had several discussions over the telephone with agents of Defendant Motion Financial (“Motion”) concerning a possible refinancing of the mortgage on their home. (ECF No. 1 (“Compl.”) ¶ 13.) The Smiths “directed Defendant Motion to extract equity from their home for the purpose of paying credit cards and other personal loans due to a deteriorating income stream versus prior year and also to be able to fund the March, 2004 mortgage payments.” (Id.) The Smiths “believed that the best way to accomplish this would be through a fix-rate loan at the lowest interest rate for which [they] qualified and with a monthly payment plan which [they] could afford given their financial situation as to income and expenses.” (Id.) On January 7, 2004, Defendant Ellyn Klein Grober allegedly represented to the Smiths that they qualified for a fixed rate mortgage loan in the principal amount of $528,500. (Id. ¶ 14.) Grober prepared a Uniform Residential Loan Application indicating that the Smiths were applying for a fixed rate loan, which the Smiths executed on January 9, 2004. (Id.) Grober also provided the Smiths with an early Truth In Lending Statement setting forth the fixed rate mortgage loan. In February 2004, Grober informed the Smiths that the fixed rate loan they initially qualified for would not provide a sufficient loan-to-value ratio to enable them to obtain a cash-out refinance program. (Compl. ¶ 17.) Grober told them that the only loan program available to them to obtain a cash-out refinance would be a program with a two-year fixed rate and an adjustable rate every six months thereafter that required an appraised value of the property of $630,000. (Id.) Grober arranged for an appraisal that valued the residence at $570,000 — insufficient to provide cash to the Smiths. (Id. ¶ 20.) She arranged a second appraisal which valued the residence at $630,000 — sufficient to provide a cash payout. (Id. ¶ 22.) With less than two weeks remaining before the Smiths would default on numerous obligations (including, presumably, their March 2004 mortgage payment), the Smiths “agreed to proceed with the closing on the adjustable rate mortgage.” (Compl. ¶ 23.) On March 5, 2004, Defendants Motion and Encore Credit Corporation (“Encore”) executed the refinancing Loan with the Smiths. (Id. ¶ 24.) The Smiths allege that the Loan, which was the result of predatory lending practices, “was sold to a securities firm” immediately after the closing and, within the Loan year, “ended up as collateral for Bear Stearns Asset-Backed Securities LLC Asset-Backed Certificates Series 2004-HES.” (Id. ¶ 28(g).)
[16] The Smiths subsequently defaulted on the loan and, on October 18, 2005, LaSalle, as Trustee for Certificate Holders of Bear Stearns Asset-Backed Securities LLC Asset-Backed Certificates Series 2004-HES (“LaSalle”), filed a foreclosure action against the Smiths and others in the Court of Common Pleas for Mahoning County, Ohio, in Case No. 2005-CV-3869 (“the Foreclosure Case”). (Compl. ¶ 49.) Nancy Smith filed an answer on December 29, 2005, and Ronald Smith filed an answer on January 10, 2006.
[17] After an evidentiary hearing, the state court granted LaSalle’s motion for summary and default judgment, and entered judgment against the Smiths on January 12, 2007. (ECF No. 12-2 at 1.) The state court decreed that if the amount then due on the loan was not fully paid within three days of the judgment, the right of the Smiths in the property “shall be foreclosed and [ ] an order of sale may be issued to the Mahoning County Sheriff, directing him to appraise, advertise in a paper of general circulation within the County and sell said premises as upon execution and according to law free and clear of the interest of all parties to this action.” (Id. at 4.)
[18] In August 2007, LaSalle filed a motion to withdraw the order of sale scheduled for August 7, 2007 upon the representation that Ronald Smith had filed a Chapter 13 bankruptcy proceeding on August 3, 2007. The court granted LaSalle’s request to have the order of sale returned by the sheriff unexecuted and granted leave to LaSalle to file an alias order of sale. On October 15, 2007, the state court granted LaSalle’s request to vacate the bankruptcy stay, reinstate the case to the active docket and for leave to continue with the prosecution of the case.
[19] On June 17, 2008, the Smiths filed this case in federal court asserting a laundry list of state and federal claims against Defendants Grober, Motion, Encore, Bear Stearns Residential Mortgage Corporation (“BSRMC”) and Option One Mortgage Corporation (which is alleged to be in an agency relationship with Encore, Compl. ¶ 4) for their predatory lending practices.*fn1 Specifically, the Smiths allege claims for violation of the Homeowners Equity Protection Act, 15 U.S.C. § 1639, the Real Estate Settlement Procedures Act , 12 U.S.C. § 2601, the Truth in Lending Act, 15 U.S.C. § 1605, the Fair Credit Reporting Act, 15 U.S.C. § 1681, the Ohio Consumer Protection Act, O.R.C. Chapter 1345, the Ohio Mortgage Brokers Act , O.R.C. Chapter 1322, and the Ohio Racketeer Influenced and Corrupt Organizations (“RICO”) Act, O.R.C. § 2929.32. They also allege claims of fraudulent misrepresentation, breach of fiduciary duty, unjust enrichment, and civil conspiracy. The Smiths ask this Court to treat the Complaint as a “Notice of Rescission” and declare the refinancing transaction illegal and void in the first instance, rescind the Loan, and enjoin the foreclosure sale of their home. They seek damages as well.
[20] On July 21, 2008, Defendant BSRMC filed the first motion to dismiss, followed by the other pending motions to dismiss. Defendants all argue that the Court lacks the jurisdiction to granted the requested declaratory and injunctive relief based on the Rooker-Feldman doctrine and the Anti-Injunction Act, that the Court should abstain from adjudicating the case based on Younger v. Harris, 401 U.S. 37 (1971), and that issue preclusion bars adjudication of the alleged claims. They argue, in the alternative, that most of the claims are time-barred and all of them fail to state a claim for which relief can be granted. Having reviewed the motions, the briefs and the record, the Court is prepared to issue its ruling.
[21] II.
[22] Defendants move for dismissal for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted. Defendants make a facial attack on the subject matter jurisdiction of this Court. In reviewing a facial attack, a trial court takes the allegations in the complaint as true, which is a similar safeguard employed under 12(b)(6) motions to dismiss. Ohio Nat’l Life Ins. Co. v. United States, 922 F.2d 320, 325 (6th Cir. 1990); see also Nat’l Ass’n of Minority Contractors v. Martinez, 248 F.Supp.2d 679, 681 (S.D. Ohio 2002) (applying standard).
[23] When ruling on a Rule 12(b)(6) motion to dismiss, the Court must construe the complaint liberally in a light most favorable to the non-moving party. Bloch v. Ribar, 156 F.3d 673, 677 (6th Cir. 1998). The Court “must accept as true all of the factual allegations contained in the complaint.” Erickson v. Pardus, — U.S. —, 127 S.Ct. 2197, 2200 (2007) (citing Bell Atl. Corp. v. Twombly, — U.S. —, 127 S.Ct. 1955, 1965 (2007) (citations omitted)). See also, NicSand, Inc. v. 3M Co., 507 F.3d 442, 449 (6th Cir. 2007) (en banc) (viewing a complaint “through the prism of Rule 12(b)(6) [requires] us to accept all of its allegations and all reasonable inferences from them as true”) (citing Mich. Paytel Joint Venture v. City of Detroit, 287 F.3d 527, 533 (6th Cir. 2002)). When reviewing a Rule 12(b)(6) motion to dismiss, the Court must “determine whether the plaintiff can prove a set of facts in support of its claims that would entitle it to relief.” Daubenmire v. City of Columbus, 507 F.3d 383, (6th Cir. Nov. 6, 2007) (quoting Bovee v. Coopers & Lybrand C.P.A., 272 F.3d 356, 360 (6th Cir. 2001)). In order to preclude dismissal under Rule 12(b)(6), a complaint must contain either direct or inferential allegations which comprise all of the essential, material elements necessary to sustain a claim for relief under some viable legal theory. Lewis v. ACB Bus. Serv., Inc., 135 F.3d 389, 406 (6th Cir. 1998).
[24] III.
[25] Defendants argue that the district court lacks subject matter jurisdiction to adjudicate the claims and grant the requested relief based on the Rooker-Feldman doctrine, issue preclusion, the Anti-Injunction Act, and the Younger abstention doctrine. The Court will address each argument in turn.
[26] A. Rooker-Feldman
[27] First, Defendants argue that the Rooker-Feldman doctrine prohibits this federal district court from granting the Smith’s request for declaratory and injunctive relief (i.e., declaring the refinancing Loan illegal and void, and enjoining the foreclosure sale of their residence). The Smiths disagree.
[28] The Rooker-Feldman doctrine stands for the proposition that federal district courts generally lack subject matter jurisdiction to review state court judgments. It derives from two Supreme Court decisions: Dist. of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983) and Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923).
[29] For years, a standard employed by the Sixth Circuit in determining whether Rooker-Feldman barred federal court adjudication of claims was whether the claims in the federal case were “inextricably intertwined” with claims previously asserted in a state court proceeding. See, e.g., Tropf v. Fidelity Nat’l Title Ins. Co., 289 F.3d 929, 937-38 (6th Cir. 2002); Kafele v. Lerner, Sampson & Rothfuss, LPA, 161 Fed. Appx. 487, 489-90 (citing Catz v. Chalker, 142 F.3d 279, 293 (6th Cir. 1998)). “Where federal relief [could] only be predicated upon a conviction that the state court [was] wrong,” the federal claims were determined to be inextricably intertwined with the state court claims and thus barred by Rooker-Feldman from adjudication in federal court. Id.
[30] After various circuits adopted differing interpretations regarding the breadth of Rooker-Feldman, the Supreme Court recently took the opportunity to clarify the doctrine’s limited scope. In re Hamilton, 540 F.3d 367-371 (6th Cir. 2008) (citing Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280 (2005)).
[31] The Rooker-Feldman doctrine, we hold today, is confined to cases of the kind from which the doctrine acquired its name: cases brought by state court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.
[32] Id. (quoting Exxon, 544 U.S. at 284).
[33] Following Exxon, the Sixth Circuit further refined the doctrine, distinguishing between plaintiffs who bring an impermissible attack on a state court judgment, in which case Rooker-Feldman does apply — and plaintiffs who assert independent claims before the district court, in which case Rooker-Feldman does not apply. Pittman v. Cuyahoga County Dep’t of Children & Family Serv., 241 Fed. Appx. 285, 287 (6th Cir. 2007) (citing McCormick v. Braverman, 451 F.3d 382, 393 (6th Cir. 2006)). The Sixth Circuit stated that the pertinent inquiry is whether the “source of the injury” upon which a plaintiff bases his federal claim is the state court judgment:
[34] If the source of the injury is the state court decision, then the Rooker-Feldman doctrine would prevent the district court from asserting jurisdiction. If there is some other source of injury, such as a third party’s actions, then the plaintiff asserts an independent claim.
[35] McCormick, 451 F.3d at 394-95. Thus, the Sixth Circuit concluded that jurisdiction is proper if a plaintiff presents an independent claim in federal court, “albeit one that denies a legal conclusion that a state court has reached in a case to which he was a party.” Id. (quoting GASH Assocs. v. Rosemont, 995 F.2d 726, 728 (7th Cir. 1993)). In fact, the Sixth Circuit recently reversed a ruling that Rooker-Feldman barred claims (including a request for rescission of a mortgage loan) brought by a mortgagor against individuals involved in state mortgage foreclosure proceedings where the source of injury was the defendants’ conduct preceding the foreclosure decree. Brown v. First Nationwide Mortg. Corp., 206 Fed. Appx. 436 (6th Cir. 2006). See also Lawrence v. Welch, 531 F.3d 364, 369 (6th Cir. 2008) (holding that claims that certain defendants committed fraud and misrepresentation in a state probate proceeding did not allege an injury caused by state court judgment and were not barred by Rooker-Feldman; however, claims that the probate court’s order of receivership violated the plaintiff’s constitutional rights were barred because “the count alleges that the state court order itself was illegal and harmed plaintiff”); Pittman, 241 Fed. Appx. at 288 (holding that claims of improper conduct by employees of a family services agency were not barred by Rooker-Feldman because their actions were independent from a juvenile court’s custody decision; plaintiff did not seek reversal of the custody order); Loriz v. Connaughton, 233 Fed. Appx. 469, 474-75 (6th Cir. 2007) (holding that a landowners’ claims challenging a zoning decision as unconstitutional were barred by Rooker-Feldman).
[36] Here, the Smiths allege that Defendants violated the Homeowner Equity Protection Act (“HOEPA“), 15 U.S.C. § 1639, by charging excessive fees, expenses and costs exceeding 10% of the financed amount (Count 1); Defendants violated the Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C. § 2601, by accepting charges for services not performed (Count 2); Defendants violated the Truth in Lending Act (“TILA”), 15 U.S.C. § 1605, by failing to disclose certain charges associated with the Loan (Count 3); Defendants violated the Fair Credit Reporting Act (“FCRA”), 15 U.S.C. § 1681s-2(b), by failing to undertake an investigation of disputed credit information (Count 4); Defendants violated the Ohio Consumer Protection Act, O.R.C. § 1345.01 by failing to disclose, altering and misrepresenting material terms of the Loan (Count 5); Defendants Motion and Grober violated the Ohio Mortgage Brokers Act by misrepresenting and concealing the knowledge that the Smiths would not qualify for the loan after the first two years; Defendants fraudulently misrepresented the Loan terms (Count 7); Defendants breached their fiduciary duty to the Smiths (Count 8); Defendants enjoyed unjust enrichment by their unlawful conduct (Count 9); Defendants engaged in a civil conspiracy (Count 10); and Defendants violated the Ohio RICO statute, O.R.C. § 2929.32, by their fraudulent conduct (Count 11). These are all independent claims against third parties where the source of injury is not the state court foreclosure judgment itself but the alleged conduct of these particular parties leading up to and encompassing the refinancing transaction. Because the source of injury is not the state court judgment, Rooker-Feldman does not bar adjudication of these claims in federal court.*fn2
[37] B. Issue Preclusion
[38] Next, Defendants argue that issue preclusion prevents the Smiths from seeking a declaration that the Loan was illegal and void, rescission of the Loan, and termination of the Loan documents. The Full Faith and Credit Act, 28 U.S.C. § 1738, requires federal courts to give state court judgments the same preclusive effect that the state would afford such judgment. McCormick, 451 F.3d at 397 (citing Exxon, 125 S.Ct. at 1527). Ohio’s doctrine of issue preclusion, also known as collateral estoppel, holds that a party asserting issue preclusion has the burden of establishing the following elements:
[39] (1) the party against whom estoppel is sought was a party or in privity with a party to the prior action;
[40] (2) there was a final judgment on the merits in the previous case after a full and fair opportunity to litigate the issue;
[41] (3) the issue must have been admitted or actually tried and decided and must be necessary to the final judgment; and
[42] (4) the issue must have been identical to the issue involved in the prior suit.
[43] Dye v. City of Warren, 367 F. Supp. 2d 1175, 1184-85 (N.D. Ohio 2005); see also, Knott v. Sullivan, 418 F.3d 561, 568 (6th Cir. 2005); State ex rel. Stacy v. Batavia Local Sch. Dist. Bd. of Educ., 779 N.E.2d 216, 219 (Ohio 2002) (“[T]hat a fact or a point that was actually and directly at issue in a previous action, and was passed upon and determined by a court of competent jurisdiction, may not be drawn into question in a subsequent action between the same parties or their privies, whether the cause of action in the two actions be identical or different.”). Issue preclusion cannot be invoked because similar issues were previously litigated and decided; rather, the same issue must have been actually litigated and decided. See Thompson v. Wing, 637 N.E.2d 917 (Ohio 1994); Goodson v. McDonough Power Equip., Inc., 443 N.E.2d 978, 987 (Ohio 1983) (“Collateral estoppel precludes relitigation only when the identical issue was actually decided in the former case.”).
[44] Defendants argue that issue preclusion is proper because the issue of the Loan’s validity was actually litigated and decided in the Foreclosure case when the state court determined that LaSalle was owed money on the note in connection with the Loan. Defendants reason that the Smiths’ claims are precluded since the previous and present issues both encompass the broad topic of the Loan’s validity. The Smiths counter that the issues in the Complaint were not “passed upon or determined” by the Mahoning County Court. Instead, the issues raised here deal with fraud, violations of federal lending laws, violations of the Ohio Consumer Practices Act, violations of the Ohio RICO Act and conspiracy, all of which are distinct from the question of the Loan’s validity.
[45] Based on case law, the Court cannot apply the broad application of the term “issue” that is espoused by Defendants to the claims in this case. The Court finds that Defendants have failed to show that the claims in the Complaint are identical to issues actually litigated and decided by the Mahoning County Court in the Foreclosure case.
[46] C. Younger Abstention
[47] Defendants argue that the Court must abstain from adjudicating this case based on Younger v. Harris, 401 U.S. 37 (1971). Under the abstention doctrine articulated in Younger, “when state proceedings are pending, principles of federalism dictate that the constitutional claims should be raised and decided in state court without interference by the federal courts.” Doscher v. Menifee Circuit Court, 75 Fed. Appx. 996, 997 (6th Cir. 2003) (citing Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 17 (1987)). “[O]nly exceptional circumstances justify a federal court’s refusal to decide a case in deference to the States.” Leatherworks P’ship v. Boccia, 245 Fed. Appx. 311, 317 (6th Cir. 2007) (citing New Orleans Pub. Servs., Inc. v. Council of the City of New Orleans, 491 U.S. 350, 368 (1989)). In order for a federal district court to abstain from hearing a claim pursuant to Younger, it must find that (1) there is an ongoing state judicial proceeding, (2) the proceeding implicates important state interests, and (3) there is an adequate opportunity in the state proceeding to raise constitutional challenges. Id. (citing Middlesex County Ethics Comm’n v. Garden State Bar Ass’n, 457 U.S. 423 (1982)). The court should proceed deliberately “to ensure that abstention remains ‘the exception, not the rule.'” Id. (quoting New Orleans, 491 U.S. at 359, in turn quoting Hawaii Hous. Auth. v. Midkiff, 467 U.S. 229, 236 (1984)). Because the Smiths have not raised any constitutional challenges to the foreclosure judgment, Younger does not require this Court to abstain from adjudicating the claims before it.
[48] D. Anti-Injunction Act
[49] Defendants argue that the Anti-Injunction Act, 28 U.S.C. § 2283, prohibits the Court from issuing the requested injunctive relief. The Court agrees.
[50] The Anti-Injunction Act states, in full, that “[a] court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.”
[51] 28 U.S.C. § 2283. The Supreme Court has acknowledged that the Act creates “an absolute prohibition against enjoining state court proceedings, unless the injunction falls within one of the three specifically defined exceptions.” Atlantic Coast Line R.R. Co. v. Bhd. of Locomotive Eng’rs, 398 U.S. 281, 286-87 (1970). The three exceptions are: (1) where Congress expressly authorizes, (2) where necessary in aid of the court’s jurisdiction, or (3) where necessary to protect or effectuate the court’s judgments. Martingale LLC v. City of Louisville, 361 F.3d 297, 302 (6th Cir. 2004); see 28 U.S.C. § 2283. Once the Anti-Injunction Act defense is raised, the party pursuing the injunction bears the burden of establishing that the injunction falls within one of the exceptions. See id.
[52] The Smiths contend that the Court can enjoin the foreclosure sale because the Ohio RICO statute expressly authorizes injunctive relief. (ECF No. 20, at 5-6.) To qualify as an “expressly authorized” exception to the Anti-Injunction Act, the test is “whether an Act of Congress, clearly creating a federal right or remedy enforceable in a federal court of equity, could be given its intended scope only by the stay of a state court proceeding.” Mitchum v. Foster, 407 U.S. 225, 238 (1972); see also, Atlantic Coast Line R.R., 398 U.S. at 297 (“Any doubts as to the propriety of a federal injunction. . . should be resolved in favor of permitting the state courts to proceed . . .”). The Ohio RICO statute permits an injunction, but the statute was not “expressly authorized” by an Act of Congress. Therefore, it does not fall within any exception to the Anti-Injunction Act.
[53] Thus, to the extent that the Smiths are asking the federal district court to stay the Foreclosure case, the request is moot because the state court has stayed the Foreclosure case pending the adjudication of claims presented in this federal case. To the extent that the Smiths are asking the federal district court to enjoin the foreclosure sale ordered by the state court, the federal district court is barred from providing that relief by the Anti-Injunction Act.
[54] IV.
[55] Defendants argue that all the federal claims and most of the state law claims are time-barred. The Court finds that all the federal claims are barred by the relevant statutes of limitations for the following reasons.
[56] A. HOEPA (Count I) and TILA (Count III)
[57] Count I alleges that “Defendants”*fn3 engaged in predatory lending practices, charged “excessive fees, expenses and costs which exceeded more than 10% of the amount financed” and failed to make required disclosures to the Smiths no later than 3 days prior to closing in violation of HOEPA, 15 U.S.C. § 1639. Count III alleges that Defendants failed to disclose certain charges incident to the extension of credit to the Smiths that were associated with the loan transaction on the Truth in Lending Statement and calculated the annual percentage rate based upon improperly calculated, undisclosed or inconsistent amounts — all in violation of TILA statutes and regulations.
[58] The TILA is a federal consumer protection statute intended to promote the informed use of credit by requiring certain uniform disclosures from creditors. In re Community Bank of Northern Virginia, 418 F.3d 277, 303-04 (3d Cir. 2005) (citing15 U.S.C. § 1607, as implemented by Regulation Z, 12 C.F.R. §§ 226.1 et seq.) Creditors who make loans secured by a borrower’s principal dwelling are required to provide borrowers with disclosures such as the annual percentage rate, the finance charge, the amount financed, the total payments, and the payment schedule. Id. at 304 (citing 12 C.F.R. § 226.23) (quotations omitted). The HOEPA, enacted as an amendment to the TILA, creates a special class of regulated loans that are made at higher interest rates or with excessive costs and fees. Id. These loans are not only subject to the restriction on terms commonly used by predatory lenders to manipulate the cost of the loans, but are also subject to special disclosure requirements. Id. (citing 15 U.S.C. § 1639). Under 15 U.S.C. § 1640(e), TILA and HOEPA must be brought “within one year from the date of the occurrence of the violation.”
[59] Defendants argue that the HOEPA and TILA claims are barred by the relevant one-year statute of limitations. These claims, which are based on the failure of Defendants to disclose certain material information leading up to or at the time the Loan transaction was entered, accrued no later than the closing date of March 5, 2004. As such, the claims expired one year later on March 5, 2005.
[60] Rather than address the many and varied claims independently, the Smiths generally assert that Defendants’ pattern “during the life of the mortgage loan, of defrauding the Smiths including failing to credit payments made, incorrectly calculating interest on the accounts and failing to accurately debit fees” entitles all of their claims to equitable tolling. Putting aside for the moment the dubious question of whether accounting errors fall within the ambit of TILA or HOEPA (or RESPA or FCRA for that matter), it is true that the HOEPA and TILA limitations statute may be subject to equitable tolling. Borg v. Chase Manhattan Bank USA, NA, 247 Fed. Appx. 627, 633 (6th Cir. 2007). When equitable tolling is applied, the one-year period begins to run when the borrower discovers or had reasonable opportunity to discover the fraudulent concealment of charges. Id. (citing Jones v. TransOhio Sav. Ass’n, 747 F.2d 1037, 1041 (6th Cir. 1984)). The Smiths argue that there was no practical way for them to know about the alleged fraudulent concealment of charges prior to being sued for foreclosure. Giving the Smiths every benefit of the doubt (i.e., assuming that the statute was tolled until the foreclosure action was commenced on October 18, 2005 or until Nancy Smith filed her answer on December 29, 2005 and Ronald Smith filed his answer on January 10, 2006), the Smiths still had until October 18, 2006 (or December 29, 2006 or January 10, 2007) to file their TILA and HOEPA claims against the appropriate entities and failed to do so.
[61] Moreover, “[a]n obligor’s right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first.”
[62] 15 U.S.C. § 1635(f). The Supreme Court has interpreted this section to be an absolute three-year bar to claims for rescission under TILA or HOEPA. Beach v. Ocwen Fed. Bank, 523 U.S. 410, 411-12 (1998) (holding that “§ 1635(f) completely extinguishes the right of rescission at the end of the 3-year period.”). Accordingly, the Smiths’ right to rescission of the refinancing loan under TILA and HOEPA was absolutely statutorily extinguished on March 5, 2007.
[63] The Court notes in passing that nothing prevented the Smiths from adding these Defendants to their foreclosure case and bringing these claims (or any of the other claims) against them in the course of those proceedings. See, e.g., 15 U.S.C. § 1536(f). For all these reasons, Counts I and III are barred by the statute of limitations.
[64] B. RESPA (Count II)
[65] Count II alleges that Defendants’ conduct in accepting charges for settlement services not rendered violates 12 U.S.C. § 2607 of the RESPA, and seek an amount equal to three times the amount of charges paid for “settlement services” under § 2607(d)(2). Among the abusive practices Congress sought to eliminate through the enactment of RESPA was the unlawful payment of referral fees, kickbacks and other unearned fees. Sosa v. Chase Manhattan Mortg. Corp., 348 F.3d 979, 981 (11th Cir. 2003) (citation omitted); see also 12 U.S.C. §§ 2601(b), 2607. Claims for violations of § 2607 of the RESPA must be brought within 1 year of the violation. 12 U.S.C. § 2614. There is no dispute that this claim accrued on March 5, 2004 and that it expired on March 5, 2005. The Smiths acknowledge that the Sixth Circuit has yet to decide whether equitable tolling applies to claims brought under § 2607 of the RESPA. See, e.g., Egerer v. Woodland Realty, Inc., No. 1:06 CV 789, 2007 WL 3467263 at *4 (W.D. Mich. Nov. 13, 2007). Even assuming that equitable tolling applies, it would fail here for the same reasons set forth respecting the TILA and HOEPA claims. Accordingly, Count II is time-barred.
[66] C. FCRA (Count IV)
[67] In Count IV, the Smiths assert that “Defendants wrongfully, improperly, and illegally reported negative information as to the Smiths to one or more credit reporting agencies” and that the Smiths are thereby entitled to maintain a private cause of action against Defendants pursuant to § 1681s-2(b). Compl. ¶¶ 73, 74. The Smiths claim that they are entitled to recover damages for Defendants’ alleged negligent non-compliance with the FCRA under § 1681o, and punitive damages for Defendants’ alleged willful noncompliance with the FCRA under § 1681(n)(a)(2). Id. ¶¶ 75, 76.
[68] Congress enacted the FCRA as part of the Consumer Credit Protection Act “to ensure fair and accurate credit reporting, promote efficiency in the banking system, and protect consumer privacy.” Safeco Ins. Co. of Am. v. Burr, 127 S.Ct. 2201 (2007) (citing 84 Stat. 1128, 15 U.S.C. § 1681 and TRW Inc. v. Andrews, 534 U.S. 19 (2001)). The Sixth Circuit has explained that the FCRA is aimed at protecting consumers from inaccurate information in consumer reports and establishing credit reporting procedures that utilize correct, relevant, up-to-date information in a confidential and responsible manner. Jones v. Federated Fin. Reserve Corp., 144 F.3d 961, 965 (6th Cir. 1998) (citation omitted).
[69] Under § 1681s-2(b), those who furnish information to credit reporting agencies have the obligation to undertake an investigation upon receipt of notice of dispute regarding credit information that they had previously furnished. Defendants contend that a claim for violation of § 1681s-2(b) is time-barred by the relevant statute of limitations. Furthermore, Defendants argue that the Smiths have failed to state a claim under § 1681s-2(b).
[70] Violations of the FCRA may be brought no later than the earlier of (1) two years after the date of discovery by the plaintiff that is the basis for such liability or (2) five years after the date on which the violation that is the basis for such liability occurs. 15 U.S.C. § 1681p. The Smiths have not alleged the date on which any alleged § 1681s-2(b) violation occurred. Indeed, any claims based violations of the FCRA prior to June 17, 2006 are time-barred.
[71] Furthermore, this claim fails to state a claim for which relief can be granted for two reasons. First, it’s not entirely clear in the Sixth Circuit whether a consumer has a private cause of action against a furnisher of information under § 1681s-2(b). Compare Downs v. Clayton Homes, Inc., 88 Fed. Appx. 851, 853 (6th Cir. 2004) (“If it is assumed that a private right of action exists under § 1681s-2(b), . . . “) and Zamos v. Asset Acceptance, LLC, 423 F.Supp.2d 777 (N.D. Ohio 2006) (“[D]isputes currently exist among the courts as to whether the FCRA creates a private cause of action for a consumer against a furnisher of credit information.”) with Bach v. First Union Nat’l Bank, 149 Fed. Appx. 354, 359-60 (6th Cir. 2005) (“While a consumer cannot bring a private cause of action for a violation of a furnisher’s duty to report truthful information, a consumer may recover damages for . . . violation of . . . § 1681s-2(b)(A)-(D).”) and Sweitzer v. Am. Express Centurion Bank, 554 F.Supp.2d 788, 794 (noting that “[t]he majority consensus among the courts that have addressed the issue is that . . . § 1681s-2(b) created a private right of action by a consumer against a data furnisher,” and declining to follow the minority view espoused in Zamos).
[72] Second, assuming for the moment that there is such cause of action, the Smiths have not alleged that they notified a credit reporting agency that (1) they had a dispute over inaccurate information on their credit report that was furnished to the agency by any of the Defendants, (2) the agency notified Defendants of the dispute, and (3) Defendants failed to undertake an investigation of the dispute. The Smiths assert only that “Defendants” negligently or willfully furnished inaccurate information to the credit reporting agencies. These allegations are insufficient to state a claim for relief, if there is such a thing, under § 1681s-2(b).
[73] For all these reasons, Count IV is dismissed.
[74] V.
[75] The Smiths filed this case in federal court based on the Court’s federal question jurisdiction over the four federal claims, 28 U.S.C. § 1331, and supplemental jurisdiction over the seven state-law claims, 28 U.S.C. § 1367(a). Compl. ¶¶ 8, 10. Because the Court has dismissed the federal claims, the Court declines to exercise its supplemental jurisdiction over the state-law claims. See 28 U.S.C. § 1367(c)(3); see also United Mine Workers v. Gibbs, 383 U.S. 715, 726 (1966) (“[I]f the federal claims are dismissed before trial, . . . the state claims should be dismissed as well.”); Experimental Holdings, Inc. v. Farris, 503 F.3d 514, 521 (6th Cir. 2007) (“Generally, once a federal court has dismissed a plaintiff’s federal law claim, it should not reach state law claims.”) Thus, the state-law claims (Counts V through XI) are hereby dismissed without prejudice.
[76] VI.
[77] In summary, the Court GRANTS IN PART the pending Motions as follows. The Court grants the pending Motions with respect to Counts I through IV and dismisses those claims with prejudice for reasons set forth in Section III. The Court dismisses without prejudice Counts V through XI for the reason articulated in Section IV. The Court also notes that, if the federal claims were not dismissed, the Court would be unable to grant the Smiths’ request to enjoin the foreclosure sale of their home as ordered by the state court by the federal Anti-Injunction Act.
[79] Dan Aaron Polster United States District Judge

Opinion Footnotes

[80] *fn1 The Court notes in passing that the Smiths defaulted on the Loan well before entering the adjustable rate portion of their refinancing program.
[81] *fn2 Given the limited scope of Rooker-Feldman, the Court is concerned that future plaintiffs may use the federal courts to collaterally attack state court judgments, as in this case. The Sixth Circuit acknowledged this problem, but noted that “this is an inevitable byproduct of the Supreme Court’s confining the scope of Rooker-Feldman in Exxon Mobil, 544 U.S. at 284. . ..” Pittman, 241 Fed. Appx. at 289.
[82] *fn3 The Court takes this opportunity to mention that the Smiths’ referral to “Defendants” as targets of all their allegations and claims is unduly vague. It is difficult to determine, for instance, how BSMRC can be liable for failure to provide the proper truth-in-lending disclosures on March 5, 2004 or what role Option One Mortgage plays in this case at all.


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Culpepper v. Irwin Mortgage Corp., No. 06-11105 (11th Cir. 07/02/2007)

Posted on November 10, 2008. Filed under: Case Law, RESPA | Tags: , |


[2] Nos. 06-11105 & 98-cv-2187

[3] 2007.C11.0001269

[4] July 2, 2007


[6] Appeal from the United States District Court for the Northern District of Alabama D. C. Docket Nos. 96-00917-CV-VEH-S & 96-02187-CV-VEH 96-cv-917.

[7] The opinion of the court was delivered by: Birch, Circuit Judge


[9] Before BIRCH and BLACK, Circuit Judges, and PRESNELL,*fn1 District Judge.

[10] The appellants, John and Patricia Culpepper and Beatrice Hiers, brought the present class action against appellee Irwin Mortgage Corporation (“Irwin”), a mortgage lender, pursuant to the Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C. § 2601 et. seq. The appellants alleged that Irwin’s payment of yield spread premiums to mortgage brokers — in exchange for delivering interest rates above the “par rate” — violated section 8 of RESPA, 12 U.S.C. § 2607(a). After a lengthy procedural history, which is detailed herein, the appellees ultimately filed motions for summary judgment and to decertify the class, both of which the district court granted.

[11] On appeal, the appellants argue that the district court erred in granting summary judgment in favor of Irwin for two reasons: first, because the “law-ofthe-case” doctrine obligates us to adhere to our prior rulings in this case, despite an intervening — and conflicting — statement of policy by the Department of Housing and Urban Development (“HUD”), the administrative agency charged with enforcing RESPA; and, second, because, even applying HUD’s test for liability, Irwin’s yield spread premium payments were illegal under RESPA. The appellants further argue that the district court erred in decertifying the class.

[12] Upon review, we conclude that two exceptions to the law-of-the-case doctrine apply and that the district court acted properly in applying HUD’s test for liability to the facts of appellants’ case and in concluding that Irwin was entitled to summary judgment. We also conclude that the district court did not abuse its discretion in decertifying the class, due to its determination that individual issues of fact predominate in this type of action. Accordingly, we AFFIRM.


[14] This is the fourth time we have had cause to review the appellants’ RESPA action against Irwin. In Culpepper v. Inland Mortgage Corporation, 132 F.3d 692 (11th Cir. 1998) (“Culpepper I”), we reversed a grant of summary judgment in favor of Irwin, vacated the district court’s denial of class certification, and remanded for further proceedings. In Culpepper v. Inland Mortgage Corporation, 144 F.3d 717 (11th Cir. 1998) (“Culpepper II”), we denied Irwin’s petition for a rehearing of Culpepper I, and clarified our decision in that case. In Culpepper v. Irwin Mortgage Corporation, 253 F.3d 1324 (11th Cir. 2001) (“Culpepper III”) we clarified the standard for liability under RESPA; we also affirmed the district court’s class certification. The procedural backdrop leading to the present appeal is, as our sister circuit has put it, “cumbersome but important.” Schuetz v. Banc One Mortgage Corp., 292 F.3d 1004, 1008 (9th Cir. 2002).

[15] Our review of this backdrop is as follows. First, we briefly discuss the facts and allegations of the appellants’ action against Irwin. Second, we review our holdings in Culpepper I and Culpepper II, as well as the 1999 Statement of Policy issued by HUD in the wake of those decisions. Third, we discuss our opinion in Culpepper III and the 2001 Statement of Policy that HUD issued in direct response to–and in explicit criticism of–Culpepper III. We then discuss the effect of the HUD 2001 Statement of Policy on our RESPA case law. Finally, we discuss the district court proceedings that led to the present appeal.

[16] A. The Borrowers’ Action Against Irwin

[17] In 1996, the appellants John and Patricia Culpepper and Beatrice Hiers (hereinafter, collectively, “the Borrowers”) brought the instant action,*fn2 on behalf of themselves and all others similarly situated, against Irwin,*fn3 a mortgage lender, alleging that Irwin had acted illegally in paying yield spread premiums to their mortgage brokers. A yield spread premium (“YSP”) is “a payment made by a [mortgage] lender to a [mortgage] broker in exchange for that broker’s delivering a mortgage that is above the ‘par rate’ being offered by the lender.” Heimmermann v. First Union Mortgage Corp., 305 F.3d 1257, 1259 (11th Cir. 2002). The “‘par rate’ refers to the rate at which the lender will fund 100% of a loan with no premiums or discounts to the broker.” Schuetz, 292 F.3d at 1007. When a mortgage broker brought Irwin a loan at below the par rate, the broker was required to pay discount points for the loan. See Culpepper I, 132 F.3d at 694. Conversely, when a mortgage broker brought Irwin a loan at a rate above the par rate, Irwin agreed to pay a YSP to the mortgage broker. Id. Generally speaking, the YSP was calculated as a percentage of the total amount of the loan; the exact amount was determined by “the extent to which the actual interest rate exceed[ed] the par rate.” Heimmermann, 305 F.3d at 1259.

[18] The particular facts these consolidated cases are not in dispute. Both of the Borrowers obtained their federally insured home mortgage loans through third party mortgage brokers, and Irwin, as the lender, was the source of the funds in each transaction. The Culpeppers obtained their loan with Irwin through Premiere Mortgage Company (“Premiere”), a mortgage broker. The interest rate that they agreed to in connection with their mortgage was 7.5%, despite the fact that the par rate–that is, the rate at which Irwin was willing to make the same loan–was actually 7.25%. Because the loan Premier assigned to Irwin was above par, Irwin paid Premier a YSP. At the closing of the transaction, the Culpeppers directly paid Premiere a loan origination fee of $760.50; in addition to this amount, Irwin paid to Premiere a YSP of $1,263.21, approximately 1.675% of the loan amount.

[19] Appellant Hiers obtained her loan with Irwin through Homebuyers Mortgage Incorporated (“HMI”), another third party mortgage broker. Hiers agreed to an interest rate of 7% in connection with her loan, despite the fact that the par rate for an adjustable rate loan was 5.5%. At the closing, Hiers paid HMI an origination fee of $1,544 and a loan discount of $14.64. In addition to these fees, Irwin paid HMI a YSP of $4,538.87, approximately 2.875% of the total loan amount.

[20] Although the YSPs were disclosed to the Borrowers at their closings and were included in their respective HUD closing forms, they argued that Irwin’s payment of YSPs from Irwin to their brokers, for obtaining above par mortgages, violated RESPA.*fn4 Specifically, the Borrowers argued that Irwin’s payment of YSPs violated section 8 of RESPA, which prohibits the payment of “any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” 12 U.S.C. § 2607(a). The Borrowers argued that the YSPs constituted illegal referral fees under RESPA, in that they were paid for nothing more than a broker’s delivery of a loan with a higher interest rate. In response, Irwin contended that its payment of YSPs to mortgage brokers were not kickbacks or referral fees, but, rather, that the payments fell within the safe harbor of RESPA, 12 U.S.C. § 2607(c), which provides that “[n]othing in this section shall be construed as prohibiting . . . the payment to any person of a bona fide . . . compensation or other payment for goods or facilities actually furnished or for services actually performed.”

[21] Irwin moved for summary judgment, which the district court granted. The subsequent appeal resulted in our first decision in this case, Culpepper I.

[22] B. Culpepper I and II, and HUD’s 1999 Statement of Policy

[23] In Culpepper I, we first noted that “[n]o circuit court [had yet] addressed whether a [YSP] violates RESPA.” 132 F.3d at 695. In addressing that issue, we held that a lender’s payment of a YSP to a broker would be an illegal referral fee under RESPA “if: (1) a payment of a thing of value; (2) [was] made pursuant to an agreement to refer settlement business; and (3) a referral actually occurr[ed].” Id. at 696. We concluded that the YSP in the Culpeppers’ case violated RESPA, since it satisfied all three requirements. Specifically, the YSP had been paid to Premiere pursuant to a pre-existing arrangement between Premiere and Irwin, and the later assignment of the Culpeppers’ loan, from Premiere to Irwin, had, in fact, occurred. Id.

[24] We also rejected the argument that the YSP was bona fide compensation for a “good” or “service” performed by Premiere, such that it should be exempt from liability under 12 U.S.C. § 2607(c). Id. at 696-97. We found that Irwin had not shown that the YSP was payment for a “good” under RESPA, because no identifiable “good” was ever transferred from Premiere to Irwin; in fact, Irwin was, from the outset, the original source of the funds and thus the sole owner of the loan. Id. at 696. Nor had Irwin established that the YSP was payment for a “service” that Premiere had provided, because: (1) the Culpeppers had already paid a separate loan origination fee directly to Premiere to cover its “services”; (2) Irwin had stated in discovery that it paid Premiere a YSP “for the right to service the [Culpeppers’] loan,” R6-149, Exh. 16 at 6, thereby belying the notion that the YSP was intended to compensate Premiere for the loan services it provided to the Culpeppers; and (3) the brokerage “services” that Premiere provided were the same, whether the loan was above par, below par, or at par. Id. at 696-97.

[25] In finding that the Culpeppers’ YSP was a referral fee that did not fall under the compensable goods/services safe harbor of § 2607(c), we concluded that the YSP was illegal under § 2607(a). Id. at 697. Our Culpepper I decision refrained from inquiring whether the YSP that Irwin had paid to Premiere was reasonable or a “fair market price,” stating that the “reasonableness” inquiry only applied if the first step of the § 2607(c) safe harbor was satisfied–that is, if it was first shown that the YSP covered a compensable “good” or “service.” Id. at 697. Accordingly, we reversed the district court’s grant of summary judgment and remanded for further proceedings.

[26] In Culpepper II, we denied a petition for a rehearing of Culpepper I. See 144 F.3d at 718. In doing so, however, we saw fit to clarify our holding in Culpepper I. We indicated that Culpepper I had not been intended to conclusively establish liability on the part of Irwin, nor had Culpepper I stated that YSPs from a mortgage lender to a mortgage broker were per se illegal under RESPA. Id. Rather, the Culpepper I decision had been limited to the question of whether the district court had erred in granting summary judgment for Irwin on the Culpeppers’ RESPA action. Id. Because Irwin had failed to establish that the YSP it had paid to Premiere had been compensation for either goods or services that Premiere had provided, we concluded that the district court had acted prematurely in granting Irwin summary judgment as a matter of law. Id. at 718-19. We stated that nothing in Culpepper I would prevent Irwin, on remand, from arguing its position at trial. Id.

[27] Subsequent to our decisions in Culpepper I and Culpepper II, HUD issued a 1999 Statement of Policy (“SOP”) intended “to clarify its position on lender payments to mortgage brokers.” See 64 Fed. Reg. 10080. HUD first stated that it was issuing the 1999 SOP because Congress had instructed it to do so, based on the fact that “Congress [had] never intended payments by lenders to mortgage brokers for goods or facilities actually furnished or for services actually performed to be violations of [RESPA] . . . .” Id. (citation omitted). HUD’s SOP indicated that mortgage brokers provided many valuable services to home buyers in processing home mortgage loans, and that it was acceptable for mortgage brokers to receive fees as compensations for those services — either directly from the borrower or indirectly from the lender — so long as the compensation bore a “reasonable relationship to the market value of the goods, facilities, or services provided.” Id. at 10086. HUD also expressly stated its view that payments by lenders to mortgage brokers, including YSPs, were not illegal per se. Id. at 10084.

[28] Rather, HUD recommended a two-part “reasonableness test” to determine whether a payment to a mortgage broker such as a YSP was permissible under RESPA. The first step of the inquiry under the HUD test was “whether goods or facilities were actually furnished or services were actually performed for the compensation paid.” Id. The SOP listed a number compensable “services” that a mortgage broker might provide in a mortgage transaction, such as, among others, taking information from the borrower and filling out the mortgage application; analyzing the prospective borrower’s income and debt and pre-qualifying the borrower for a mortgage; educating the borrower about the various loan products available to him or her; and assisting the borrower in the mortgage financing, from commencement of the process to the closing. Id. at 10085.

[29] The second step of the HUD test then asked whether the total compensation paid to the mortgage broker was “reasonably related” to the value of those goods or services that he furnished. Id. at 10086. As to this second step, HUD stated that courts were to examine the “total compensation” paid to the broker — that is, fees paid by both the lender and the buyer — as a lump sum in order to assess whether it was “reasonably related” to the services provided. Id.

[30] C. Culpepper III and HUD’s 2001 Statement of Policy

[31] In 2001, we again addressed the Borrowers’ RESPA action against Irwin. The issue before us in Culpepper III was whether the district court had erred in certifying a class action pursuant to Federal Rule of Civil Procedure 23(c). 253 F.3d at 1325-26. Although Culpepper III involved the narrow question of class certification, we accepted the parties’ contention that we could only determine if class certification was appropriate if we first “settle[d] on a rule of liability” under 12 U.S.C § 2607(a) and (c). Id. at 1327. Thus, in Culpepper III we sought to construe the proper test for liability under RESPA, in light of HUD’s recent pronouncement on the question via the 1999 SOP.

[32] First, we indicated our view that the 1999 HUD SOP on RESPA was “ambiguous.” Id at 1327. We then construed the two-part test that had been set forth in the 1999 SOP. We observed that the first step under that test was an assessment of whether the payments at issue were for services “actually performed for the compensation paid.” Id. at 1329-30 (citing 64 Fed. Reg. at 10084). We construed that first step as requiring some level of “exchange” between the broker and the lender. Id. at 1329 (stating that “the inquiry in this step includes not only whether the broker performed services, but also whether the broker performed the services as part of a services-for-money exchange”). That is, we held that it was not enough for a lender to show that services had been performed by the mortgage broker; rather, we stated that the lender would have to show that the services that were performed were directly tied to the YSP payment. Id. at 1329-30; see also Schuetz, 292 F.3d at 1010 (stating that in Culpepper III we held that “the test for § 8 liability is not whether the broker performed some services, but whether the YSP is payment for those services”).

[33] We then stated that, if the compensation to the broker was not shown to be directly tied to the services performed — that is, if the YSP was not shown to be “payment for those services,” Culpepper III, 253 F.3d at 1331 – then the second step of the HUD analysis (whether the total compensation was reasonable) was wholly unnecessary. Rather, if the defendant failed at the outset to establish that the YSP payment was directly tied to the services performed, then the YSP was likely a referral fee, which, we held, was “illegal, period” under RESPA. Id. at 1330. After articulating this approach to liability under RESPA, we indicated that class certification in the Borrowers’ case was proper, because the YSPs were paid pursuant to standardized, across-the-board agreements between the lender and the mortgage broker, and, therefore, the requirements of Rule 23 had been satisfied. Id. at 1332.

[34] In the wake of our decision in Culpepper III,HUD issued a second SOP in October 2001, entitled, in pertinent part, “Clarification of Statement of Policy 1999-1 Regarding Lender Payments to Mortgage Brokers.” See 66 Fed. Reg. 53052 (Oct. 18, 2001). HUD stated that the new SOP was intended to “eliminate any ambiguity concerning the Department’s position with respect to [YSPs].” Id. HUD also indicated that the SOP was being issued in direct response to Culpepper III, indicating that “[t]he need for further clarification of HUD’s position, as set forth in the 1999 [SOP], on the treatment of lender payments to mortgage brokers under [12 U.S.C. § 2607(a)] is evident from the recent decision [in Culpepper III].” Id. at 53054. HUD went on to state that it “disagree[d] with the judicial interpretation” of § 2607 that we had set forth in Culpepper III. Id.

[35] HUD’s 2001 SOP reiterated the two-step test it had established in the 1999 SOP, indicating that the proper analysis involved an assessment, first, into whether compensable services were actually performed by the broker, and, second, whether the total compensation paid to the broker was reasonable. Id. at 53053. The SOP “restate[d]” HUD’s position that YSPs were neither per se legal, nor per se illegal. Id. at 53054. Rather, HUD advised that each case involving a YSP payment from a lender to a broker should be assessed based on “the specific factual circumstances applicable to each transaction in which a [YSP] is used.” Id.

[36] HUD then clarified its two-step test for YSP payments under RESPA. As to step one, HUD stated that it was improper to require (as we had in Culpepper III) that there be a clear and direct link between the “services” the mortgage broker provided and the compensation that was paid. Id. Rather, HUD observed that a lender might often be aware that a mortgage broker was performing compensable services for both the lender and the broker, even if the relationship between the services provided and the compensation paid was not explicitly set forth in a contractual agreement. Id. HUD recommended that the inquiry instead focus on whether compensable services–such as those it had listed in its 1999 SOP–had been provided by the mortgage broker, irrespective of whether the parties had agreed that the YSP was intended to cover those services. Id. In clarifying step one in this way, the SOP rejected the “exchange” analysis that had been applied by our court in Culpepper III. HUD’s SOP also made clear that if any compensable “services” were, in fact, provided by a broker, the proper analysis would then to be move to step two, that is, whether the total compensation was reasonably related to those services.

[37] As to that second step, HUD reiterated that the inquiry should focus on whether the “total compensation” that the mortgage broker received was “reasonably related to the total set of goods or facilities actually furnished or services performed.” Id. HUD stated that the total compensation was to be viewed as a whole (not just the YSP in isolation), and that an assessment of whether the compensation was “reasonable” involved both an objective component (that is, typical mortgage broker compensation in comparable markets) and a subjective component (that is, in light of the particular services that the broker provided). Id.

[38] D. The Impact of the 2001 Statement of Policy on Our Case Law

[39] Subsequently, in Heimmermann v. First Union Mortgage Corporation, We addressed the impact of the HUD 2001 SOP. Although the Borrowers in the instant case were not parties to Heimmermann, the facts of that case were similar to the Borrowers’ action; we characterized Heimmermann as “one of several [cases] dealing with RESPA’s effect on the legality of the payment of [YSPs] by mortgage lenders to mortgage brokers.” 305 F.3d at 1259. The issue before us in Heimmermann was whether the district court had applied the correct legal standard for RESPA liability in the course of certifying a class in that case.

[40] At the outset, Heimmermann addressed the applicability of the 2001 HUD SOP on our RESPA case law. First, we held that the 2001 SOP was not a “new rule” or regulation, but merely a clarification of existing law, and therefore, “no problem with the retroactive application of the [SOP] exist[ed].” Id. at 1260. Second, we noted that RESPA expressly delegated to HUD the power to issue interpretations and rules — including statements of policy similar to the 2001 SOP — that carry the full force of law, and therefore, the 2001 SOP was entitled to Chevron*fn5 deference by our court. Id. at 1262.*fn6 We rejected the plaintiff’s arguments that the 2001 SOP should not be afforded Chevron deference because

[41] (1) it had not been issued pursuant to a formal notice-and-comment process; and

[42] (2) it was inconsistent with earlier expressions of HUD’s position and the statutory language. Id.

[43] After determining that the 2001 SOP was entitled to Chevron deference, we held that the rule announced in the 2001 SOP had the effect of “overrul[ing] the holding of Culpepper III.” Id. at 1263. We stated that the 2001 SOP had “explicitly reject[ed] the foundation of Culpepper III” and that we were bound to apply the revised two-step test as it had been articulated by HUD in the 2001 SOP. Id. We cited our decision in Satellite Broadcasting and Communications Association of America v. Oman, 17 F.3d 344 (11th Cir. 1994), for the proposition that we were bound to defer to an intervening statutory interpretation that was contrary to our earlier precedent, so long as the agency’s interpretation was based on a permissible construction of the statute. Id.

[44] Having adopted the 2001 SOP as the law in our circuit on the question of YSP liability under RESPA, we concluded in Heimmermann that the district court had applied the “wrong legal standard” in deciding to certify the class. Id. at 1264. Specifically, we observed that the district court had certified the class based on the fact that “for each class member’s loan, the YSP was not tied directly to specific additional services provided by the broker.” Id. (emphasis added). Because that legal standard was suggestive of Culpepper III’s “exchange” analysis — an approach that had since been rejected by the 2001 SOP — we held in Heimmermann that the district court had committed legal error. Id. Moreover, we indicated that the 2001 SOP had made clear that “it [was] necessary to determine whether compensable services were provided by the broker and whether the total amount of broker compensation was reasonable in the light of the circumstances of each loan,” a fact that militated against certifying a class of plaintiffs based only on the fact that their mortgage brokers had received YSPs. Id.

[45] Although the Heimmermann court did not proceed to apply the HUD test as articulated in the 2001 SOP, we later had occasion to apply that test in Hirsch v. Bank America Corporation, 328 F.3d 1306 (11th Cir. 2003) (per curiam). Like the Borrowers’ case, Hirsch was an action against a mortgage lender for paying a YSP to a mortgage broker. Id. at 1307. In Hirsch the mortgage broker had received $1,750 in fees from the plaintiff/borrower, and had received an additional $375 YSP from the lender for delivering a loan with a favorable interest rate. Id. at 1307-08.

[46] In Hirsch, we reiterated that Heimmermann had adopted the 2001 SOP as the law of this circuit; we then applied the two-step test as articulated in the 2001 SOP. Id. at 1309. First, we found that the mortgage broker had provided “actual services” to the Hirsches, such as recording their information, preparing the mortgage application, analyzing their income and debt, and attending the closing. Id. Having satisfied the first step of the HUD test, we then moved to step two, and concluded that the total compensation paid to the broker–about 1.4% of the loan amount–was reasonable under the circumstances. Id. Accordingly, we held that the defendant/lender was entitled to summary judgment on the Hirsches’ RESPA claim, since the Hirsches’ had failed to establish that the YSP was illegal under the HUD test construing section 8 of RESPA. Id.

[47] E. The District Court Proceedings After the 2001 Statement of Policy

[48] In the wake of these appeals, and subsequent to the parties’ discovery in this case, Irwin filed motions for summary judgment and to decertify the class. As to Irwin’s motion for summary judgment, the district court found that Heimmermann had made clear that our circuit had adopted HUD’s two-prong test, as articulated in the 2001 SOP.The court then turned to the facts of the Borrowers’ transactions in order to assess whether the services provided by their mortgage brokers (Premiere for the Culpeppers, and HMI for Hiers) had complied with HUD’s two-step test. As to step one, the district court found that the Borrowers’ mortgage brokers had provided compensable services to them, including those services listed in the 1999 SOP, such as collecting financial information; assisting with the mortgage application process; and maintaining contact with the borrower.

[49] Moving to step two — whether the total compensation the mortgage brokers received was “reasonably related” to the value of the services the mortgage brokers performed, 64 Fed. Reg 10084 — the district court found that the Borrowers had not presented any evidence to show that the compensation received by their brokers was unreasonable. The court found that the Borrowers’ argument that the YSP was paid to their brokers without any concomitant reduction in their out-of-pocket, up-front costs was not sufficient, in and of itself, to establish that the brokers’ total compensation was not “reasonably related” to the services the brokers provided.The court further found that the Borrowers had failed to present any evidence that the compensation these brokers received was unreasonable in comparison to similar mortgage loans in similar transactions. Because the Borrowers had not provided “any evidence that establishe[d] the unreasonableness of Premier’s or HMI’s total compensation in light of market norms,” the district court concluded that there was no genuine issue of fact on the issue of the reasonableness of the compensation, and, therefore, Irwin was entitled to summary judgment on the Borrowers’ RESPA action. R9-204 at 22.

[50] As to the separate motion to decertify the class, the district court indicated that the Heimmermann decision made clear that YSP payments to brokers should be assessed on a case-by-case basis, and that therefore class certification was not appropriate for these kinds of actions, in which individual fact issues predominate. The court also rejected the Borrowers’ argument that the YSP payments were above the 1% FHA-imposed limit on loan origination fees, and therefore that They were per se illegal, without the need for an individualized assessment.The court found that this approach would contradict the HUD SOPs of 1999 and 2001, which mandated a case-by-case analysis to determine if a particular YSP was illegal under RESPA.Accordingly, the court granted Irwin’s motion, and decertified the class. This appeal followed.


[52] A. District Court’s Grant of Summary Judgment in Favor of Irwin

[53] We review a district court’s grant of summary judgment de novo, Applying the same legal standard used by the district court. See Johnson v. Bd. of Regents, 263 F.3d 1234, 1242 (11th Cir. 2001) (citation omitted). Under that standard, summary judgment is appropriate where “there is no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). We have held that “the plain language of Rule 56(c) mandates the entry of summary judgment . . . against a party who fails to make a showing sufficient to establish the existence of an element essential to that party’s case, and on which that party will bear the burden of proof at trial.'” Johnson, 263 F.3d at 1243 (quotations and citation omitted).

[54] The Borrowers make two arguments concerning the district court’s Decision to grant summary judgment in favor of Irwin. First, they argue that the law-of-the- case doctrine obligates us to adhere to our prior rulings in this case, despite the intervening — and conflicting — approach taken by HUD in its 1999 and 2001 SOPs. Second, the Borrowers argue that even assuming the HUD test for liability applies to their case, summary judgment still should not have been granted to Irwin, since their evidence establishes that the YSPs Irwin paid were illegal under that test. We address each contention in turn.

[55] 1. Law-of-the-Case

[56] The Borrowers argue that the law-of-the-case doctrine precludes us from reconsidering our holdings in the earlier Culpeppercases–specifically our holding in Culpepper III that we need not assess the “reasonableness” of the compensation Irwin paid to the mortgage brokers, and may find a RESPA violation, absent any evidence that the YSP was directly tied to the services that the mortgage brokers provided. The Borrowers argue that, under the law-of-the-case doctrine, we are bound by the approach that we took in Culpepper III, notwithstanding the fact that approach was expressly refuted in the HUD 2001 SOP, and notwithstanding the fact that we later held that the HUD 2001 SOP overruled Culpepper III. See Heimmermann, 305 F.3d at 1263-64.

[57] The law-of-the-case doctrine holds that subsequent courts will be “bound by the findings of fact and conclusions of law made by the court of appeals in a prior appeal of the same case.” Wheeler v. City of Pleasant Grove, 746 F.2d 1437, 1440 (11th Cir. 1984) (per curiam) (citation omitted). The purpose of the doctrine is to bring an end to litigation, and to protect against the agitation, or re-litigation, of settled issues. Id.(citations omitted). Although the doctrine bars reconsideration of settled issues, however, we have stated that the law-of-the-case rule is not an inexorable command, nor does it “require rigid adherence to rulings made at an earlier step of a case in all circumstances.” Murphy v. FDIC, 208 F.3d 959, 966 (11th Cir. 2000) (citation omitted). Rather, we have described the doctrine as “direct[ing] a court’s discretion” rather than “limit[ing] the tribunal’s power.” Id. We are not bound under the doctrine to “adhere to a ruling with which we have emphatically and repeatedly disagreed.” Id.

[58] Moreover, there are three notable exceptions to the doctrine. We will not be barred from reconsidering the law-of-the-case “when (1) a subsequent trial produces substantially different evidence (2) controlling authority has since made a contrary decision of law applicable to that issue or (3) the law-of-the-case is clearly erroneous and will work manifest injustice if not if not reconsidered.” Wheeler, 746 F.2d at 1440 (citation omitted).

[59] The district court concluded that the law-of-the-case doctrine was inapplicable to the present case, and, consequently, that it was not bound to follow the approach to RESPA liability taken in Culpepper III. This conclusion was proper, for two reasons. First, the doctrine’s second exception applies, because the 2001 SOP constituted “controlling authority has since made a contrary decision of law applicable to that issue.” See Wheeler, 746 F.2d at 1441. Moreover, the lawof-the-case doctrine is inapplicable because we are “convinced that the prior decision [Culpepper III] is clearly erroneous and would work manifest injustice” if it were blindly followed. See Murphy, 208 F.3d at 966 (citations omitted).

[60] As to the first point, the 2001 HUD SOP constituted “controlling authority [that] has since made a contrary decision of law applicable” to the Borrowers’ case. Wheeler, 746 F.2d at 1441. In Heimmermann, we stated that the 2001 HUD SOP was an agency ruling that carried the full force of law, that it was based on a permissible construction of the statute, and that it was entitled to Chevron deference by our court.*fn7 See 305 F.3d at 1205. Moreover, in Heimmermann, we adopted the 2001 SOP as the law of our circuit. See id. at 1263; see also Hirsch, 328 F.3d at 1309. Because the 2001 SOP constitutes “controlling authority” carrying the force of law, we our bound to follow it, rather than our earlier, contrary holding in Culpepper III. A contrary result would “wed this circuit to [an earlier] decision, while all other circuits and the Supreme Court would be bound under Chevron to defer to the [agency] rule.” See Satellite Broadcasting, 17 F.3d at 348.

[61] Moreover, we are convinced that the third exception to the law-of-the-case doctrine is applicable–that is, that the approach to RESPA liability taken in Culpepper III was “clearly erroneous,” such that continuing to apply it “would work manifest injustice.” See Murphy, 208 F.3d at 966. We intimated as much in Heimmermann, where we stated that the district court, by following the standard of liability of Culpepper III, had “applied the wrong legal standard.” 305 F.3d at 1264 (emphasis added). We have repeatedly stated that the 2001 SOP had the effect of overruling Culpepper III, thereby suggesting that the approach to RESPA liability taken in Culpepper III was clearly erroneous. See id.; see also Glover v. Standard Federal Bank, 283 F.3d 953, 964 n.9, 966 (8th Cir. 2002) (rejecting the analysis of Culpepper III and querying whether the case retains any residual viability in the Eleventh Circuit in the wake of HUD’s 2001 SOP). For that reason, we find that continuing to follow Culpepper III would work manifest injustice.

[62] Because we conclude that the approach to RESPA liability taken in Culpepper III was clearly erroneous and that continuing to follow that approach would work manifest injustice, we agree with the district court that the law-of-the-case doctrine is inapplicable to the Borrowers’ case. We are not bound under the law-of-the-case to continue to follow the RESPA liability standard set forth in Culpepper III; rather, the HUD 2001 SOP test applies. We now turn to that test in order to determine if Irwin was entitled to summary judgment as a matter of law.

[63] 2. Whether the Borrowers’ YSPs Constitute Illegal Payments Under RESPA

[64] The Borrowers contend that even under the HUD two-step test, the district court nevertheless erred in granting summary judgment in favor of Irwin, because the YSPs Irwin paid to the Borrowers’ mortgage brokers were unreasonable and illegal under the HUD test.

[65] HUD’s test for whether a YSP to a mortgage broker constitutes an illegal payment under RESPA involves two steps. First, we ask whether the broker performed “actual services” in the course of arranging the mortgage transaction, that is, whether he performed any of the services mentioned in HUD’s 1999 SOP. Hirsch, 328 F.3d at 1308-09. If the answer to the first question is no, then a RESPA violation has been established. Glover, 283 F.3d at 965. If the answer to the first question is yes, we then proceed to ask whether the total compensation was reasonable in light of the total array of services that the broker performed. See Hirsch, 328 F.3d at 1309. In undertaking this analysis, we do not ask whether the services the broker performed were linked to the YSP in particular; rather, we look at “all of the services performed and [] evaluate them in light of all the compensation (not just the YSP in isolation) the mortgage broker received from any source.” Id. at 1309 n.8; 66 Fed. Reg. 53053; see also Glover, 283 F.3d at 965 (stating that step two involves an assessment of “whether any part of the total payment, including the YSP, proves to be excessive, and, thus, an unlawful referral fee”).

[66] Here, it is undisputed that the Borrowers’ mortgage brokers provided them with the kinds of services listed in HUD’s 1999 SOP, including, among others, taking down their information and filling out their mortgage applications; analyzing their income and debt and pre-qualifying them to determine the maximum mortgages that they could afford; collecting their financial information; and participating in their loan closings. See 64 Fed. Reg. 10085. These are compensable services under RESPA, and thus the first step of the HUD two-part test is satisfied.*fn8

[67] We then must ask whether the total compensation paid to the mortgage brokers was unreasonable in light of the services that they performed. In the case of the Culpeppers, Premiere’s compensation consisted of a loan origination fee of $760.50, as well as a YSP of $1,263.21 — about 1.675% of the loan amount —bringing Premiere’s total compensation to $2,023.71. In the case of Hiers, HMI’s compensation consisted of an origination fee of $1,544, a loan discount of $14.64, and a YSP of $4,538.87 — approximately 2.875% of the total loan amount —bringing its total compensation to $6,097.51.

[68] The Borrowers do not present any evidence demonstrating that these compensation amounts were unreasonable in light of the total array of services performed. Instead, they argue that the fact that the YSP payment did not in any way reduce their up-front closing costs establishes that they were unreasonable under RESPA. This contention fails, for two reasons. First, as discussed previously, in deciding the question of reasonableness we are instructed to assess the “total compensation” the broker received, which “includes direct origination fees and other fees paid by the borrower, indirect fees, including those that are derive from the interest rate paid by the borrower, or a combination [thereof] . . . .”

[69] 66 Fed. Reg. 53055. Second, as the district court concluded, the fact that the Borrowers’ up-front closing costs were not reduced is not sufficient, standing alone, to establish that the brokers’ compensation was unreasonable in light of the services that they performed. This is especially so where the services they performed otherwise appear to have aided and benefitted the Borrowers in closing their mortgage transactions.

[70] Nor are we convinced by the Borrowers’ contention that the YSP was per se unreasonable because under federal regulations a broker’s compensation is limited to an origination fee of 1%. See 24 C.F.R. § 203.27(a)(2)(i). Other circuits that have considered that argument have rejected it, concluding that the limitation on mortgage broker fees set forth in 24 C.F.R. § 203.27(a)(2)(i) only applies to fees “directly collected [from the mortgagor], not indirectly collected [from the lender].” See Bjustrom v. Trust One Mortgage Corp., 322 F.3d 1201, 1205 (9th Cir. 2003). Because we agree with the Ninth Circuit that 24 C.F.R. § 203.27(a)(2)(i) does not preclude a mortgage broker from collecting a YSP indirectly from a mortgage lender, we cannot accept the Borrowers’ blanket contention that any compensation in excess of the 1% origination fee is per se unreasonable under RESPA. Such an approach would flout HUD’s case-by-case inquiry to YSP payments.

[71] In summary, the Borrowers bear the burden of demonstrating, with specific evidence, that the total remuneration that their brokers received was unreasonable, see Hirsch, 328 F.3d at 1309, in light of both objective market standards and the subjective facts of their mortgage transactions. 66 Fed. Reg. 53055. This is a burden they have failed to satisfy. Because neither of the Borrowers has submitted evidence sufficient to demonstrate that the total compensation paid to their respective brokers was somehow “unreasonable” under HUD’s RESPA analysis, summary judgment was appropriate for Irwin. See, e.g., Hirsch, 328 F.3d at 1309 (affirming grant of summary judgment for the lender where the plaintiffs did not present any evidence that the total amount paid to their broker, including a YSP, was unreasonable in light of the services the broker performed); Bjustrom, 322 F.3d at 1208 (affirming grant of summary judgment to the lender on a RESPA action where the plaintiff “offered no evidence to prove that her mortgage broker’s services weren’t worth what was paid”); Schuetz, 292 F.3d at 1014 (same). We discern no error in the district court’s order.

[72] B. District Court’s Order Decertifying the Class

[73] The Borrowers separately challenge the district court’s decision to decertify the class, a decision that was reached in conjunction with the court’s decision to grant summary judgment for Irwin. Under Rule 23(c)(1)(C) of the Federal Rules of Civil Procedure, a district court may alter or amend its certification order at any time before rendering a decision on the merits. We review the propriety of a district court’s decision to decertify a class for abuse of discretion. See Sikes v. Teleline, Inc., 281 F.3d 1350, 1359 (11th Cir. 2002); see also Forehand v. Fla. State Hosp. at Chattahoochee, 89 F.3d 1562, 1566 (11th Cir. 1996) (“Questions concerning class certification are left to the sound discretion of the district court.”) (citation omitted). “A district court abuses its discretion if . . . it applies the wrong legal standard . . . or makes findings of fact that are clearly erroneous.” Sikes, 281 F.3d at 1359 (citations and quotation omitted).

[74] In this case, the district court concluded that HUD’s SOPs had repeatedly urged a case-by-case analysis to the legality of a compensatory payment to a broker under RESPA. After concluding — in light of the HUD SOPs as well as Heimmermann — that such an individualized, case-by-case assessment made class certification inappropriate for section 8 RESPA claims, the court decertified the class. The Borrowers contend that this was in error.

[75] The Borrowers’ case was originally certified as a class action in February of 1999, prior to both the 1999 and the 2001 SOPs. At that time, the putative class had been generally defined as “all persons” who obtained a federally insured mortgage “that was funded by Irwin Mortgage Corporation wherein the broker was paid a loan origination fee of 1% or more and wherein Irwin paid a [YSP] to the broker.” R2-47 at 1. In arguing for class certification, the Borrowers had focused on the general nature of their claims, stating that “each of the class members had fallen victim to the same improper conduct as the named Plaintiffs–being sold an inflated interest rate loan in order to fund Irwin Mortgage Corporation’s [] illegal referral fee to the class members’ mortgage brokers.” Id. at 2. The district court accepted this characterization of the Borrowers’ case, stating in its certification order that class certification was proper because the Borrowers’ “proof will, of necessity, be of a general nature . . . and will not be fact specific.”*fn9 R2-59 at 9.

[76] The 2001 SOP, however, made clear that the legality of a YSP payment to a mortgage broker is to be assessed in light of the particular facts and circumstances of the borrower’s transaction; the agency ruling repeatedly emphasized the individualized nature of the inquiry under RESPA. See, e.g., 66 Fed. Reg. 53054 (stating that “the legality of any [YSP] can only be evaluated in the context of the test HUD established and the specific factual circumstances applicable to each transaction in which a [YSP] is used”); id. at 53055 (“[I]t is necessary to look at each transaction individually, including examining all of the goods or facilities provided or services performed by the broker in the transaction”). HUD’s recommendation that each mortgage transaction be assessed on a individual, caseby-case basis certainly calls into question the district court’s original decision to certify the Borrowers’ class, based on its presupposition that the Borrowers’ action would “be of a general nature . . . and [would] not be fact specific.” R2-59 at 9.

[77] Moreover, in Heimmermann we reversed a class certification, based, in part, on the fact the 2001 SOP had made clear that “it [was] necessary to determine whether compensable services were provided by the broker and whether the total amount of broker compensation was reasonable in the light of the circumstances of each loan.” 305 F.3d at 1264. We concluded that this interpretation militated against certifying a class based only on the fact that all class members’ brokers had received YSPs. Id. In addition, our sister circuits have concluded that class certification is inappropriate in section 8 RESPA cases, in light of HUD’s 2001 SOP expressly urging an individualized assessment of compensatory payments to brokers. See, e.g., Glover, 283 F.3d at 965 (concluding that class certification is impractical in RESPA actions involving YSP payments to brokers, since HUD’s SOP made clear that these transactions are “case specific” and that district courts are to undertake a “loan specific inquiry”); Schuetz, 292 F.3d at 1014 (class certification inappropriate because whether the YSP is prohibited depends on the services provided and the compensation paid “in any particular case”); see also O’Sullivan v. Countrywide Home Loans, Inc., 319 F.3d 732, 741-42 (5th Cir. 2003) (finding class certification inappropriate for a section 8(b) RESPA action because, “[c]onsistently with the HUD reasonable relationship test, individualized factfinding will be required for each transaction” and stating that the “inquiry must be performed on a transaction-by-transaction basis, because a single finding of liability based on an unreasonable relationship between goods and services does not necessitate the conclusion that such unreasonableness exists on a classwide basis”).

[78] In light of these decisions, we cannot conclude that the district court abused its discretion in finding that class certification was improper and in thereby decertifying the class. Under Rule 23(c)(1) of the Federal Rules of Civil Procedure, district courts are free to revisit the initial decision to certify a class, in light of subsequent developments in the case. See Gen. Tel. Co. of Sw. Falcon, 457 U.S. 147, 160, 102 S.Ct. 2364, 2372 (1982). Here, the district court concluded that the Borrowers’ action should not have been certified as a class action in the first place, in light of both the subsequent HUD pronouncement on RESPA liability as well as our decision in Heimmermann adopting the 2001 SOP as the law of this circuit. That conclusion was not in error, and therefore we affirm the district court’s order decertifying the class.


[80] The Borrowers have appealed the district court’s order granting summary judgment in favor of Irwin on their section 8 RESPA claim, and the district court’s separate order decertifying the class in their case. Upon review, we conclude that, based on the HUD test for RESPA liability set forth in the 2001 SOP, the Borrowers have failed to provide evidence that the total compensation Irwin paid to their mortgage brokers was unreasonable in light of the services that they provided. Therefore, Irwin was entitled to summary judgment on the Borrowers’

[81] RESPA claim. In addition, we find that individual issues of fact predominate in these types of RESPA actions, and therefore, we conclude that the district court did not abuse its discretion in decertifying the class in the Borrowers’ case. Accordingly, we AFFIRM.

Opinion Footnotes

[82] *fn1 Honorable Gregory A. Presnell, U.S. District Judge for the Middle District of Florida, sitting by designation.

[83] *fn2 This action was originally brought by John and Patricia Culpepper. In 1998, Beatrice Hiers’ RESPA action was consolidated with the Culpeppers’ case, thereby giving rise to the action that is pending before us.

[84] *fn3 The Culpeppers’ original lawsuit was actually brought against Inland Mortgage Corporation (“Inland”), the predecessor lender from whom the Culpeppers obtained their home mortgage. Inland subsequently changed its name to Irwin. For ease of reference, we refer to the appellee throughout this opinion as “Irwin.”

[85] *fn4 Congress enacted RESPA with the goal of “protect[ing] the American home-buying public from unreasonably and unnecessarily inflated prices in the home purchasing process.” See 64 Fed. Reg. 10081-82 (March 1, 1999); see also 12 U.S.C. § 2601(a). In addressing real estate settlement procedures, Congress sought to, among other things, “effect certain changes in the settlement process for residential real estate that will result (1) in more effective advance disclosure to home buyers and sellers of settlement costs; (2) in the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services . . . .” 12 U.S.C. § 2601(b); see also 64 Fed. Reg. 10082.

[86] *fn5 See Chevron U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S. 837, 844, 104 S.Ct. 2778, 2782 (1984) (stating that where Congress has delegated authority to an agency to elucidate a provision of a statute, the agency’s rules carry the full force of law and are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute).

[87] *fn6 Other circuits, including the Ninth Circuit and the Second Circuit, have similarly concluded that HUD’s 2001 SOP construing RESPA is entitled to Chevron deference. See, e.g., Schuetz, 292 F.3d at 1012, 1014 (stating that the 2001 SOP is entitled to Chevron deference and that it “provides the appropriate standard of liability for YSPs under RESPA”); see also Kruse v. Wells Fargo Home Mortgage Inc., 383 F.3d 49, 61 (2d Cir. 2004) (affording Chevron deference to the 2001 SOP in the context of section 8(b) of RESPA).

[88] *fn7 In reaching that conclusion, we cited to Satellite Broadcasting, a case in which we concluded that we are not precluded from revisiting our prior precedent in light of a subsequent and conflicting agency ruling on an issue of law, so long as (1) the prior precedent left room for the agency to speak to the question; and (2) the intervening agency regulation was not arbitrary or capricious. 17 F.3d at 347-48. Here, the Culpepper III court had found HUD’s two-part RESPA test to be ambiguous, thus leaving room for HUD to step in and clarify it, as it did with the 2001 SOP. Moreover, HUD’s 2001 SOP was not arbitrary or capricious. See Heimmermann, 305 F.3d at 1263. Accordingly, as in Satellite Broadcasting, we are inclined to follow the intervening agency ruling and to afford it Chevron deference.
The Borrowers argue that the HUD SOP is not entitled to Chevron deference, because (1) it is at odds with the plain meaning of the statute; and (2) HUD failed to engage in a formal notice-and-comment process before issuing its ruling. We rejected both of these arguments in Heimmermann, see 305 F.3d 1261-62, and we likewise reject them now.

[89] *fn8 The Borrowers argue that no compensable “service” was ever performed by their mortgage brokers. In support of this contention, they cite to a 1996 interrogatory in which Irwin stated that it paid a YSP to the Culpeppers’ broker, Premiere, “for the right to service the loan.” R6-149, Exh. 16 at 6. The Borrowers argue that this admission shows that no “service” was performed that redounded to the Culpeppers’ benefit. Rather, they contend that this admission shows that the YSP was nothing more than a payment by Irwin to purchase the Culpeppers’ loan, and that therefore the payment fails on the first step of the HUD liability test.
We reject this argument. HUD has stated that the YSP is not to be viewed in isolation, but as part of the total compensation to the broker. 66 Fed. Reg. 53053. HUD has also made clear that it “does not view the name of the payment”— that is, how the parties refer to a piece of the compensation —“as the appropriate issue under RESPA.” Id. at 53054. Rather, the transaction’s legality must be assessed according to the totality of the circumstances. In light of that guidance, the fact that Irwin stated in an interrogatory that it was paying “for the right to service the [Culpeppers’] loan” does not, standing alone, establish that the Culpeppers’ mortgage broker did not perform any compensable services that inured to their benefit.

[90] *fn9 It should also be pointed out that the district court’s order certifying the class in 1999 relied heavily on the “exchange” approach of the earlier Culpepper cases. See, e.g., R2-59 at 8 (stating, in certifying the class, that the YSP couldn’t be a payment for “services” under section 8(c), because the YSP was “not tied in any fashion to the amount of services paid either to the Culpeppers or to the defendant”). This approach was subsequently rejected by the HUD 2001. Moreover, in Heimmermann, we reversed a certification of a class that had been based on similar legal reasoning, characterizing it as the “wrong legal standard.” See Heimmermann, 305 F.3d at 264.

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Capell v. Pulte Mortgage L.L.C., No. 07-1901 (E.D.Pa. 11/07/2007)

Posted on November 10, 2008. Filed under: Case Law, RESPA | Tags: , |


[2] CIVIL ACTION No. 07-1901

[3] 2007.EPA.0001057

[4] November 7, 2007


[6] The opinion of the court was delivered by: Dalzell, J.


[8] In 2006, plaintiff Ellen Zaccheo Capell bought a house from a Pulte Homes of PA, L.P. (“PHPA”). The purchase agreement stated that if Capell used certain real estate settlement service providers affiliated with PHPA, then Capell would (and did) receive a $25,000 closing cost credit.

[9] Capell sued Pulte Homes, Inc., Pulte Mortgage L.L.C., Pulte Closing Services, L.L.C., Pulte Diversified Companies, Inc., and Pulte Home Corporation (together “Pulte”), alleging that by offering a $25,000 closing cost credit, Pulte required her to use affiliated settlement services providers, thereby violating the Real Estate Settlement Procedures Act (“RESPA”).

[10] 12 U.S.C. § 2601, et seq. Pulte moved to dismiss Capell’s complaint based on Fed. R. Civ. P. 12(b)(1) and 12(b)(6).

[11] I. Background

[12] On June 12, 2006, Capell and PHPA entered into a purchase agreement for a new house to be built in a development at Chester Springs, Pennsylvania. Compl ¶ 22, Ex. 1. According to the construction order, the house cost about $450,000. Id.

[13] Ex. 1 The purchase agreement included various addenda, including Affiliated Business Arrangement Disclosure Statements, and a Concession Addendum. Id. ¶ 23, Ex. 2, 3, 4.

[14] The Affiliate Business Arrangement Disclosure Statements stated that PHPA was the “Majority Member” of both Pulte Mortgage and Pulte Closing Services. Id. Ex. 2, 3. These Statements listed the anticipated costs for using the respective services. Id. The Statements included the following language in bolded type just above the acknowledgment and signature line:


[16] Id.

[17] The Concession Addendum presented the “Smart Buyer Bonus Program”, which offered buyers of Pulte houses either a price reduction or a closing cost credit for using businesses affiliated with PHPA. Id. Ex. 4. The Addendum stated that Capell would receive a $25,000 closing credit if she (1) obtained her mortgage from Pulte Mortgage, (2) used Pulte Closing Services or another settlement service PHPA selected, and (3) settle on the house within 120 to 160 days from the start of construction. Id. The Addendum stated that the seller would not be obligated to reduce the price or provide the closing credit if the buyer opted not to use the affiliated services. Id. It also stated that “the choice of a title agency and lender is the Purchaser’s sole decision and Purchaser is not obligated to use Pulte Closing Services, Pulte Mortgage, LLC or to elect the Smart Buyer Bonus Option.” Id.

[18] On June 12, 2006, Capell signed the purchase agreements and various addenda. Id. Ex. 1, 2, 3, 4. She secured her mortgage through Pulte Mortgage and got title insurance through Pulte Closing Services. Id. ¶ 25.

[19] On May 10, 2007, Capell filed suit in this Court, arguing that by giving her the $25,000 closing cost credit Pulte obligated her to use Pulte Mortgage and Pulte Closing Services, and this violated RESPA § 8(a), § 8(b), and § 9, codified at 12 U.S.C. §§ 2607(a)-(b), 2608. Pulte moved to dismiss the complaint, contending that the facts Capell averred do not state a claim under RESPA, and that Capell lacks standing to bring these claims.

[20] II. Analysis*fn1

[21] Congress enacted RESPA in 1974 to advance disclosure of settlement costs, eliminate kickbacks and fees that increase such costs, reduce the funds buyers place in escrow prior to the closing of real estate sales, and modernize recordkeeping of title information. 12 U.S.C. § 2601(b). To further these aims, RESPA creates certain prohibitions and obligations relating to any transaction involving a “federally related mortgage loan.” Id. § 2602(1). Capell alleges that Pulte violated RESPA §§ 8(a), 8(b), and 9.

[22] RESPA § 8(a) creates a blanket prohibition against giving or receiving “any fee, kickback, or thing of value pursuant to any agreement or understanding…that business incident to…real estate settlement service…shall be referred to any person.” Id. § 2607(a). RESPA § 8(b) imposes a similar prohibition against giving or receiving a portion “of any charge…for the rendering of a real estate settlement service…other than for services actually performed.” Id. § 2607(b).

[23] RESPA § 8(c), however, exempts certain types of referrals from RESPA § 8(a) and 8(b)’s prohibitions. Id. § 2607(c). Relevant here, RESPA § 8(c) permits referral through “affiliated business arrangements” (hereinafter “ABAs”) under certain circumstances. Id. An ABA is an agreement between someone “in a position to refer business incident to…a real estate” transaction and a real estate settlement service provider where the referring party has “an affiliate relationship with or a direct or beneficial ownership interest of more than 1 percent” in the settlement service provider. Id. § 2602(7). RESPA exempts referrals through ABAs if (1) the referred settlement service provider discloses the ABA and gives a written estimate of charges to the person referred to them, (2) “such person is not required to use any particular provider,” and (3) “the only thing of value” that the referring party receives (other than payments specifically permitted by 12 U.S.C. § 2607(c)) is a return on investment in the affiliated business. Id. § 2607(c)(4).

[24] RESPA § 9 prohibits sellers of houses from “requir[ing], directly or indirectly, as a condition to selling the property, that title insurance…be purchased…from any particular title company.” Id. § 2608.

[25] Pulte cites three reasons why we should dismiss this case. First, it argues that RESPA does not prohibit closing cost credits because such credits do not require the buyer to use the affiliated services. Def.’s Mem. at 2, 8-13. Since the “required…use” of a settlement service provider is an element of each cause of action Capell asserts, her claim must fail under Rule 12(b)(6). Id. Second, Pulte argues that even if Capell has sufficiently alleged required use, she fails to allege the other elements of her claims. Id. at 2-3, 14-17. Under RESPA § 8(a), Pulte notes that Capell fails to assert a kickback or referral agreement; under RESPA § 8(b), she fails to assert that her settlement service fees were split by the providers; and under RESPA § 9, she fails to sue the seller of the property as the statute requires. Id. Third, Pulte contends that Capell did not suffer an injury in fact, and therefore lacks standing to sue because she did not allege Pulte overcharged her for any settlement costs. Id. 3, 17-22.

[26] We shall move from Pulte’s last argument to its first. First, Capell does have standing to assert claims against Pulte, but, second, she has failed allege all the necessary elements to state a claim under RESPA §§ 8(b) and 9. Third, Capell has failed to allege facts sufficient to establish that Pulte’s closing cost credit required her to use Pulte’s affiliated settlement service providers. Thus, we shall dismiss Capell’s entire complaint.

[27] A. Standing

[28] Both parties believe that Article III standing is an issue in this case. For a plaintiff to have constitutional standing, she must establish (1) an injury in fact, i.e., invasion of plaintiff’s legally protected interest that is (a) concrete and particularized, and (b) actual and imminent (rather than conjectural or hypothetical); (2) a causal connection between plaintiff’s injury and defendant’s conduct, i.e., no intervening, independent action of a third party caused plaintiff’s injury; and (3) it is likely, and not merely speculative, that a favorable decision will redress plaintiff’s injury. Trump Hotel & Casino Resorts, Inc. v. Mirage Resorts Inc., 140 F.3d 478, 484-85 (3d Cir. 1998) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992)). But “[standing may exist] solely by virtue of statutes creating legal rights, the invasion of which creates standing.” Warth v. Seldin, 422 U.S. 490, 500 (1975) (internal quotations omitted).

[29] Pulte argues that a plaintiff asserting a RESPA violation must allege a settlement fee overcharge; if not, the plaintiff has suffered no injury in fact. Def. Mem. at 17-22. Capell argues that alleging financial injury “is not a prerequisite to Article III standing” to bring a RESPA claim because Pulte’s failure to comply with RESPA is itself the injury Congress envisioned when it created a private right of action in RESPA. Pl.’s Mem. at 21-22. Each side cites cases in support of their position, all of which turn on the interpretation of RESPA § 8(d)(2), which states,

[30] Any person or persons who violate the prohibitions or limitations of this section shall be jointly and severally liable to the person or persons charged for the settlement service involved in the violation in an amount equal to three times the amount of any charge paid for such settlement service.

[31] 12 U.S.C. § 2607(d)(2). The cases Capell cites hold that this language does not oblige the plaintiff to pay an overcharge in order to have standing to bring suit. Robinson v. Fountainhead Title Group Corp., 447 F. Supp. 2d 478, 486-89 (D. Md. 2006); Kahrer v. Ameriquest Mortgage Co., 418 F. Supp. 2d 748, 753-754 (W.D. Pa. 2006); see also Yates v. All American Abstract Co., 487 F. Supp. 2d 579, 582 (E.D. Pa. 2007). Pulte cites cases that hold the opposite. Cater v. Welles Bowen Realty, 493 F. Supp. 2d 921, 927 (N.D. Ohio 2007); Contawe v. Crescent Heights of America, Inc., 2004 WL 2244538, *3-4 (E.D. Pa. Oct. 1, 2004); Mullinax v. Radian Guaranty, Inc., 311 F. Supp. 2d 474, 486 (M.D.N.C. 2004); Moore v. Radian Group, Inc., 233 F. Supp. 2d 819, 825 (E.D. Tex. 2002).

[32] With all due respect to courts who have decided the RESPA § 8(d)(2) issue on standing grounds, we believe that this question is more properly analyzed under Rule 12(b)(6).*fn2 The standing doctrine’s goal is to determine whether the plaintiff’s complaint alleges more than “that he suffers in some indefinite way in common with people generally.” Lujan, 504 U.S. at 574 (quoting Massachusetts v. Mellon, 262 U.S. 447, 488-89 (1923)). An inquiry into standing is an inquiry as to “who” the proper person to bring suit is, and courts analyze “injury in fact” to further this inquiry. Capell has alleged that Pulte violated RESPA, affecting her in a way that is distinct from people generally. We agree that if anyone can bring this suit under this statute, it is Capell.

[33] The proper inquiry here is not “who” can sue, but what elements make up the cause of action under RESPA. Capell and Pulte are not really arguing about whether Capell is the appropriate litigant. Rather, they are at odds over whether RESPA liability attaches only if the plaintiff alleges an overcharge. Viewed through the lens of Fed. R. Civ. P. 12(b)(6), the question is whether an overcharge is an element of a cause of action under RESPA. Thus, we shall employ the 12(b)(6) standard, and answer the question in the negative.

[34] Under RESPA § 8(d)(2), defendants are liable for an “amount equal to three times the amount of any charge paid for such settlement service.” 12 U.S.C. § 2607(d)(2). One line of cases, primarily relying on the analysis in Moore, holds that to maintain a RESPA claim a plaintiff must allege an overcharge for settlement services. Moore, 233 F. Supp. 2d at 825; see Cater, 493 F. Supp. 2d at 927; Contawe, 2004 WL 2244538, *3-4; Mullinax, 311 F. Supp. 2d at 486. Moore focused on the Congressional purpose for RESPA, which is “to insure that consumers…are protected from unnecessarily high settlement charges.” 12 U.S.C. 2601(a); see Moore 233 F. Supp. 2d at 825. Moore interpreted RESPA’s § 8(d)(2) “any charge paid” language to mean the amount charged above the proper rate. Moore 233 F. Supp. 2d at 826. It concluded that if the defendant did not subject the consumer to higher settlement charges, then the Congressional purpose was not implicated and the plaintiff cannot sustain a claim. Id. at 825.

[35] Another line of cases, primarily relying on the analysis of Kahrer, holds that RESPA § 8(d)(2)’s “any charge paid” language includes all of the relevant settlement charges, and thus no overcharge is necessary to sustain a claim. Kahrer, 418 F. Supp. 2d at 753-754; Yates, 487 F. Supp. 2d at 582; Robinson, 447 F. Supp. 2d at 486-89. Kahrer pointed to the plain language of the statute — which creates liability for “any charge paid” — suggesting that damages should be calculated from the totality of the settlement charges rather than a portion of them. Kahrer, 418 F. Supp. 2d at 753. Also, Kahrer took issue with Moore’s reading of the legislative history — specifically, that it failed to consider the 1983 amendment to RESPA that created the language as it exists today — in the relevant portion of the statute. Kahrer, 418 F. Supp. 2d at 753-54. Kahrer pointed to a House Committee Report that stated that Congress feared that ABAs, if abused, could cause “the advice of the person making the referral [to] lose its impartiality …[and ABAs could] effectively reduce the kind of healthy competition generated by independent settlement service providers.” Id. at 754 (quoting H.R. Rep. No. 97-532, 97th Cong., 2nd Sess. at p. 52 (1982)). Kahrer took this as an indication that Congress intended to expand RESPA liability to include “harm to consumers beyond an increase in settlement charges as had been the concern when RESPA was first enacted.” Id.

[36] We find the Kahrer line of cases more persuasive. First, limiting RESPA § 8(d)(2)’s “any charge paid” language to overcharges is less consistent with the plain language of the statute than reading the locution as including the entirety of the settlement charge.*fn3 Second, the 1983 amendment changed RESPA’s statutory language in important ways that the Moore line fails to acknowledge. Third, the Moore line relies on a narrow reading of Congress’s purpose of protecting consumers from unnecessarily high settlement charges. RESPA allows individuals to police the marketplace in order to ensure impartiality of referrals and competition between settlement service providers, thereby creating a market-wide deterrent against unnecessarily high settlement costs. Suits without overcharges thus advance Congress’s goals under this statute.

[37] Therefore, Capell does not have to allege an overcharge to state a claim under RESPA.

[38] B. Failure of Prima Facie Case for RESPA §§ 8(a),(b) and 9

[39] Pulte asserts that Capell fails to properly allege specific elements of her claims under RESPA §§ 8(a), 8(b), and 9. Specifically, Pulte first argues that Capell’s RESPA § 8(a) claim fails because she has not alleged any “agreement or understanding” to give “fee[s], kickback[s], or thing[s] of value” to various Pulte entities. 12 U.S.C. 2607(a); see Def.’s Mem. at 14-15. Capell alleges the existence of legal relationships between the various Pulte entities, and asserts that PHPA did refer her to Pulte Mortgage and Pulte Closing Services. Compl. ¶¶ 3-8, 24. More importantly, Capell alleges that the Pulte entities were involved in an ABA under RESPA. Id. ¶ 26. RESPA acknowledges that one “thing of value” is a “return on the ownership interest”. 12 U.S.C. § 2607(c)(4)(C). Thus, Capell has alleged facts from which one can infer the existence of an “agreement or understanding” between these entities that PHPA would refer business to Pulte Mortgage and Pulte Closing Services, and receive a “thing of value” in the form of return on investment.

[40] Second, Pulte contends that Capell’s claim under RESPA § 8(b) must fail because she does not allege any fee splitting on the part of any of the Pulte entities. Def.’s Mem. at 15-16. This RESPA provision prohibits a settlement service provider from both unilaterally marking-up a third-party fee and splitting fees with other settlement service providers who have done no actual work. See Santiago v. GMAC Mortgage Group, Inc., 417 F.3d 384, 390 (3d Cir. 2005). Capell does not allege any instance of fee splitting or unilateral mark-ups. Instead, she argues that Pulte’s failure to satisfy the ABA exemption contained in 12 U.S.C. § 2607(c) is sufficient to establish a per se violation of all of RESPA. Pl.’s Mem. at 25-26. Capell is wrong. She must still establish all the elements of the prima facie case outlined in that part of the statute that gives her a private right of action. Simply stating something is a per se violation does not make it so.

[41] Third, Pulte argues that RESPA § 9 only creates liability for the seller of the property, and Capell has not sued the seller, PHPA. Def. Mem. at 16-17. Capell argues that there is “factual ambiguity” as to the seller of the house. Pl. Mem. at 26. But the first line of the purchase agreement clearly identifies PHPA as the seller of the house. Compl. Ex. 1. Capell also claims that Pulte’s use of various corporations to do business in several states permits Capell to forego suing the right entity. Pl. Mem. at 26. Although all of the Pulte entities are in a sense legal fictions, the law recognizes them as separate, distinct juridical persons. See, e.g., Klein v. Board of Tax Sup’rs of Jefferson County, 282 U.S. 19, 24 (1930). The statutory provision in question creates liability only for the seller of the property. 12 U.S.C. § 2608.

[42] Thus, Capell has failed to state a claim under RESPA §§ 8(b) and 9, and we will dismiss counts II and III of her complaint on these grounds.

[43] C. Required Use of Specific Settlement Service Providers

[44] Assuming that Capell could make out all of the other elements of her various claims, the validity of Capell’s complaint ultimately turns on whether she can establish that PHPA’s closing cost credit required her to use Pulte Mortage and Pulte Closing Services as her settlement service providers. This type of “required use” is a central element in each of her RESPA claims. Although a “closing cost credit” may still constitute a “required use” of particular settlement providers, Capell has here not alleged facts sufficient to infer that from her complaint.

[45] To move forward with any of her claims, Capell must establish that the closing cost credit obligated her to use Pulte Mortgage and Pulte Closing Services. All claims under RESPA § 8 are subject to § 8(c)’s exemptions. 12 U.S.C. § 2607(c). Thus, a plaintiff asserting a RESPA § 8 claim must establish that the transaction is not exempt under RESP § 8(c). To qualify as an exempt ABA, inter alia, the referred person must not be required to use any particular settlement service provider. 12 U.S.C. § 2607(c)(4). Similarly, a plaintiff suing under RESPA § 9 must establish that the seller “require[d]…as a condition to selling the property [that the buyer use a] particular title company.”

[46] 12 U.S.C. § 2608(a).

[47] The United States Housing and Urban Development(“HUD”) has defined “required use” in its implementing regulation as an instance in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service.

[48] 24 C.F.R. § 3500.2 (2007) (emphasis added). HUD palpably sought to permit certain types of incentives to use affiliated settlement services. It specifically excluded from its definition of “required use” offering “discounts or rebates to consumers for the purchase of multiple settlement services” as long as those discounts and rebates were “optional to the purchaser” and were a “true discount below the prices that are otherwise generally available, [and not] made up by higher costs elsewhere in the settlement process.” Id.

[49] On its Web site, HUD offers a basic example of how this definition is applied:

[50] Question: A builder is offering to pay my closing costs or give me an upgrade package only if I agree to use his mortgage company. Is this legal under RESPA?

[51] Answer: Yes. While a builder cannot require you to use a mortgage company with whom he is affiliated, a builder is allowed to offer you a discount if you use a specific company. Under RESPA, the builder cannot charge you more for the home if you do not use his affiliated mortgage company.

[52] U.S. Department of Housing and Urban Development, Frequently Asked Questions About RESPA, found at hsg/sfh/res/resconsu.cfm (last visited November 1, 2007).

[53] Also, two courts have taken up a similar issue to the one presented here, and have held that such large, optional credits or rebates do not amount to “required use.” See Spicer v. The Ryland Mortgage Group, Inc.,__ F. Supp. 2d __, 2007 WL 3071419, (N.D. Ga., October 18, 2007) (holding that offering a $10,500 discount on approved settlement costs incurred through use of specified providers without more was not “required use”); Geisser v. NVR, Inc., 2001 WL 36016177 (M.D. Tenn. May 15, 2001) (holding that seller’s optional contributions to closing costs for use of specified settlement service providers was not “required use”).

[54] Capell urges that the HUD interpretation of “required use” does not permit Pulte to discount the cost of the house itself because the only type of inducement the HUD regulations permits is a discount on the cost of the settlement services itself — all other discounts or rebates are prohibited. Def. Mem. at 17-19. The HUD regulations place no restrictions on what type of discount or rebate one can offer, other than that it must be “true” and “optional.” 24 C.F.R. 3500.2. Nothing in the language of the regulations or the examples suggests otherwise.*fn4

[55] Indeed, if adopted, Capell’s view of the regulation would lead to absurd results. For example, it would be impermissible to offer a free month’s dry cleaning, a car wash, or a box of cookies as optional inducements to use specified settlement service providers because none of these is a direct discount applied to the price of settlement services. We do not think the HUD regulations sweep so far.

[56] None of this implies that one can avoid RESPA liability by simply labeling an inducement to use specified settlement services a “credit” or a “discount.” A credit or discount could be structured to require use of specified service providers. For example, a plaintiff could establish required use if she alleged a seller conducted a bait and switch where the negotiated price assumed the inclusion of such a credit, and the seller did not tell the buyer this until the deal was ready to close. Or a RESPA claim may lie if a seller threatened a buyer with an increased price unless the buyer used specified settlement services, and then the seller wrote up the contract to reflect that the price arrived at was actually at a discount from the threatened increased price. But see Geisser, 2001 WL 36016177, at *4 (holding a plaintiff cannot assert a claim on such facts because such allegations do not amount to “illiteracy, fraud or duress” sufficient to overcome the parole evidence rule).

[57] But Capell does not aver these or any other facts from which we could infer that she was required to do anything –indeed, she proffers nothing to undermine the plain meaning of the Addendum’s “choice” language. Instead, Capell argues that the closing cost credit required her to use Pulte’s settlement service providers because Capell’s only “viable economic option was to use the affiliate service providers, because the price of her home (even after paying the affiliate service providers for their services) would be far less if she did so.” Pl.’s Mem. at 2. The crux of Capell’s argument is that the credit was so big she could not turn it down, so she had to use Pulte’s specified service providers, which she otherwise would not have done. This alone cannot be enough to establish that the closing cost credit constituted “required use” of the settlement service providers. Capell has not alleged that the sale of the home was ever conditioned upon her using the settlement service providers, nor has she averred that she expected to get that credit for any other reason. For an act to be “required” there must be some element of coercion — as implied in a Corleone-type “offer he can’t refuse” — and it must be alleged in the complaint.

[58] Capell attempts to resurrect her claims by analogizing Pulte’s closing cost credit to a “tie-in” arrangement in the antitrust context. Antitrust law prohibits combining products together in such a way that purchasing such products separately is prohibitively expensive, while the products bundled together are not. In antitrust, certain types of discounts or package sales can contain “the element of coercion” if “the combined purchase is the only economically- viable alternative.” Ramallo Bros. Printing, Inc. v. El Dia, Inc., 392 F. Supp. 2d 118, 134-35 (D.P.R. 2005) (citing Marts v. Xerox, Inc., 77 F.3d 1109, 1113 (8th Cir. 1996); Ortho Diagnostic Sys., Inc. v. Abbott Labs., Inc., 920 F. Supp. 455, 471 (S.D.N.Y. 1996)). We are uncomfortable importing jurisprudence from the antitrust area, which involves repeated transactions between varying participants, into the RESPA context, which involves a single transaction with fixed participants. The legal realms are too distant from one another. Moreover, plaintiff offers no reasons for us to use this jurisprudence to inform the terms of RESPA, so we decline to do so. But at bottom, the bold language just above the Disclosure Statements’ signature line could not reasonably be construed to imply an anticompetitive tie.

[59] Thus, Capell has failed to aver facts sufficient to characterize the closing cost credit Pulte offered as a “required use” under RESPA § 8(c). Since this is a central element to all of the RESPA claims Capell asserts, we must dismiss all of her claims under Fed. R. Civ. P. 12(b)(6).

[60] ORDER

[61] AND NOW, this 7th day of November, 2007, upon consideration of the defendants’ motion to dismiss (docket entry #3), plaintiff’s response, and defendants’ reply, it is hereby ORDERED that:

[62] 1. Defendants’ motion is GRANTED;

[63] 2. Plaintiff’s complaint is DISMISSED WITHOUT PREJUDICE; and

[64] 3. Plaintiff is GRANTED LEAVE to file an amended complaint if she does so conformably with Fed. R. Civ. P. 11 by November 21, 2007.

[65] Stewart Dalzell, J.

Opinion Footnotes

[66] *fn1 In reviewing a motion to dismiss for failure to state a claim, “[w]e accept all well pleaded factual allegations as true and draw all reasonable inferences from such allegations in favor of the complainant.” Worldcom, Inc. v. Graphnet, Inc., 343 F.3d 651, 653 (3d Cir. 2003).
To survive a motion to dismiss, the plaintiff must “allege facts sufficient to raise a right to relief above the speculative level.” Broadcom Corp. v. Qualcomm Inc., __ F.3d __, 2007 WL 2475874, at *14 (3d Cir. Sept. 4, 2007) (citing Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007)). The complaint must include “enough facts to state a claim to relief that is plausible on its face.” Twombly, 127 S.Ct. at 1974. This requires “either direct or inferential allegations respecting all the material elements necessary to sustain recovery under some viable legal theory.” Haspel v. State Farm Mut. Auto. Ins. Co., 2007 WL 2030272 at *1 (3d Cir. Jul. 16, 2007) (unpublished) (quoting Twombly, 127 S.Ct. at 1969).

[67] *fn2 This particular RESPA issue is an instance in which the standing analysis collapses into a 12(b)(6) analysis. Pulte’s cases all focus on the statute requiring an overcharge as the injury in fact. E.g., Moore v. Radian Group, Inc., 233 F. Supp. 2d 819, 825 (E.D. Tex. 2002). If a plaintiff must be overcharged to suffer an injury in fact, then no one could ever state a claim under RESPA without alleging an overcharge. On the other hand, Capell’s cases hold that the plaintiff suffers a non-financial injury when defendant violates RESPA. E.g., Robinson v. Fountainhead Title Group Corp., 447 F. Supp. 2d 478, 489 (D. Md. 2006) (“lack of impartiality in the referral and a reduction of competition between settlement service providers”). If a plaintiff can show injury in fact by pointing to non-financial injury, then no one would have to allege an overcharge to establish a claim. We believe adding a constitutional dimension to the inquiry only muddles the analysis, so we avoid discussing the issue at hand in such terms.

[68] *fn3 Pulte’s view also seems to misunderstand the exact harm that Congress is trying to protect against. Through RESPA § 8(a), Congress prohibited creating arrangements to refer business except, of course, for the exemptions. Much like conspiracy, it is the agreement itself that is the wrong, and the defendant need do no more than engage in such a nonexempt agreement to have wronged the plaintiff.

[69] *fn4 The one example Capell does provide from HUD’s implementing regulation concerns instances when it is appropriate to compensate individuals for referring business, and is inapposite here. Id. at 18. Capell points to no other portion of the regulations or any examples of its application to support her contention.


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Clifford v. FMF Capital

Posted on October 12, 2008. Filed under: Case Law, Mortgage Audit, Mortgage Law, RESPA, Truth in Lending Act, Yield Spread Premium | Tags: , , , |


Case No. 1:06-CV-316
v. Hon. Richard Alan Enslen
The crooks in prison wear (orange jump suits) are easy to spot. Those in business wear are
not; though they do no less harm to their unsuspecting victims.
This matter is before the Court on Plaintiff Marcia Mae Clifford’s Motion for (Partial)
Summary Judgment concerning Count One of the First Amended Complaint. Plaintiff seeks partial
judgment only against Defendant Premier Mortgage Funding, Defendant FMF Capital, LLC having
been previously dismissed from this suit. The Motion has been fully briefed and oral argument is
unnecessary in light of the briefing. See W.D. Mich. L. Civ. R. 7.2(d).
Plaintiff Marcia Mae Clifford is an indigent person. (Financial Affidavit at 1; Order to
Proceed in Forma Pauperis.) According to her Financial Affidavit, her sole monthly income of
$715/month is furnished by the Social Security Administration (disability income); she also receives
$30/month of food stamp assistance. (Financial Affidavit 2.) Her sole property, apart from a $600
vehicle, is her primary residence at 232 Hambrook Street, Belding, Michigan, which is valued at
$79,000, most of which is subject to a mortgage by FMF Capital, LLC. (Id.)
How Ms. Clifford acquired this mortgage is the subject of this lawsuit and her claims against
Defendant Premier Mortgage Funding. Plaintiff has sued Defendant on several grounds, including
violation of the Real Estate and Settlement Procedures Act (“RESPA”), 12 U.S.C. § 2601 et seq.
(First Am. Compl. ¶¶ 33-38.) Plaintiff acquired her loan from FMC Capital, LLC through Defendant
Premier Mortgage Funding, who acted as the mortgage loan originator/broker. (Pl.’s Br. in Support
of Mot., Ex. 2 at 1; Marcia Clifford Aff. ¶ 7.) The first Application for the loan, which was
completed by Defendant’s agent, Pleas Roy Daniels, disclosed no employment for Ms. Clifford on
the employment section of the Application. (Id.) The first Application also disclosed that Ms.
Clifford was applying for a fixed rate conventional mortgage refinancing loan. (Id.) This is not what
Ms. Clifford ultimately obtained, however.
Some weeks later when the loan was to close, the title agent, Laura Holstine of Netco Title,
presented for Ms. Clifford’s signature, at her home, a second loan application for an adjustable rate
loan. (Pl.’s Br. in Support of Mot., Ex. 3 at 1; Marcia Clifford Aff. ¶ 12-17.) The second
Application was also blatantly false in that it represented that Ms. Clifford was engaged in paid fulltime
work at a foster care home. (Id.) Ms. Clifford was urged to sign the forms and did not learn
the pertinent misrepresentations and loan terms until afterwards. (Id.)
Among the surprises to Ms. Clifford in the loan paper work were the high amount of
settlement charges ($4,692.19) for borrowing a total of $62,000. (Pl.’s’ Br. in Support of Mot, Ex.
5 at 1-2.) Of that amount, which was ample, Defendant included charges for both a $1,500 loan
origination fee and a $1,240 fee for the “yield-spread premium.” (Id. at 2 lines no. 101 & 108.) These
amounts were later characterized by the person who assessed them, Daniels, as “just ridiculous,
1Defendant’s characterization also fails to explain how they could have accepted a
representation of full-time work, but treated her as a shut-in for the purpose of closing the loan.
wow.” (Daniels Dep. 20.) Daniels only submitted Clifford’s loan application to a single lender for
approval. (Pl.’s Req. to Admit ¶ 24.)
Defendant, in its opposition briefing, characterizes the charges as routine for a high-risk loan
which warranted both additional services by the lender (investigation and verification) and additional
compensation for assuming a riskier loan. (Def.’s Br. 4-5.) Defendant has also characterized the
preparation of the false documents as caused by misrepresentations by Plaintiff, though Defendant
has not filed any evidence (affidavits or deposition testimony) supporting either its position about
how and why the loan documents were prepared falsely or its position that it performed additional
services for the yield-spread premium.1 (See Id. & Exhibits.) Even acknowledging that Plaintiff’s
credit score was not perfect, Plaintiff’s expert has stated under oath that the fees charges in
connection with this loan were approximately twice as much as what are considered high-end fees
for FHA lending appropriate to the borrower’s situation. (Danell Merren Aff. ¶¶ 6-7.) Defendant
has failed to provide competing evidence concerning the commercial reasonableness of the fees
charged, which on their face were “ridiculous” according to the person who prepared the documents.
Plaintiff’s Motion is brought pursuant to Federal Rule of Civil Procedure 56. Under the
language of Rule 56(c), summary judgment is proper if the pleadings, depositions, answers to
interrogatories and admissions on file, together with affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled to judgment as a matter of law. The
initial burden is on the movant to specify the basis upon which summary judgment should be granted
and to identify portions of the record which demonstrate the absence of a genuine issue of material
fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The burden then shifts to the non-movant
to come forward with specific facts, supported by the evidence in the record, upon which a
reasonable jury could find there to be a genuine fact issue for trial. Anderson v. Liberty Lobby, 477
U.S. 242, 248 (1986). If, after adequate time for discovery on material matters at issue, the nonmovant
fails to make a showing sufficient to establish the existence of a material disputed fact,
summary judgment is appropriate. Celotex Corp., 477 U.S. at 323. The factual record presented
must be interpreted in a light most favorable to the non-movant. Matsushita Elec. Indus. Co. v.
Zenith Radio Corp., 475 U.S. 574, 587 (1986).
Rule 56 limits the materials the Court may consider in deciding a motion under the rule:
“pleadings, depositions, answers to interrogatories, and admissions on file, together with the
affidavits.” Copeland v. Machulis, 57 F.3d 476, 478 (6th Cir. 1995) (quoting Federal Rule of Civil
Procedure 56(c)). Moreover, affidavits must meet certain requirements:
[A]ffidavits shall be made on personal knowledge, shall set forth such facts as would be
admissible in evidence, and shall show affirmatively that the affiant is competent to testify
to the matters stated therein. Sworn or certified copies of all papers or parts thereof referred
to in an affidavit shall be attached thereto or served therewith.
Fed. R. Civ. P. 56(e).
In accordance with Rule 56(e), the Sixth Circuit has held “that documents submitted in
support of a motion for summary judgment must satisfy the requirements of Rule 56(e); otherwise,
they must be disregarded.” Moore v. Holbrook, 2 F.3d 697, 699 (6th Cir. 1993). Thus, in resolving
a Rule 56 motion, the Court should not consider unsworn or uncertified documents, Id., or unsworn
statements, Dole v. Elliot Travel & Tours, Inc., 942 F.2d 962, 968-69 (6th Cir. 1991); Little v. BP
Exploration & Oil Co., 265 F.3d 357, 363 n.3 (6th Cir. 2001). These requirements are fatal to
Defendant’s defense of Count One, which depend entirely upon unsworn statements in their
opposition briefing.
Plaintiff’s Count I RESPA claim alleges that Defendant, in connection with the above
described mortgage transaction, violated RESPA by accepting a “referral fee” for assigning the
mortgage to the lender. Section 8 of RESPA, as amended, provides in pertinent part:
No person shall give and no person shall accept any fee, kickback, or thing of value pursuant
to any agreement or understanding, oral or otherwise, that business incident to or a part of
a real estate settlement service involving a federally related mortgage loan shall be referred
to any person.
12 U.S.C. § 2607(a). Notwithstanding, the above section does not prohibit the payment of bona fide
salary or compensation for goods, facilities or services actually performed. 12 U.S.C. § 2607(c)(2).
Given these parameters of RESPA, the United States Department of Housing and Urban
Development (“HUD”) has developed two policy statements to distinguish between illegal
kickbacks/referral fees and legal fee for service agreements in the context of yield-spread premium
charges. See RESPA Statement of Policy 2001-1, 66 FR 53052, 53055-56 (Oct. 18, 2001); RESPA
Statement of Policy 1999-1, 64 FR 10080, 10084-85 (Mar. 1, 1999). These policies generally state
that yield-spread charges are not illegal per se, nor is the assessment of charges based upon a rate
sheet illegal per se, but, nevertheless, the individual lending transaction will be assessed for legality
based upon whether: the total compensation for the mortgage broker is for goods or facilities
furnished or services actually performed; and second, the total compensation mut be reasonably
related to the goods or facilities furnished or services actually performed. Mortgage counseling is
one service which may warrant additional compensation, but typically only when the broker obtains
at least three competing offers for borrower consideration. See 64 FR at 10085.
In this instance, the record supports that the mortgage lender did precious little to earn the
large loan origination fee let alone the additional yield-spread premium. What the broker did on this
record was to consult with the borrower, complete an application, complete a second falsified
application with adverse lending terms not sought by the borrower, and obtain a single lending offer
for the borrower’s acceptance. The broker was not involved at the closing and the fees assessed were
not related to mortgage counseling, which did not occur. Verification services were not
meaningfully provided given that the transaction was prepared to be fraudulent and to misstate the
borrower’s financial condition for the purpose of rewarding the brokerage firm, but impoverishing
the borrower. The only evidence of record shows that the total compensation for the loan origination
was grossly out of the range of reasonable compensation and no additional services were performed
to authorize payment of a yield-spread premium. See Perkins v. Johnson, 2007 WL 521172, *2 (D.
Colo. 2007) (permitting complaint alleged in accordance with RESPA/HUD standards). Cf. Schuetz
v. Banc One Mortg. Corp., 292 F.3d 1004, 1012-14 (9th Cir. 2002) (allowing payment of yieldspread
premium when based upon reasonable compensation within marketplace). No reasonable
juror could dispute on this record that the yield-spread premium, $1,240, was not reasonable in
amount and was not based upon actual goods, facilities or services when the agent who prepared the
documentation was of the view that the origination fees were ridiculous.
RESPA assesses damages in the event of an unauthorized kickback or referral fee in the
amount of three times the illegal fee. 12 U.S.C. § 2607(d)(2). Since the record is clear that the
unearned yield-spread premium fee was $1,240, the Court will assess treble damages on Count I in
the amount of $3,720. The Court will also enter partial judgment in favor of Plaintiff as to such
amount. While RESPA also allows a prevailing plaintiff to recover attorney fees and costs, see 12
U.S.C. § 2607(d)(5), see also Blum v. Stenson, 465 U.S. 886 (1984) (permitting attorney fee recovery
by not-for-profit legal organization), under the Federal Rules of Civil Procedure and the Western
District of Michigan Local Civil Rules, the process to recover those fees and costs is to occur only
after entry of the final judgment (in order to avoid piecemeal requests). See Fed. R. Civ. P. 54(d)
(permitting attorney fee and expense motions within 14 days of judgment); W.D. Mich. L. Civ. R.
54.1 (permitting filing of bill of costs within 30 days of judgment). As such, the question of costs
and attorney fees is reserved.
In accordance with this Opinion, Plaintiff’s Motion for (Partial) Summary Judgment shall
be granted and summary judgment shall enter as to Count I in favor of Plaintiff and against
Defendant Premier Mortgage Funding in the amount of $3,720, and the approval of costs and
attorney fees is reserved pending final judgment.
/s/ Richard Alan Enslen

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