Court rules that banks can charge discretionary settlement service fees

Real Estate Weekly, June 12, 2002

Lending institutions are allowed to charge discretionary settlement service fees without violating the Real Estate Settlement Procedure Act (RESPA), the U.S. Court of Appeals for the Fourth Circuit ruled 3-0 late last month, a case the venable law firm won on behalf of Wells Fargo Home Mortgage Corp.

In Boulware v. CrossLand, Maryland resident Tyna Boulware filed suit against CrossLand Mortgage Co., now a unit of Wells Fargo Home Mortgage Corp., claiming it violated Section 8(b) of RESPA by charging her $65 for a credit report she alleged only cost Crossland $15 to obtain. She also sought a class action for all borrowers who used CrossLand in the past 12 months. The U.S. district court dismissed her case in October 2001, and she subsequently appealed. The U.S. Department of Housing and Urban Development (HUD), arguing as amicus curiae on behalf of Boulware in front of the appellate court, relied heavily on a policy statement it issued in the Federal Register in October 2001 interpreting Section 8(b) as giving HUD the power to regulate settlement service charges.

However, the plain language of the RESPA statute says that the charges -- which can apply not only to credit reports, but to filing fees, reporting fees, title fees, appraisal fees and other incidental charges -- violate the statute only if there is a kickback or fee splitting arrangement between settlement service providers.

The opinion, written by Chief Judge J. Harvie Wilkinson and supported by Circuit Judges Karen J. Williams and William B. Traxler on May 22, 2002, largely ignored HUD's policy statement, stating "[i]f Congress had intended Section 8(b) to sweep as broadly as Boulware proposes, it could easily have written Section 8(b) to state that 'there shall be no markups or overcharges for real estate settlement services.'" Judge Wilkinson said. "But Congress chose not to draft the statute that way. And we have no authority to recast it."

"The decision takes a forceful and clear stand limiting the scope and ability of HUD to regulate settlement service charges between lenders and borrowers," said Michael Schatzow, a litigation partner for Venable, who argued the case for Wells Fargo.

While this decision is precedent only within the Fourth Circuit, it may become the basis for decisions in other circuits. Mark Maneche, a litigation associate in Venable's commercial law group, worked with Mr. Schatzow to prepare the briefs submitted to the Fourth Circuit.

The opinion was based not only upon the plain language of the statute, but from three decisions from the Seventh Circuit Court of Appeals. This was the first appellate decision to be issued following HUD's policy statement. "A market driven economy shouldn't allow government agencies to determine prices. We believe prices should be set by the market, creating competition which will ultimately result in fairer prices to the consumer," Schatzow said.