The U.S. Supreme Court may have slammed the door this week on consumer lawsuits against some of the nation’s largest real estate brokerages, alleging that the flat fees they charged clients in addition to the percentage-based commissions brokers traditionally collect violate a 1974 federal anti-kickback statute.

The lawsuits allege that the fees — instituted by many brokerages in recent years to boost their bottom lines without taking a bigger cut of their agents’ commission checks — violate provisions of the Real Estate Settlement Procedures Act (RESPA) governing kickbacks and unearned fees for which no services are provided.

Brokerages named in the lawsuits include Long & Foster Real Estate Inc., Coldwell Banker Real Estate LLC, Howard Hanna Co., Prudential Real Estate Affiliates Inc., and RealtySouth. The lawsuits typically seek class-action status to represent thousands of buyers and sellers of homes who have been charged the fees over the years.

All of the brokerages that have been sued denied that the fees, which can amount to several hundred dollars per transaction, are unearned, or that they violated RESPA or similar state consumer protection laws.

Brokerages that charge the fees maintain that they have the right to structure commissions as they see fit, combining a flat fee with percentage-based charge, for example, as long as they have disclosed the charges to their clients.

Lawyers for consumers who have sued over the fees — which are sometimes labeled as "administrative" — claimed they were unearned or duplicative, because no additional services were provided by brokerages that charged them.

Some brokerages have agreed to pay hundreds of thousands of dollars to settle lawsuits without admitting wrongdoing. Other s continue to litigate suits in federal courts that were stayed pending the outcome of the Supreme Court’s decision in another lawsuit, Freeman v. Quicken Loans Inc., which claimed that loan discount fees collected by the lender violated RESPA because they were unearned.

In a unanimous opinion published Thursday, the Supreme Court ruled that the section of RESPA in question, entitled "Prohibition against kickbacks and unearned fees," applies only when fees are split between the company collecting them and another person or persons.

The Supreme Court’s ruling in Freeman v. Quicken Loans means that any lawsuits that have been filed against real estate brokerages in federal courts claiming flat fees violated RESPA’s prohibitions on kickbacks and unearned fees "are all going to get dismissed," said Jay Varon, a Washington, D.C.-based attorney who authored several friend-of-the-court briefs filed by real estate industry groups in Freeman v. Quicken Loans.

In most of those cases, Varon said, brokerages argued that their costs were going up, and that they needed to raise their prices as a result. But brokerages maintained that if they simply raised their percentage-based commission, they would have to split the additional revenue raised with their agents, "So (they) just added a flat fee, and didn’t split it with the agent," Varon said.

Even in cases where brokers split the fee with agents, a long-standing exemption allows fee splitting between brokers and agents, he said.

The only reason brokers got into trouble in the first place, Varon said, was because until it was amended in 2009, the HUD-1 settlement statement forced brokerages to list the flat fee as a separate charge.

Before it was amended, the HUD-1 required that real estate brokerage commissions be reported as a percentage of sale price. Today, the total brokerage commissions are reported as a dollar amount — allowing the combined flat-fee component and percentage-based commission to be reported on the same line.

In a 2010 letter to Varon, the top lawyer at the Department of Housing and Urban Development (HUD) detailed procedures for brokers and agents to combine flat-fee and percentage-based commissions on the HUD-1 statement.

Varon said the ruling in Freeman v. Quicken Loans has implications for all settlement services providers, including mortgage lenders, title and escrow companies, who will no longer be vulnerable to claims that mortgage processing fees or title document fees that they do not split are unearned under RESPA.

"I think Freeman is a very important case for the industry, because it will provide all kinds of real estate (settlement services) providers with flexibility in designing pricing systems that are rational and efficient," Varon said. "If they do something fraudulent or unfair, there will still be state law" to protect consumers.

But James DeRoche, a Cleveland, Ohio-based lawyer representing consumers who have sued brokerage Howard Hanna Co. over allegedly unearned flat fees, said he thinks Varon’s "chicken dance in the end zone will prove to be premature, given that we have a fraud claim pending in this case."

"The fact remains that Howard Hanna got money for nothing, when they told consumers that it was for something," DeRoche said in an email. "Stay tuned."

In friend-of-the-court briefs, the National Association of Realtors and other real estate industry groups maintained that in passing RESPA in 1974, lawmakers were attempting to address problems with kickbacks paid by title insurers and other settlement services providers to lawyers, real estate brokers and agents, and others in a position to refer business to them.

But in interpreting RESPA and drafting the regulations that implement it, HUD expanded the act’s scope beyond the original intent of lawmakers, real estate industry groups said.

In a 2001 policy statement, HUD formalized its position that unearned fees violate RESPA even in cases where they are not split. In passing RESPA, HUD said at the time, Congress intended not only to protect consumers against kickbacks, but also "unnecessarily high settlement charges."

Four federal courts of appeal had rejected HUD’s interpretation, ruling that RESPA’s anti-kickback provisions apply only when fees are split. Three other courts of appeal had been more deferential to HUD’s position, setting the stage for the Supreme Court to weigh in.

When the Supreme Court agreed to hear Freeman v. Quicken Loans, real estate trade groups including NAR, the Mortgage Bankers Association, and the American Land Title Association (ALTA) filed "friend of the court" briefs supporting Quicken Loans’ position that RESPA applies only when unearned fees are split.

"In response to increased competition and rising costs, real estate brokerages have in recent years experimented with innovative compensation structures, including commissions that have a fixed component," attorneys for NAR said.

HUD’s interpretation of RESPA "not only transforms the statute into a rate-regulation scheme, but also functionally prevents real estate brokerages from modifying their compensation arrangements."

In its friend-of-the-court brief, NAR said a 2007 decision by the Second Circuit Court of Appeals had opened the floodgates to lawsuits that threaten brokerages "with ruinous class-action liability."

That case, Cohen v. JP Morgan Chase & Co., involved an undivided, $225 "post closing fee" charged by Chase when refinancing a homeowner’s mortgage. Although the Second Circuit Court of Appeals found RESPA’s wording to be "ambiguous," the court deferred to HUD’s 2001 regulatory interpretation.

"Obviously we’re thrilled with this result and think the court got it exactly right," NAR Associate General Counsel Ralph Holmen said of the ruling in Freeman v. Quicken Loans.

He noted that the decision has no impact on state laws that prohibit charging an administrative flat fee, or alter RESPA’s prohibition against the payment by a broker of anything of value in return for the referral of business to the brokerage.

Holmen said NAR’s purpose in filing its friend-of-the-court brief was not necessarily to come to the defense of brokerages that have been sued, but "to demonstrate to the (Supreme Court) the significance of the issues in real estate and the absurdity of interpreting (RESPA) to permit suits challenging those fees, since it’s well-established that RESPA is not intended to regulate fees. It’s clear the court understood this point."

In a friend-of-the-court brief in support of Quicken Loans, lawyers for real estate brokerage networks The Realty Alliance and Leading Real Estate Companies of the World said RESPA "was never intended to be a panacea for all perceived pricing ills — warranted or not."

The law, they said "was intended to increase the disclosure consumers received and to prohibit certain limited abusive practices — namely kickbacks and fee splitting where no services were performed. The state unfair trade practice and consumer fraud laws provide more than adequate mechanisms for policing alleged unfair pricing."

The Obama administration and attorneys general of 20 states also weighed in on Freeman v. Quicken Loans. Overturning HUD’s interpretation of RESPA, they said, would undermine the act’s consumer protection objectives.

Lawyers for the government said HUD has "consistently interpreted" RESPA "to prohibit all unearned fees, regardless of whether such fees are divided between two or more parties."

The Consumer Financial Protection Bureau, which took over responsibility for enforcing RESPA last year, had adopted HUD’s long-standing interpretation that RESPA applies even in cases where fees are not split, lawyers for the Obama administration said.

Attorneys general of 20 states including California, Arizona, Nevada, Illinois, Ohio, Connecticut and Georgia also maintained that HUD’s interpretation was "the most natural reading" of RESPA, and that carving out an exception for fees would "open a gaping hole in the statute’s consumer-protective umbrella."

In addition to protecting mortgage borrowers from paying discount points without corresponding rate reductions, the attorneys general said HUD’s interpretation of RESPA helps protect consumers from being charged unearned "junk fees" for processing, administration, or other services not performed.

When the Supreme Court heard oral arguments in Freeman v. Quicken Loans, several justices wanted to know more about the debate lawmakers engaged in before adopting RESPA, and HUD’s interpretation of the law.

RESPA came about in the aftermath of four-part expose published by the Washington Post in January 1972, which alleged that title insurers were paying kickbacks to lawyers and others who could send business their way. A month after the series ran, HUD and the Veterans Administration published a report on mortgage settlement costs, which concluded that such practices were so widespread that the government should regulate prices.

The recommendation that the government develop standards for establishing maximum charges for settlement services was controversial. In 1974, after holding a series of hearings, lawmakers rejected a bill sponsored by Sen. William Proxmire that would have imposed rate regulations on settlement services providers, and passed RESPA instead.

(The hearings and the debate over whether to impose rate regulations for settlement services were summarized by Harvard Law School professor Howell E. Jackson in a 2002 paper, "Kickbacks or Compensation: The Case of Yield Spread Premiums").

"It is clear that Congress intended to take only a measured step in this complicated field," lawyers for Quicken Loans argued.

In passing RESPA, lawmakers ordered HUD to put together another report examining whether it would be "necessary and desirable" for the federal government to regulate charges for real estate services. That report, published in 1981, recommended scrapping most of RESPA’s provisions and replacing them with a system of regulated, lender-packaged closing costs. Congress did not act on the report’s recommendations.

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