Regulations

Mortgage service provider escapes markup allegations in RESPA case

11th Circuit Court rules that fee for illegal service is not ‘unearned’ fee under RESPA

Mortgage service provider LSI Title Agency Inc., a division of Lender Processing Services Inc., is breathing easier after the 11th U.S. Circuit Court of Appeals cleared it of alleged violations of the Real Estate Settlement Procedures Act in a case concerning the permissibility of certain fees charged by the title agency.

The case began when Georgia homeowner Patricia L. Clements refinanced a mortgage with Wells Fargo Bank NA, which hired LSI to provide mortgage refinancing services for the transaction. Because Georgia law requires all closing services to be performed by a licensed attorney, LSI contracted with the Law Offices of William E. Fair III to provide a closing attorney.

After the refinancing, Clements filed a class-action lawsuit in state court against LSI, the law firm and other unnamed defendants, claiming that LSI routinely hires non-attorneys to prepare closing documents. In her case, Clements argued, the law firm arranged for a licensed attorney to witness the signing of documents in violation of Georgia law. The case was removed to federal court.

Clements alleged two violations of RESPA: First, she alleged that she paid a $300 settlement fee for services that LSI provided in violation of Georgia law, and that the defendants split the settlement fee while providing no actual services related to the loan closing. Second, she alleged that LSI violated RESPA when it charged her $125 for government recording charges for which LSI paid only $40 and provided no services for the $85 markup.

RESPA Section 2607 stipulates that “no person shall give and no person shall accept any portion, split or percentage of any charge made or received for the rendering of a real estate settlement service … other than for services actually performed.” To prove a violation, a plaintiff must allege that no services were rendered in exchange for a settlement fee.

But in a March 2 ruling, the 11th Circuit Court ruled that Clements failed to prove her claims, and said although the settlement fee “was arguably ‘unearned’ as a matter of [Georgia] law, as a factual matter, it was not in exchange for nothing.” It also concluded that the law firm and attorney earned their portion of the settlement fee because arranging for a third-party contractor to perform a service is itself a service.

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“A ‘nominal’ service exists in name only. That Georgia law [that] made it illegal for LSI to provide settlement services does not mean that the services existed in name only,” the court added.

That Georgia law [that] made it illegal for LSI to provide settlement services does not mean that the services existed in name only." - 11th Circuit Court of Appeals

The legality of markups for settlement services under RESPA have divided the nation’s circuit courts for years. The 2nd and 3rd Circuits have held that markups are a violation of RESPA, while the 4th, 5th, 7th and 8th Circuits have held that this portion of RESPA is unambiguous, and that if Congress wanted to prohibit markups, it could have easily written that section to state that there can be no markups or overcharges for settlement services, or that a mortgage lender may only charge a consumer what is paid to a third-party for rendering these services.

Fidelity National Financial, the nation’s top title insurance underwriter, acquired Lender Processing Services in late 2013.

Email Amy Swinderman.