United States District Court, Northern District of Illinois, Eastern Division
August 23, 2002
JUAN A. DOMINGUEZ, NOEL GARCIA, MARIA J. HERNANDEZ AND ANA K. DOMINGUEZ, PLAINTIFFS, VS. ALLIANCE MORTGAGE COMPANY AND AMERIHOME MORTGAGE CO., LLC, DEFENDANTS.
The opinion of the court was delivered by: James B. Moran, United States District Judge
MEMORANDUM OPINION AND ORDER
Plaintiffs Juan A. Doininguez, Noel Garcia, Maria J. Hernandez and Ana
K. Dominguez bring suit against defendants Alliance Mortgage Company
(Alliance) and Amerihome Mortgage Company, LLC (Amerihome), alleging that
defendants' fee structure violates the Real Estate Settlement Procedures
Act (RESPA), 12 U.S.C. § 2601 et seq. and its implementing
regulations, 24 C.F.R. § 3500.1 et seq. Plaintiffs also assert state
law claims against Amerihome for breach of fiduciary duty, against
Alliance for inducing Amerihome's breach, and against both defendants for
violations of the Illinois Consumer Fraud and Deceptive Business
Practices Act (ICFA), 815 ILCS 505/2. Defendants move for summary
judgment. For the following reasons, defendants' motion is granted.
When plaintiffs sought a mortgage, their real estate agent referred
them to Amerihome, a mortgage broker, who arranged for an FHA-backed loan
from Alliance. The total loan amount was $152,112.00. Plaintiffs paid
Amerihome a "loan origination fee" of $1,498.65 and a "loan discount" of
$380.28 in connection with the loan. Amerihome also received payment from
Alliance, in the form of a $1,901.40 "yield spread premium."
A yield spread premium (YSP) is a payment by a lender, such as
Alliance, to a mortgage broker, such as Amerihome, apart from any fees
paid by the borrower. The lender establishes a par interest rate, at which
it will make or purchase a loan from a class of borrowers, and informs
brokers of this rate by disseminating rate sheets to the brokers on a
regular basis. If the broker secures a borrower at a higher rate, the
lender pays a YSP linked to the increase in the rate. The formula for
computing the premium is included in the rate sheets.
We may only grant summary judgment when there are no genuine issues of
material fact and the moving party is entitled to judgment as a matter of
law. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). We must
also draw all inferences and view all admissible evidence in the light
most favorable to plaintiffs. See Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 255 (1986). This does not mean there must be absolutely no
evidence supporting the non-moving party, but, rather, there is not
enough to support a reasonable jury verdict. Id. at 248.
Plaintiffs advance two legal theories as to how defendants' practices
violate RESPA. First, they maintain that HUD regulations impose a hard
cap, 1% of the loan amount, on broker compensation, and that when
combined, the origination fee, discount fee and YSP exceed this cap. And
second, they assert that the yield spread premium is an illegal kickback
or referral fee.
The 1% Cap Theory
HUD regulations limit the fees that mortgage brokers can charge
borrowers applying for FHA-insured loans:
203.27 Charges, fees or discounts.
(a) The mortgagee may collect from the mortgagor the
following charges, fees, or discounts:
(2) A charge to compensate the mortgagee for expenses
incurred in originating and closing the loan, the
charge not to exceed;
(i) $20 dollars or one percent of the original
principal of the mortgage. . . .
(3) Reasonable and customary amounts, but not more
than the amount actually paid by the mortgagee, for
any of the following items:
(i) Recording fees and recording taxes or other
charges incident to recordation;
(ii) Credit report;
(iii) Survey, if required by mortgagee or mortgagor;
(iv) Title examination; title insurance, if any;
(v) Fees paid to an appraiser or inspector approved
by the Commissioner for the appraisal and
inspection, if required, of the property.
(vi) Such other reasonable and customary charges as
may be authorized by the Commissioner.
24 C.F.R. § 203.27(a). Origination fees in particular are capped at
1% of the original loan principaL 24 C.F.R. § 203.27(a)(2).
Plaintiffs do not dispute that the $1,498.65 origination fee was less
than 1% of the $152,112.00 original principal amount. Instead, they argue
that the regulation limits the broker's total compensation — from
any source — to 1%, and that we must aggregate the discount fee and
YSP with the origination fee to assess the legality of the broker's
compensation. Taken together, the origination fees, loan discount and YSP
total approximately 2.5% of the original principal amount. Defendants
maintain that discount fees and YSP's do not count toward the 1% limit
imposed by § 203.27(a)(2)(i).
Many courts have already addressed this precise question and the
overwhelming weight of authority, including from this district, rejects
plaintiffs' position. See, e.g., Bjustrom v. Trust One Mortgage,
178 F. Supp.2d 1183 (W.D. Wash. 2001); Vargas v. Universal Mortgage
Corp., 2001 WL 1545874 at *4 (N.D. Ill. Nov. 29, 2001) (Zagel. J.);
Watson v. CBSK Financial Group, 2002 WL 598521 at *4-5 (N.D. Ill Apr.
18, 2 (102) (Nordberg, J.); Krzalic v. American Home Mortgage Corp., 2002
WL 924618 at *2 (N.D. Ill. May 3. 2002) (Kennelly, 3.). Plaintiffs
concede this and ask us to reject these authorities as unpersuasive in
light of the statutory and regulatory text. We disagree.
As outlined above, § 203.27(a) lists several different types of
permissible fees. Origination fees, described in (a)(2), are but one.
Brokers may also charge for things such as recording fees, recording
taxes, credit reports, surveys, title examination and title insurance
(§ 203.27(a)(3)), and discount fees are expressly permitted (§
203.27(a)(4)). The Bjustrom court undertook a thorough historical and
structural analysis and concluded that
[t]he fact that these items are organized in a
consecutive list of permitted payments indicates that
they may all be charged. There is no indication in the
language or structure of the statute to suggest that
subcategory (2) subsumes all the other parallel,
numbered subcategories. Consequently, [borrowers] may
be charged an appraisal fee, a tax service fee, as
well as other fees authorized by 24 C.F.R §
203.27(a)(3), (4) and (5) in addition to the 1% charge
allowed by subsection (a)(2).
178 F. Supp.2d at 1189 (emphasis in original).*fn1
We agree. The
addresses each type of fee separately and does not impose a
hard cap on total fees. Because the discount fee is authorized separately
from the origination fee, it does not count toward the 1% limit.
We also agree with Bjustrom's analysis with respect to the YSP.
Amerihome collected the YSP from Alliance, not from plaintiffs. Borrowers
may ultimately bear this cost indirectly, in the form of higher interest
payments, but that is not prohibited. Section 203.27 focuses on fees paid
up-front to originate and close the loan. Interest payments are regulated
separately by § 203.20(a). HUD clearly accepts this tradeoff between
lower closing fees and higher interest rates, at least where the borrower
deals directly with the lender. See Deregulation of Mortgagor Income
Requirements, 54 Fed. Reg. 38646, 38646 (Sept. 20, 1989) ("[ W]hile the
loan origination fee cap may be set below the cost of providing loan
origination services, the shortfall is easily recovered by charging
higher interest rates."). There is no reason to treat mortgage brokers
any differently. This is consistent with the statute's purpose of
fostering home ownership by allowing borrowers to effectively finance
their closing costs. HUD's policy statements and its practice of
routinely approving loans that include a YSP exceeding 1% also support
this interpretation. We agree with the litany of cases holding that the
1% limit on origination fees only applies to fees directly collected from
the borrower, not indirectly collected through Interest payments.
The Kickback/Referral Fee Theory
Plaintiffs also contend that YSPs are nothing more than kickbacks to
brokers to induce referral of above-market loans. RESPA prohibits lenders
from paying referral fees or kickbacks to brokers.
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
settlment service involving a federally related
mortgage loan shall be referred to any person.
RESPA § 8(a), 12 U.S.C. § 2607(a). But RESPA also exempts certain
payments from being considered referral fees:
Nothing in this section shall be construed as
prohibiticig (1) the payment of a fee (C) by a lender
to its duly appointed agent for servces actually
performed in the making of a loan, (2) the payment to
any person of a bona fide salary or compensation or
other payments for goods or facilities actually
furnished or for services actually performed.
RESPA § 8(c), 12 U.S.C. § 2607(c). The question is whether YSP's
fall within the § 8(c) safe harbor.
HUD and the courts have had an ongoing debate over the proper standard
for assessing YSPs' legality. The Eleventh Circuit prescribed a
three-part test and found that YSPs were prohibited because they were
"(1) a payment of a thing of value is (2) made pursuant to an agreement
to refer settlement business and (3) referral actually occurs." Culpepper
v. Inland Mortgage Corp. (Culpepper I), 132 F.3d 692 (11th Cir. 1998).
Shortly thereafter, Congress asked HUD to clarify its position on YSPs.
HUD responded with a policy statement that YSPs were neither legal nor
illegal per se:
[T]he first question is whether goods or facilities
were actually furnished or services were actually
performed for the compensation paid. The fact that
goods or facilities have been actually furnished or
that services have been actually performed by the
mortgage broker does not by itself make the payment
legal. The second question is whether the payments are
reasonably related to the
value of the goods or
facilities that were actually furnished or services
that were actually performed.
In applying this test, HUD believes that total
compensation should be scrutinized to assure that it
is reasonably related to goods, facilities, or
services furnished or performed to determine whether
it is legal under RESPA. Total compensation to a
broker includes direct origination and other fees paid
by the borrower, indirect fees, including those that
are denied from the interest rate paid by the
borrower, or a combination of some or all. The
Departments consider that higher interest rates alone
cannot justify higher total fees to mortgage brokers.
All fees paid will be scrutinized as a part of total
compensation to determine that total compensation is
reasonably related to the goods or facilities actually
furnished or services actually performed. HUD believes
that total compensation should be carefully considered
in relation to price structures and practices in
similar transactions an(l in similar markets.
Real Estate Settlement Procedures Act Statement of Policy 1999-1
Regarding Lender Payments to Mortgage Brokers, 64 Fed. Reg. 10080, 10084
(Mar. 1, 1999) (HUD 1999 Policy Statement). This amounts to a two-part
test: (1) whether the broker offered compensable goods or services; and
(2) whether the broker's total compensation was reasonably related to the
goods or services provided.
There is some disagreement, however, over how to apply this test. The
Eleventh Circuit focused in on the word "for," as in "payment . . . for
services." It imputed that the broker must establish a direct nexus
between any compensation it received and the services it provided.
Because the amount of the YSP was computed based on a rate sheet and not
tied directly to the broker's services, the court concluded it was really
a referral fee. Culpepper v. Irwin Mortgage Corp. (Culpepoer III),
253 F.3d 1324, 1329 (11th Cir. 2001). HUD responded with another policy
statement, further elucidating its position on YSPs:
It is HUD's position that neither Section 8(a) of
RESPA nor the 1999 Statement of Policy supports the
conclusion that a yield spread premium can be presumed
to be a referral fee based solely upon the fact that
the lender pays the broker a yield spread premium that
is based upon a rate sheet, or because the lender does
not have specific knowledge of what services the
broker has performed. Whether or not a yield spread
premium is legal or illegal cannot be determined by
the use of a rate sheet, but by how HUD's test applies
to the transaction involved.
Real Estate Settlement Procedures Act Statement of Policy 2001-1:
Clarification of Statement of Policy 19994 Regarding Lender Payments to
Mortgage Brokers, and Guidance Concerning Unearned Fees Under Section
8(b), 66 Fed. Reg. 53052, 53055 (Oct. 11, 2001) (HUD 2001 Policy
Statement). Two other circuits have taken up this question since the HUD
2001 Policy Statement, both rejecting Culpeppef III's nexus requirement.
So long as the broker provided any compensable services, we go
immediately to the reasonableness prong. See Glover v. Standard Federal
Bank, 283 F.3d 953
(8th Cir. 2002); Schuetz v. Banc One Mortgage Corp.,
292 F.3d 1004
(9th Cir. 2002). The Eleventh Circuit has not revisited
this issue since the HUD 2001 Policy Statement.
We must also consider the degree of deference we should give to HUD's
policy statements. Plaintiffs argue that we need not defer to HUD's policy
statements because they were not the product of notice and comment
rulemaking. We disagree. Glovet and Schuetz both gave
strong deference to
HUD, albeit for slightly different reasons. The Ninth Circuit applied
Chevron*fn2 deference because RESPA specifically authorized HUD to
interpret the statute, the policy statements were published in the
Federal Register and Congress' directive that HUD issue a statement
within 90 days appeared to be the only reason for foregoing formal notice
and comment procedures. Schuetz, 292 F.3d at 1012, quoting Barnhart v.
Walton, — U.S. —, 122 S.Ct. 1265 (2002) ("[T]he fact that the
Agency previously reached its interpretation through means less formal
than `notice and comment' rulemaking does not automatically deprive that
Interpretation of the judicial deference otherwise its due."). The Eighth
Circuit noted that HUD's formal regulation, 24 C.F.R. § 3500.14(b),
merely repeated RESPA's ambiguous language. Policy statements
interpreting an agency's own ambiguous regulation are entitled to
controlling deference unless "plainly erroneous or inconsistent with the
regulation." See Glover, 283 F.3d at 962, citing Auer v. Robbins,
519 U.S. 452, 461 (1997) and Christensen v. Harris County, 529 U.S. 576
587 (2000). But even if lesser deference were appropriate, "HUD's Policy
Statements in this instance pack sufficient power to persuade given HUD's
specialized mission, experience and broad investigation into the consumer
lending market." Id., citing Skidmore v. Swift & Co., 323 U.S. 134, 140
(1944). We agree with Glover that the HUD 2001 Policy Statement is
entitled to deference as an agency's interpretation of its own ambiguous
regulation. it is controlling unless is it plainly erroneous or
inconsistent with the regulation or underlying statute.*fn3
Although some courts have rejected HUD's interpretation and continue to
follow Culpepper III, the vast majority have accepted the HUD test
endorsed by Glover and Schuetz . . . See McCrillis v. WMC Mortgage
Corp., 133 F. Supp.2d 470, 474-75 (S.D. Miss. 2000) (listing cases prior
to the HUD 2001 Policy Statement). We find Glover and Schuetz persuasive
on the merits as well. The difference between the two tests can best be
seen through their underlying presumptions. Under Culpepper III, brokers
bear the burden to prove their compensation was related to services they
performed. The presumption is that if the amount of the fee is not
directly related to specific services, it must be a kickback. Under the
BUD test, the burden is on the borrower to show that the broker's
compensation was excessive. The presumption is that so long as brokers
receive only reasonable market value for their services, they have no
incentive to direct referrals. YSPs, by definition, are computed based on
interest rates. Requiring brokers to show a direct nexus with particular
services will make it nearly impossible for any YSP to pass muster. We do
not believe Congress intended RESPA to specifically prescribe which
formulae brokers and lenders cairn and cannot use to compute their
compensation arrangements. And the reasonableness prong of HUD's two-step
test ensures that total compensation is not excessive. Such a lenient
standard certainly has is shortcomings. As Culpepper III and its progeny
aptly point out, it ignores the parties' intent and permitspost hoc
explanations of fees. But HUD's interpretation is consistent with the
statutory purpose and it is entitled to deference.
Applying HUD's test to the present case, it is undisputed that
Amerihome offered compensable services. It helped plaintiffs complete the
application, collected and verified information, counseled and educated
plaintiffs, analyzed plaintiffs' income and debt, arranged appraisals and
inspections and provided disclosures. There is scant evidence in record
to assess whether Amerihome's total compensation here is reasonable in
the Chicago market. Amerihome submits affidavits from its own officers
stating that 2.5% is typical in their market. Self-serving affidavits are
not the most persuasive evidence, but they are admissible because these
officials would have knowledge of local industry norms. Plaintiffs'
purported evidence, on the other hand, tells us nothing. All they have
proffered are generic articles about mortgage broker compensation that
allude to 1-2% as a typical range. These articles are not specific to the
Chicago market or to FHA loans. We are also mindful of other cases where
courts have found comparable fees as not excessive. See, e.g.,
McCrillis, 113 F. Supp.2d at 474 (finding that 2.3% total compensation
was reasonable); Lee v. N.F. Investments. Inc., 2000 U.S. Dist. LEXIS
20712 at *14 n. 1 (E.D. Mo. Mar. 15, 2000) (finding 3.35% was
Many of the opinions permitting RESPA referral fee cases to proceed are
on motions to dismiss, where plaintiff need only allege that the broker's
compensation was excessive. See, e.g., Watson, 2002 WL 598521 at *5. By
the summary judgment stage, however, plaintiffs must produce some
evidence sufficient to create a material factual question. They have
not. Self-serving affidavits, when unrebutted, can support summary
judgment. See Schmitz v. Aegis Mortgage Corp., 48 F. Supp.2d 877, 883-84
(D. Minn. 1999). Under the HUD test the burden is on plaintiffs to
provide evidence that the broker's compensation was unreasonable. Because
plaintiffs have not provided a single creditable piece of evidence tending
to show that defendant's compensation deviated from market norms, we must
conclude that they were reasonable.
The State Law Claims
Our jurisdiction over counts III-VI, the ICFA, fiduciary duty and
inducement claims, was predicated on the federal RESPA claims. See
28 U.S.C. § 1367(a). Having disposed of all claims over which we had
original jurisdiction, we decline to exercise our supplemental
jurisdiction over the remaining state law claim. See
28 U.S.C. § 1367(c)(3).
For the foregoing reasons, we grant defendants' motion for summary
judgment with respect to counts I and II, and dismiss the state law
claims for lack of subject matter jurisdiction.