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On October 2, the U.S. District Court for the District of Maryland certified a class of mortgage borrowers who alleged that a Maryland bank referred them to a title firm in exchange for cash and kickbacks in violation of RESPA. The court’s decision approved a class defined as borrowers of federally-related mortgage loans originated or brokered by the bank who were referred to the title firm in connection with the closing of their loan. As previously covered by InfoBytes, the case originally was dismissed on the grounds that the plaintiffs’ RESPA claims were time-barred, but the U.S. Court of Appeals for the Fourth Circuit reversed the decision, finding that the plaintiffs were entitled to proceed because the kickback scheme was allegedly “fraudulently concealed” by the defendants. Among other things, the plaintiffs claimed that the title firm provided bank loan officers kickbacks in exchange for referrals, including cash payments, free marketing materials, credits for future marketing services, and customer referrals from other lenders. Because of these alleged kickbacks, the plaintiffs contended they were deprived of “impartial and fair competition” and “paid more for their settlement services than they otherwise would have.” The defendant argued, among other things, that the plaintiffs lacked standing because they did not suffer a concrete injury, and that the class was overboard because the plaintiffs had not proven that each loan was affected by a RESPA violation or that every loan fell outside a relevant exemption.
The court found that the plaintiffs had standing, stating that the plaintiffs have shown evidence supporting their claims that they may have been overcharged. But the court also noted that the bank may be able to continue to challenge that the plaintiffs failed to allege more than a mere procedural violation of RESPA. The court likewise rejected the bank’s objections to class certification, ruling that the plaintiffs were able to show that a majority of the loans were not subject to a RESPA exemption, and that the concern over RESPA exemptions “does not predominate over the numerous, imperative questions that are answerable on a class-wide basis.”
On August 28, the U.S. District Court for the District of Maryland certified a class of mortgage borrowers who alleged a national bank (defendant) referred them to a title firm in exchange for free marketing materials pursuant to an undisclosed agreement. In doing so, the court approved a class defined as borrowers who (i) had a loan originated or brokered through the defendant; and (ii) received title and settlement services from the title firm in connection with the closing of their loan. The plaintiffs claimed their payments to the title firm were shared in part with the defendant through their broker, who received free marketing materials in exchange for the referrals in violation of RESPA. Additionally, the plaintiffs alleged that “because of this kickback arrangement, they paid higher costs for their settlement services than they otherwise would have paid.”
The defendant argued, among other things, that the named plaintiffs lacked Article III standing because they did not pay more for settlement services, contending that the title firm’s fees “were based on prevailing market rates in the geographic location and did not depend” on the “alleged kickbacks.” Additionally, the defendant argued that the named plaintiffs are not adequate class representatives because they do not have knowledge sufficient to prove their own claims. The court disagreed, stating the plaintiffs “presented some evidence to corroborate the claim that they were harmed by paying higher fees than they would have absent the alleged RESPA violations,” and that “burdensome individualized scrutiny of each proposed class member’s transaction” was not necessary to establish each violation.
On April 6, the Virginia governor signed HB 819 to add additional sections to the state code related to real estate settlements and settlement agents. Among other things, the amendments discuss the prohibition against the “payment or receipt of settlement services kickbacks, rebates, commissions, and other payments”—whether directly or indirectly—pursuant to an agreement or understanding to refer business incident to a settlement. The amendments also allow for the imposition of penalties and liabilities if a person is found to have willfully engaged in an act or practice in violation of this chapter. Specifically, the state attorney general may recover civil penalties of not more than $5,000 per violation, as well as costs, reasonable expenses, and attorney’s fees. The amendments take effect July 1.
On March 13, the U.S. Court of Appeals for the Fourth Circuit affirmed the dismissal of a putative class action filed by two consumers (plaintiffs) against a real estate brokerage group (real estate defendant) and a title company (title defendant), (collectively defendants), alleging a kickback scheme in violation of RESPA. The plaintiffs bought a house in 2008 with the help of a real estate agent affiliated with the real estate defendant. The real estate agent told the plaintiffs that the title defendant would provide settlement services, after which the plaintiffs filed an acknowledgment that they understood they could use the title company of their choice for their closing, and that they were not first-time homebuyers. The plaintiffs indicated their approval to use the settlement company selected by the real estate agent. Five years later, the plaintiffs filed suit, claiming that the real estate agent’s referral to the title defendant violated RESPA. The consumers, as lead class members, alleged that a marketing agreement between the defendants provided for payments by the title defendant to the real estate defendant for settlement services referrals. The plaintiffs claimed that the illegal kickback arrangement denied class members of ‘“impartial and fair competition between settlement service[s] providers in violation of RESPA.’”
The district court granted the defendants’ motion for summary judgement, holding that the plaintiffs lacked Article III standing to file suit because they were not overcharged in the settlement of their real estate transaction and did not otherwise show an injury-in-fact. In addition, the court determined that the claim was time-barred under RESPA’s one-year statute of limitations.
On appeal, the 4th Circuit agreed with the district court that the plaintiffs lacked standing, noting that “a statutory violation is not necessarily synonymous with an intangible harm that constitutes injury-in-fact.” The appellate court pointed out that the plaintiffs did not claim to have been overcharged for settlement services, and indeed, the plaintiffs agreed that the settlement service fees were reasonable. The appellate court also rejected the plaintiffs’ assertion that they suffered a concrete injury due to the lack of competition between settlement service providers.
On June 19, the U.S. Court of Appeals for the 3rd Circuit affirmed the dismissal of a RESPA class action against a national bank, concluding the suit was not timely filed. According to the opinion, two consumers took out mortgages with the bank in 2005 and 2006. In 2011, the consumers were part of the putative class in a separate class action, alleging the bank violated RESPA by referring homeowners to mortgage insurers that then obtained reinsurance from a subsidiary of the bank, which the consumers claimed amounted to a kickback. After the class action was dismissed as untimely in 2013 and while it was pending appeal, the consumers filed a new class action as the named plaintiffs, which alleged the same violation of RESPA. The consumers argued that, while RESPA has a one-year statute of limitations, (i) RESPA makes each kickback a separately accruing wrong and that the insurers paid a kickback for each insurance premium payment, therefore, the suit is timely up to one year after the last premium payment and kickback; and (ii) the filing of the first class action tolled the limitation period for their claims and because the class action continued until November 2013, tolling extended their limitations period until then.
The appeals court upheld the district court’s dismissal of the action, agreeing with the consumers’ separate-accrual theory, but noting that the consumers paid no premiums in the year before they filed their complaint, so the limitations period had expired before the consumers filed the new action. Specifically, the appellate court rejected the bank’s argument that RESPA’s statute of limitations runs only from the mortgage closing, not from each later premium payment, holding that under RESPA the limitations period accrues separately for each kickback, stating “[s]o a party violates the Act anew each time it takes the discrete act of giving or receiving a kickback under an agreement to make referrals.”
As for whether the 2011 class action tolled the consumers’ claims, the appellate court cited the Supreme Court’s 2018 opinion in China Agritech, Inc. v. Resh, noting that the Court in that case held that such tolling is only available for individual claims, not class claims. The appellate court rejected the consumers’ arguments that China Agritech does not apply to new class claims filed before the first action has officially ended, stating, “[t]olling new class actions filed while the first one was pending would encourage more plaintiffs to seek second bites at the apple.” Because the consumers’ action was not timely filed, the appellate court affirmed the district court’s dismissal.
On April 26, the U.S. Court of Appeals for the 4th Circuit reversed a district court’s dismissal of five plaintiffs’ putative class actions alleging RESPA violations, concluding that the claims were not time-barred due to the fraudulent concealment tolling doctrine. According to the opinion, between 2009 and 2014, several banks and mortgage companies (collectively, “defendants”) referred plaintiffs to a title company to procure title insurance and obtain settlement services, which allegedly provided the defendants with “several forms of ‘unearned fees and kickbacks’ to induce those referrals” in violation of RESPA. The plaintiffs alleged the kickbacks came in the form of payments to advertising and marketing shell companies for the referrals, which would then make payments to brokers or loan officers of the defendants. The district court dismissed the class actions because the first of the five class actions was not filed until June 2016, which was well beyond the one-year statute of limitations under RESPA.
On appeal, the plaintiffs argued that they were entitled to relief under RESPA because the kickback scheme was allegedly “fraudulently concealed” by the defendants by using “sham” entities and not reporting the payments on the plaintiffs’ HUD-1 settlement statements. The 4th Circuit agreed, concluding that the district court erred in dismissing the plaintiffs’ claims. The appellate court noted that Congress did not intend to “allow individuals and entities that conceal their unlawful kickback schemes and other RESPA violations to reap the benefit of the statute of limitations as a defense.” Rejecting the defendants’ assertion that publicly-available information, including earlier court filings, should have “‘excited further inquiry’” by the plaintiffs to timely file the action, the appellate court emphasized that the fraudulent concealment doctrine requires only “reasonable diligence” and does not “necessarily hold individual borrowers to the diligence standard of combing court filings in potentially related cases, particularly when the borrower has no reason to be aware of the related cases.”
On December 7, the U.S. District Court for the District of Maryland granted a motion for summary judgment filed by a real estate team and title company (defendants), finding that an alleged kickback scheme involving the defendants did not constitute a violation of RESPA, and that the plaintiffs failed to demonstrate that they suffered from any concrete harm. According to the court, the plaintiffs filed a suit on behalf of a putative class more than four and a half years after they purchased their home, claiming the defendants violated RESPA by allegedly “using a ‘sham’ marketing agreement . . . to disguise an illegal kickback scheme,” which provided the real estate team with “unearned fees” through settlement referrals to the title company. The plaintiffs further argued that they were entitled to equitable tolling because the kickback scheme was allegedly concealed in an undisclosed marketing and services agreement, and that even if the agreement had been disclosed, it would have seemingly appeared to be valid. However, the court found “no genuine issue of material fact that the [p]laintiffs failed to exercise reasonable diligence to discover their claim” because at the time of closing, “they knew that they could choose their own settlement and title company” but elected not to. In addition, the court disagreed with the plaintiffs’ argument that they had Article III standing because they were “deprived of impartial and fair competition between settlement services,” finding that the plaintiffs were not overcharged for services due to the alleged kickback scheme and failed to show that the costs of settlement services were unnecessarily increased.
Moreover, the court found that the plaintiffs (i) did not inquire about a potential relationship between the defendants; (ii) did not claim dissatisfaction with the title company services provided; and (iii) did not claim that the fees paid to the title company were “unreasonable or undeserved.” Furthermore, the court found that the claim was barred by RESPA’s one-year statute of limitations and that equitable tolling did not apply.
Court approves $17 million class action settlement with mortgage company and real estate service companies for alleged RESPA violations
On August 27, the U.S. District Court for the Central District of California approved a class action settlement agreement resolving allegations against a national mortgage company and a real estate services family of companies (defendants) for allegedly arranging kickbacks for unlawful referrals of title services in violation of RESPA. As previously covered by InfoBytes, the 2015 complaint accused the defendants of violating RESPA by allegedly facilitating the exchange of unlawful referral fees and kickbacks through an affiliated business arrangement, while also directing various banks to refer title insurance and other settlement services to a subsidiary in the family of real estate services companies without informing customers of the relationship between the entities. In a stipulation of settlement filed in 2017 alongside a motion for preliminary approval, defendants indicated that they continued “to deny each and all of the claims and contentions alleged in the [a]ction . . . [but] have concluded that the further conduct of the [a]ction against them would be protracted and expensive.” The stipulation further noted that “substantial amounts of time, energy and resources have been and, unless this [s]ettlement is made, will continue to be devoted to the defense of the claims asserted in the [a]ction.”
The approved settlement class encompasses more than 32,000 transactions related to borrowers who closed on mortgage loans originated by the mortgage company between approximately November 2014 through November 2015, and who paid any title, escrow or closing related charges to the real estate services companies. The defendants will pay $17 million into a settlement fund, which covers payment to class members as well as attorney’s fees and costs.
Court holds lenders may not require borrowers to use an affiliated appraisal management company under RESPA; denies class certification
On February 7, a magistrate judge of the U.S. District Court for the Northern District of Georgia recommended denial of a motion for class certification in a case alleging that a mortgage lender, an affiliated appraisal management company (AMC), and the individual owner, through trusts, of both the lender and the AMC committed RESPA violations. The plaintiffs alleged that the individual owner received a thing of value, i.e, profit distributions from the AMC, that were generated from the lender’s referrals to the AMC in violation of Section 8(a) of RESPA, notwithstanding the exemption for affiliated business arrangements, (i) because no disclosure of the affiliation was provided to the borrowers, or (ii) because, even when a disclosure was provided, the borrowers were required to use the AMC.
While reviewing whether the class would have standing, the court disagreed with the defendant’s assertion that the affiliated business arrangement exemption under Section 8(c)(4) of RESPA, which generally bans the required use of an affiliate, but permits a lender to impose its choice of an attorney, credit reporting agency, or real estate appraiser to represent the lender’s interest, should be interpreted to permit the mortgage lender’s required use of an affiliated AMC. The defendants argued that allowing a consumer to shop for an appraisal management company would be inconsistent with TILA and Regulation Z, whose official commentary to Section 1026.37(f)(2) lists “appraisal management company fee” as an example of an item that may be disclosed under “services you cannot shop for” in the Good Faith Estimate. The court rejected that assertion, stating that there are multiple settlement services the lender may require the consumer to use which do not run afoul of RESPA or TILA and that Section 8 is only implicated where there is a kickback involved. The court further examined the plain meaning of Section 8(c)(4) and determined that, from a statutory interpretation perspective, an appraiser and an appraisal management company are not “one and the same.”
Additionally, the court disagreed with the defendants argument that the plaintiffs’ payment to the AMC was covered under the exception in Section 8(c)(2) of RESPA because the payment was not a “thing of value” under Section 8(a). In rejecting the defendants’ argument, the court noted the kickback at issue is the profit ultimately paid to the individual owner, not the plaintiffs’ payment to the AMC, and the defendants did not present any authority that the exception applies when the payment is for ownership interest.
The court ultimately recommended the denial of the class certification because plaintiffs did not demonstrate that ascertaining the class was administratively feasible, including the problem of ascertaining which loans were federally related mortgage loan and which were not. The court also concluded that, given the number of individual inquiries in the case, the requirement that common question of law and fact predominate was not satisfied.
On October 17, the New York Department of Financial Services (NYDFS) adopted two final regulations designed to stop “unscrupulous practices” in the title insurance industry. The final regulations—which are the culmination of a NYDFS’ investigation into the practices of title insurers—supersede “emergency” versions of both regulations that went into effect earlier this year. (See previously InfoBytes coverage here.) Specifically, the first rule clarifies that certain “reasonable and customary” advertising and marketing expenses will be permitted provided “they are without regard to insured status or conditioned directly or indirectly on the referral of title business.” Meals, entertainment, and other forms of inducements are prohibited. According to a NYDFS press release, the state’s “anti-inducement statute is not limited to situations in which there is a direct quid pro quo for business.” The second rule requires, among other things, that title insurance companies or agents function independently from any affiliates through which they generate a portion of their business and make “good faith” efforts to accept business from non-affiliate sources.
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