RESPA Section 8– the federal law that prohibits kickbacks and equivalent pay-for-referral arrangements between referrers of settlement service business and settlement service providers– is an immensely important law that is due for some attention for the sake of independent title businesses, among others. But unfortunately, the two RESPA Section 8 cases are now pending before the Supreme Court aren’t the attention that is needed.
I’ve got to say that as someone who finds sham affiliated business arrangements repugnant: I hate both of these RESPA Section 8 Supreme Court cases. Neither Edwards in Edwards v. First American, nor Freeman in Freeman v. Quicken Loans has a particularly compelling case in general. What that means is that the Supreme Court can come down in favor of big business, like it almost always does, and nobody is going to feel like the plaintiffs got screwed.
To drive home the point, let’s look at the cases individually for a moment.
In Edwards v. First American, First American’s alleged misdeed is that it bought a minority stake in a large title agency and in return got an agreement that the title agency would use First American as its sole underwriter, cutting out other underwriters that the title agency was using up to that point. Edwards used this title agency in her transaction and later alleged that this arrangement was an illegal fee splitting arrangement under RESPA Section 8.
To me, First American’s business arrangement in Edwards is lacking a critical element that makes realtor or broker or other referrer controlled affiliated business arrangements repugnant… namely, an undue conflict of interest inherent in the ownership arrangement that would be likely to discourage sound title work. Unlike referrer-owned affiliated business arrangements, there is essentially no additional conflict of interest between an agency and their underwriter introduced by a part ownership arrangement that would encourage lax title standards so that someone could get their fee or commission. The underwriter would naturally share an agent’s interest in the integrity of title, whether they own all, part, or none of the business. Similarly, the interests of the underwriter are more or less aligned with the agency, even if there is an exclusivity agreement. If the agency insures a bad transaction, whoever underwrote that transaction is likely to be damaged, regardless of whether they insure all that agency’s transactions or only some of them.
There’s nothing else about Edwards’ case that engenders any extraordinary sympathy. She wasn’t overcharged, and there’s no allegation that her transaction was mishandled. She hasn’t had a title claim on the property as far as I know, and there’s no reason to believe that First American wouldn’t have paid a valid claim under the terms of the policy. Let me put it this way… if it was only about Edwards, I could sleep at night if she lost.
Problem is, it’s not just about her issue, or this particular flavor of business arrangement. And the impending danger is that an unfavorable Supreme Court ruling in this case is going to greatly damage the chances of those who would like to go after more harmful business practices that rob the title industry of independence to the detriment of the consumer.
Freeman v. Quicken Loans is another loser. Of all the cases that the Supreme Court could have chosen in order to clarify RESPA Section 8, Freeman has to be among the weakest and least relevant. Freeman was charged a “loan discount fee” by Quicken Loans, but did not get a discount off of his interest rate. I feel for the guy, but it’s simply not a particularly strong RESPA Section 8 case. There’s no fee-splitting involved at all, no conflict of interest, no meat on the bone at all if you are concerned about kickback-like arrangements in the settlement service business. In fact, it’s highly questionable that a loan discount fee is even a fee for a settlement service, considering that a federal appeals court has just ruled that it is not. Yet who knows how the pro-big-business Supreme Court will use this case to put yet another brick in the wall against those of us who have an interest in preventing further undermining of RESPA Section 8.
Neither case alleges kickbacks, sham affiliated business arrangements, or other schemes that involve paying out a portion of settlement service income in return for referrals– the core reason for a strong interpretation of RESPA Section 8. But that won’t stop the Supreme Court from using these cases to render RESPA Section 8 even more toothless than it already is, to the benefit of all the dubious affiliated business arrangements that exist out there.
It really is a discouraging situation all around. When I look at both these cases in the context of the previous pro-big-business decisions of this Supreme Court, it sure feels like the fix is in here. It looks like the court has cherry-picked two weak RESPA Section 8 cases in order to issue pre-packaged rulings for the big guys, and I fully anticipate friendly rulings for affiliated business arrangements. I do not blame the plaintiffs in these cases for pursuing their cases to the fullest extent (and Edwards actually won her appeal), but as an unintended consequence, I see nothing but bad news coming out of these Supreme Court cases, with ramifications far beyond the plaintiffs’ claims. In my mind, the decisions in these cases are foregone conclusions and the only question is how deeply the Supreme Court will gut RESPA Section 8. I hope I am wrong.