November 2011

RESPA: Supreme Court to Review Act

The Real Estate Settlement Procedures Act (RESPA) will be debated before the Supreme Court in a case that could shield banks and other lenders from extensive litigation under a variety of state and federal statutes. (First American Financial Corp. v. Edwards, 131 S. Ct. 1592, 179 L. Ed. 2d 472 (2011)). The court will decide this fall whether a consumer who purchased title insurance through a referral arrangement that allegedly violated the anti-kickback provisions of RESPA can bring a suit in federal court even if no monetary loss resulted. If the high court rules against the consumer, banks and companies charged with violations of RESPA may begin challenging the constitutionality of awarding damages in cases where the plaintiff cannot prove actual harm. RESPA prohibits payment of any “fee, kickback or thing of value” in exchange for a business referral. The act also prohibits “a portion, split or percentage of any charge made or received for the rendering of a real estate settlement service” for services not actually rendered to the customer. Anyone in the real estate industry who provides settlement services under RESPA is potentially affected by the case.

In the Edwards case, the plaintiff bought a home in Cleveland in 2006 and paid $455.43 for title insurance. A year later she began a lawsuit in federal court claiming her insurer, Tower City Title Agency, entered into a captive insurance agreement with First American that was a violation of RESPA. The lawsuit alleged that because First American paid $2 million for a 17% minority interest in Tower City in 1998, it received most of the local agent’s referral business. The suit sought class-action status on behalf of all consumers who purchased insurance through a title agency subject to an exclusive referral agreement with First American. The suit alleged damages of up to $150 million. After the District Court refused to grant class-action status, Edwards appealed to the Ninth Circuit Court of Appeals, which rejected First American’s motion to dismiss on the grounds that Edwards lacked standing under RESPA. The court ruled in favor of Edwards, saying “the damages provision in RESPA gives rise to a statutory cause of action whether or not an overcharge occurred."

First American, in its appeal to the high court, is asking the court to review two issues: (1) whether a consumer can recover treble damages measured by the charge paid even though no injury was suffered; and (2) whether such damages are a violation of the U.S. Constitution, which requires an injury to bring a claim. The high court has limited its review to the constitutionality issue. If the Supreme Court reverses the Ninth Circuit's decision, it will be a very rare case where the consumer will be able to prove actual injury under RESPA and the Truth in Lending Act (TILA), which could be a very positive event for the banking industry.

This article was written by Alvin Arnold and originally appeared in BDO USA, LLP's "Real Estate Monitor" newsletter (Spring 2011). Copyright 2011 BDO USA, LLP. All rights reserved. www.bdo.com. Somerset is a member of the BDO Seidman Alliance, a nationwide association of independently owned accounting and consulting firms.