Supreme Court dismisses appeal regarding illegal kickbacks in mortgage industry (and that might be a good thing for consumers)

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by John Chapman

As a general rule, a person seeking to bring a lawsuit must show that they have been personally injured. For example, someone failed to perform their contract with you and that cost you money, or someone ran a stop sign and damaged your car. The right to bring a lawsuit is called “standing” and standing generally requires that you personally suffered an injury.

However, there are laws that apply somewhat different notions of standing. For example, federal copyright law allows a copyright owner to recover money from an infringer without requiring the owner to show he was harmed. Under the Telephone Consumer Protection Act, consumers can recover money without showing they suffered any particular injury when a company makes prerecorded calls to their cell phone without their consent.

Another such law is the Real Estate Settlement Procedures Act (RESPA), a federal consumer protection statute first passed in 1974. The purposes of RESPA are to help consumers become better shoppers for mortgage loan settlement services and to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain mortgage settlement services. Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of mortgage loan settlement service business involving a federally related mortgage loan. For example, when you take out a mortgage loan, your real estate agent or bank is not allowed to receive a kickback or referral fee that is based on successfully referring your business to some particular service provider (say, a particular title insurance company).

In November of 2011, the United States Supreme Court heard oral argument in First American Financial v. Edwards, 10-708. In the case, Cleveland homebuyer Denise Edwards alleges that her title insurance provider, First American Financial Corp, engaged in an illegal kickback scheme with her settlement agent, Tower City Title Agency. Edwards alleges that Tower City was paid a kickback by First American for referring her business to First American in violation of RESPA.

First American responded to the lawsuit by arguing that Edwards lacked standing because she didn’t suffer an injury. Under the state law that applied to her mortgage loan, all title insurance policies in the state cost the same amount. Thus, First American argued that even if it did pay a kickback to Tower City for referring her business, the kickback did not change or increase the amount that Edwards paid.

The trial court and then the Ninth Circuit Court of Appeals disagreed with First American and ruled that that Edwards has standing to bring her RESPA lawsuit—even though the kickback did not result in her paying additional money.

According to he Ninth Circuit, the statute provides that a party who makes a kickback related to a mortgage settlement service is liable to the consumer for “any charge paid for such settlement service.” The court noted that liability under the statute extends to “any charged paid” and not just to an “overcharge.” Indeed, the court of appeals noted that the term “overcharge” does not exist anywhere within the text of the statute.

Just weeks ago, everyone was expecting the Supreme Court to decided whether it agreed with Ms. Edwards and the Ninth Circuit or with First American—i.e., can a plaintiff bring suit seeking an award of statutory damages when she was steered to a particular title insurance company on account of a kickback but did not allege that she paid too much for the insurance or obtained substandard insurance or suffered any other particular injury in fact?

Despite having heard oral argument in the case, the Supreme Court decided to punt the question for now. The appeal was dismissed on June 28, 2012. This means that the Ninth Circuit opinion stands unchanged. Thus, the suit filed by Ms. Edwards (which seeks to represent a class of other, similarly-situated mortgage consumers and alleges First American paid some $2 million to Tower City) will proceed.

It can be difficult if not impossible to determine whether some party to a mortgage loan engaged in an illegal kickback payment. If you feel there may be a RESPA violation with regard to your mortgage, we recommend you discuss it with an attorney. Please feel free to contact our firm for a free consultation by calling toll-free at 1-877-446-9001, or by filling out our free case evaluation form.