Opinion
Case Number 98 C 7430
March 26, 1999
MEMORANDUM OPINION AND ORDER
Plaintiffs Donald E. Golon and Janice T. Golon bring this suit on behalf of themselves and others similarly situated against Defendant Ohio Savings Bank ("OSB"), their mortgage company. The Golons allege in Count I that OSB violated the Real Estate Settlement Procedures Act ("RESPA"), by paying a broker premium (or "yield spread premium") to Midwest Financial Group, Inc., ("Midwest"), the mortgage broker that arranged the loan between Plaintiffs and Defendant OSB. In Count II, the Golons allege that OSB violated the Illinois Consumer Fraud and Deceptive Business Practices Act by failing to properly disclose an assignment fee charged to Plaintiffs at the closing. This court has jurisdiction over Plaintiffs' RESPA claim under 28 U.S.C. § 1331 and pendent jurisdiction over Plaintiffs' Illinois state law claim.
Defendant has moved to dismiss both counts for failure to state a claim. As discussed below, the motion is denied with respect to Count I and granted as to Count II.
FACTS
The facts of this case are straightforward. Plaintiffs applied to Midwest, a mortgage broker, to help them secure a loan to finance a residence. (Complaint ¶ 5.) Plaintiffs purchased a home located at 195 Harbor Drive, Chicago, Illinois, on July 15, 1998. (Id. ¶ 4.) Although Midwest was the nominal creditor on the loan, Midwest actually arranged for Plaintiffs to borrow $215,000.00 from OSB. (Id.) Plaintiffs allege that in exchange for its services in procuring the loan, Midwest charged the Golons $295.00. (Id. ¶ 5.) The Settlement Statement also reflects a charge of $25.00 for assignment of the mortgage to a third party. ( Id. at line 1204.)
The court is uncertain about Plaintiff's calculation; perhaps Plaintiffs are referring to the total of a $250.00 appraisal fee and $45.00 credit report fee. According to the Department of Housing and Urban Development Settlement Statement ("Settlement Statement") prepared by the Chicago Title Insurance Company and presented to Plaintiffs at the closing, the Golons paid Midwest the following fees: appraisal fee of $250, credit report fee of $45, flood certification fee of $25, and document preparation fee of $100 ($420.00 total fees to Midwest). (Settlement Statement, Ex. A to Complaint, at lines 803, 804, 809, 1105.)
In addition, the Settlement Statement discloses at line 806 that Defendant OSB paid a "broker premium" of $1,612.50 to Midwest. (Complaint ¶ 7; Settlement Statement, Ex. A to Complaint, at line 806.) Plaintiffs allege that OSB pays a broker premium to Midwest whenever Midwest arranges a loan at a higher interest rate than the minimum interest rate that OSB has available at that time. (Complaint ¶ 13.) The Golons assert that before the closing, they did not know that OSB intended to pay Midwest this broker premium. They note that the broker premium was not included on the Good Faith Estimate of Settlement Costs provided to the Golons on April 7, 1998. ( Id. ¶ 7; Good Faith Estimate, Ex. B to Complaint.) The Good Faith Estimate does state, "Lender pays Midwest a premium of 1 to 3%," but a corresponding monetary value for this premium is not specified. (Good Faith Estimate, Ex. B to Complaint, at line 811.) The Good Faith Estimate identified Midwest as the source of the information provided and states that, as of the time of preparation of the Good Faith Estimate, a lender had not yet been obtained. ( Id.)
Plaintiffs' response brief argues that the premium was not properly disclosed on the Settlement Statement. (Plaintiffs' Memorandum in Response to Defendant Ohio Savings Bank's Motion to Dismiss ¶¶ 8, 10.) No such allegation appears in the complaint, however, and Plaintiffs claim under RESPA hinges on the assertion that "No referral fee for selling an above market loan is legal," rather than on an assertion that the broker premium is illegal because it was not properly disclosed on the Good Faith Estimate or on the Settlement Statement. (Plaintiff's Memorandum ¶ 13.)
DISCUSSION
In deciding a motion to dismiss for failure to state a claim upon which relief can be granted, the court considers the allegations in the complaint to be true and views all facts and any reasonable inferences from the facts in the light most favorable to the plaintiff. Durr v. Intercounty Title Co., 14 F.3d 1183, 1187 (7th Cir. 1994). The court should grant the motion to dismiss only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Id. (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).
A. Count I: Plaintiffs Have Adequately Alleged a Violation of RESPA
In Count I, Plaintiffs claim that Defendant violated 12 U.S.C. § 2607 by paying a broker premium fee to Midwest. The statute provides:
(a) Business referrals. 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 settlement service involving a federally related mortgage loan shall be referred to any person.12 U.S.C. § 2607(a). Defendant argues that Section 2607(a) of RESPA is limited by Section 2607(c) which provides, "Nothing in this section shall be construed as prohibiting . . . (2) the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed." 12 U.S.C. § 2607(c). Defendant further argues that another exception to the rule against referral fees is "[a] payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan." 24 C.F.R. § 3500.14(g)(1)(iii). As the regulations explain, however, even if a service has been performed, the fee may constitute an improper referral fee if it bears "no reasonable relationship to the market value of the goods or services provided." 24 C.F.R. § 3500.14(g)(2).
These RESPA sections thus prohibit mortgage companies from paying kickbacks or referral fees to mortgage brokers in some circumstances; however, whether a broker premium violates RESPA because it does not meet the requirements of the statutory exceptions to the rule is a highly factual determination. At least one recent decision suggests that Plaintiffs' allegations adequately state a claim under RESPA. In Culpepper v. Inland Mortgage Corp., 132 F.3d 692 (11th Cir. 1998) (" Culpepper I"), the Eleventh Circuit examined a set of facts nearly identical to Plaintiff's allegations and reversed the district court's grant of summary judgment for the defendant on the plaintiff's claim under the anti-kickback provision of RESPA. As in this case, in Culpepper I, a mortgage broker obtained a loan for plaintiffs from the defendant mortgage company, which paid the mortgage broker a yield spread premium in return for the broker's arranging a loan at a rate higher than the lowest rate that the mortgage company would accept. Id. at 694. The plaintiffs also paid the mortgage company an origination fee for their services. Id. Although the broker was the nominal lender, the mortgage company owned the loan from the outset, under a system referred to as "table funding," in which the mortgage company advanced the loan money at the same time that the broker assigned the loan to the mortgage company. Id.
Culpepper I recognized that a mortgage company may violate RESPA by making a yield spread payment for a referral "if (1) a payment of a thing of value is (2) made pursuant to an agreement to refer settlement business and (3) a referral actually occurs." Id. at 695-96. The mortgage broker made a referral when it chose to arrange the loan to the plaintiffs from the defendant mortgage company instead of with another lender . Id. Here, similarly, the Golons have alleged that Midwest referred the Golons to OSB, and that OSB paid Midwest for arranging a mortgage at interest rates higher than the minimum that OSB would accept. These allegations are sufficient to withstand the motion to dismiss.
Under RESPA, "A referral includes any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service." 24 C.F.R. § 3500.14(f)(1). Originating, handling and closing a loan are "settlement services." 12 U.S.C. § 2602(3); Brancheau v. Residential Mortgage, 182 F.R.D. 579, 584 n. 3 (D. Minn. 1998).
As Defendant notes, RESPA recognizes exceptions to the prohibition against referral fees, where such a fee reflects reasonable compensation for services rendered. The complaint in this case is silent as to whether Midwest performed a compensable service or whether the fee paid is reasonable if it is valid. Whether or not the broker has performed a compensable service, and whether that service bears a reasonable relationship to the market value are factual questions. See Culpepper v. Inland Mortgage Corp., 144 F.3d 717, 718 (11th Cir. 1998) (" Culpepper II") (denying rehearing, but noting that Culpepper I depended whether or not the yield spread premium payment fit into one of the exceptions).
Culpepper I concluded that the yield spread premium at issue there did not fit under the statutory exception as a payment for goods because under the system of table funding the lender owned the loan from the beginning, even though the broker is the nominal lender. Culpepper I, 132 F.3d at 696. Nor did the yield spread premium qualify as a payment for services to the plaintiffs; the plaintiffs had paid a loan origination fee of one percent to the broker, and the broker admitted in answers to interrogatories that the premium was paid at least in part for the above-minimum interest rate on the mortgage. Id. at 696-97. Finally, the yield spread premium in Culpepper I was not compensation for services that the broker provided to the mortgage company because the premium amount was related to the interest rate on the loan, not to the quality or quantity of services provided. Id. at 697.
If there is evidence that the referral fee in this case does fall into an exception for RESPA, that evidence can be developed at the trial or summary judgment stage. The possibility of an exception does not support dismissal of the Golon's complaint on motion, however. A handful of district court decisions that have addressed the question are in accord. In Dubose v. First Sec. Sav. Bank, 974 F. Supp. 1426 (M.D. Ala. 1997), for example, the record showed that plaintiff's mortgage broker never owned the loan, the broker arranged a loan at an interest rate above par, the plaintiffs paid the broker a two percent loan origination fee, and the mortgage company paid the broker a premium. Id. at 1427. The court denied the defendant mortgage company's motion for summary judgment, holding that an issue of material fact existed as to whether the broker premium constituted a referral fee that was paid to influence the broker's selection of a mortgage company. Id. at 1431-32. Similarly, in Martinez v. Weyerhaeuser Mortgage Co., 959 F. Supp. 1511 (S.D. Fla. 1996), the court denied the defendant mortgage broker's motion for summary judgment and held that factual questions existed as to whether the yield spread premium payments paid to the broker were illegal under RESPA or were paid in exchange for actual services rendered. Id. at 1522. In Barbosa v. Target Mortgage Corp., 968 F. Supp. 1548 (S.D. Fla. 1997), the court granted the mortgage company's motion for summary judgment. The court held that the yield spread premium was not a prohibited referral fee because it was paid to the mortgage broker for the arrangement of a loan at a higher than par interest rate, not for the referral of business. Id. at 1556-57.
Defendant urges that the payment at issue in this case is authorized by regulations promulgated by the Department of Housing and Urban Development. According to Defendant, HUD has "implicitly acknowledged" that yield spread premiums are permitted under RESPA by providing instructions concerning the appropriate procedures for disclosing such premiums. See 24 C.F.R. Part 3500, App. B, Ex. 12. Defendant insists it did in fact comply with these disclosure instructions and that the premium at issue here must therefore be permissible. Even if those instructions by themselves do not explicitly authorize the premium involved here, Defendants continue, they preclude a finding in favor of Plaintiffs here because the RESPA statute provides that there can be no liability for any "act done in good faith in conformity with any [HUD regulation]. . . ." 12 U.S.C. § 2617(b).
In this court's view, the HUD regulations do not defeat Plaintiff's complaint under the liberal standards for assessing its sufficiency. First, the court does not understand HUD regulations to mean that a yield spread premium that would otherwise violate RESPA is acceptable so long as it is adequately disclosed to a lender. See Martinez, 959 F. Supp. at 1522 (the fact that HUD regulations recognize the legality of certain yield spread premiums does not demonstrate that any such premium is lawful). More importantly, in considering a motion to dismiss, the court assumes the truth of the well-pleaded allegations of the complaint. Nothing in those allegations supports the conclusion that OSB took action in this case in good faith reliance on HUD regulations. If that is true, and if that fact supports judgment in favor of Defendant, it must be demonstrated on an adequate factual record, not by way of argument in support of a motion to dismiss.
The cases Defendant cites in support of its motion are not to the contrary. They simply demonstrate that, as note previously, whether a broker fee violates RESPA is a factual question, to be decided on a case by case basis, and thus class certification may be improper. See Taylor v. Flagstar Bank, 181 F.R.D. 509, 524 (M.D. Ala. 1998) (denying motion for class certification because whether goods or services were furnished and their value had to be examined in each individual case); Marinaccio v. Barnett Banks, Inc., 176 F.R.D. 104, 107 (S.D.N.Y. 1997) (denying class certification because "trier of fact would need to examine what services were actually performed in exchange for each of the premiums paid . . . and whether the payment in each of these transactions bears a reasonable relationship to the market value of the . . . services provided") (quotations omitted). Again, the possibility that individual fact questions might preclude class certification-a determination the court does not make at this time-does not support dismissal of the complaint on motion.
C. Count II: Plaintiff Fail to Allege a Violation of the Illinois Consumer Fraud and Deceptive Practices Act
In Count II, Plaintiffs assert that Defendant violated the Illinois Consumer Fraud and Deceptive Business Practices Act ("FDBPA"), 815 ILCS 505/2, by charging them a $25.00 assignment fee for assigning the mortgage to a third party. Plaintiffs allege that they had no previous knowledge of this fee until they received the closing statement. The FDBPA provides:
[U]nfair or deceptive acts or practices, including but not limited to the use or employment of any deception, fraud, false pretense, false promise, misrepresentation or the concealment, suppression or omission of any material fact, with intent that others rely upon the concealment, suppression or omission of such material fact . . . in the conduct of any trade or commerce are hereby declared unlawful whether any person has in fact been misled, deceived or damaged thereby.815 ILCS 505/2.
Defendant argues that Plaintiffs can not make out the elements of a claim under the FDBPA. Under the FDBPA, a plaintiff is required to allege the following elements: "(1) a deceptive act or practice; (2) an intent by defendant that plaintiff rely on the deception; and (3) the deception occurred in the course of conduct involving trade or commerce." Elson v. State Farm Fire Cas. Co., 295 Ill. App.3d 1, 14, 691 N.E.2d 807, 816 (1st Dist. 1998). Plaintiffs here do not allege that OSB required the assignment fee, asked for the assignment fee, or received the assignment fee. Nor have Plaintiffs alleged that the omission or concealment of the fee was material or that OSB intended the Plaintiffs to rely on the nondisclosure. Defendant notes, further, that an action under the FDBPA can only be brought against the person who committed the act, and not against a third party who benefitted from the act. See Zekman v. Direct Am. Marketers, Inc., 182 Ill.2d 359, 370, 695 N.E.2d 853, 859 (1998) (declining to create cause of action against third party who knowingly benefitted from deceptive practices). Plaintiffs respond that Chicago Title, the title insurer that prepared the Settlement Statement, acted as Defendant's agent and at Defendant's direction in charging the fee. Plaintiffs also rely on the fact that the loan was "table funded," apparently in an attempt to place liability on Defendant, even though Midwest is the named lender on the Settlement Statement. Respectfully, the court does not understand how these facts establish that OSB benefitted improperly from a fee paid to Midwest.
As Defendant here urges, a plaintiff must allege the violations of the FDBPA with specificity. Elson, 295 Ill. App.3d 1, 14-15, 691 N.E.2d 807, 817 (granting defendant's motion to dismiss where complaint relied on characterizations of defendant's actions, and did not plead elements of FDBPA with specificity). In this case, Plaintiffs only allege the conclusion that "Defendant's failure to disclose to Plaintiff that they would be charged [the] assignment fee was a violation of the [FDBPA]." (Complaint ¶ 29.) This allegation is wholly inadequate to state a claim under the FDBPA.
CONCLUSION
For the reasons discussed above, the motion to dismiss is denied as to Count I and granted as to Count II.