Limiting Federal Claims Against Title Insurers

Title insurance is a regulated business in New York. Title insurers are required to file their rates with the state insurance department, and are required to adhere to those rates. If the insurers fail to adhere to their filed rates, New York state courts have recognized the possibility of class action relief for consumers. See Piscioneri v. Commonwealth Land Title Ins. Co. (In re Coordinated Title Ins. Cases), 2 Misc. 3d 1007A. See also Good v. American Pioneer Title Ins. Co., 12 AD3d 401 (upholding denial of title insurers' motion to dismiss). But suppose overcharged consumers seek more than compensatory damages. Can they seek recovery under federal law ' the Real Estate Settlement Procedures Act (RESPA) ' which provides for both treble damages and attorneys fees? In Lang v. First American Title Insurance Co. (NYLJ 9/16/2011), the federal district court for the Western District of New York dismissed a RESPA claim brought as a class action against one New York title insurer.

RESPA Background

Congress enacted RESPA in 1974. The statute, designed to address both the confusion and cost surrounding real estate closings (see 12 USC section 2601), applies to “federally related mortgage loans,” a category that includes mortgage loans on one- to four-family residential properties whenever the loan is made by a lender whose deposits or accounts are insured or regulated by a federal agency (12 USC section 2602). Many of its provisions are designed to force participants in the settlement process to provide more, and more useful, information to borrowers. Section 8 (12 USC section 2607), entitled “Prohibition against kickbacks and unearned fees” extends beyond disclosure requirements, and explicitly bans a number of practices. Section 8(b), the heart of the statute, provides that “[n]o person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”

The Department of Housing and Urban Development (HUD), the federal agency charged with administration of the statute, issued a policy statement in 2001 construing the statute to prohibit unearned fees in three circumstances: 1) when two or more persons split fees for settlement services, any portion of which is unearned; 2) when one settlement service provider marks up the cost of services performed by another provider without adding additional services to justify the markup; and 3) when one service provider charges a fee for no work, or charges a fee “in excess of the reasonable value of goods or services provided.” HUD's policy statement provoked litigation over practices alleged to violate RESPA.

Second Circuit Cases

In Kruse v. Wells Fargo Home Mortgage, Inc., 383 F.3d 49, plaintiffs contended that Wells Fargo had engaged in two practices that violated RESPA. First, plaintiffs contended that Wells Fargo had marked up the price of services provided by a third party. Second, plaintiffs alleged that Wells Fargo charged fees in excess of the reasonable value of services it provided. The Second Circuit held that only the first of these two practices violated the statute. With respect to the second practice ' charging excessive fees ' the court found no support in the statute to sustain HUD's policy statement. Because the court concluded that the statute was unambiguous ' it did not impose price controls on settlement services ' the court found no reason to defer to HUD's interpretation. On the other hand, with respect to markups, the court found the statute ambiguous, and deferred to HUD's interpretation prohibiting markups.

The Second Circuit again faced a RESPA challenge in Cohen v. JP Morgan Chase & Co., 498 F.3d 111. In Cohen, plaintiff, suing on behalf of herself and a class, alleged that Chase had charged an unearned “post-closing fee” in violation of the statute. The district court had dismissed the claim, believing that Kruse controlled. The Second Circuit reversed, concluding that the statute was ambiguous with respect to Congress' intent to prohibit unearned fees when those fees where not divided among multiple entities. Because the statute was ambiguous, the court deferred to HUD's interpretation.

The Lang Case

Neither Kruse nor Cohen involved a claim against a title insurer. By contrast, in Lang, plaintiffs contended that although its title insurer had filed a rate schedule representing that it would offer a 50% discount on refinanced mortgages if the policy is issued within 10 years of the original loan and the new mortgage is for less than $475,000, the insurer did not in fact provide the discount. They alleged that the amount charged was in violation of RESPA.

Because Kruse had established that RESPA does not prohibit overcharges, plaintiffs sought to characterize the title insurer's misconduct as a charge for which no services were performed. Plaintiffs argued that the fee should be divided into two parts ' the part that represented the rate the title insurers had filed with the state insurance department, and the part above the filed rate. They contended that the portion above the filed rate was a fee for which no services were performed.

The District Court rejected plaintiff's claim. The court found no support in the statute for dividing a fee into earned and unearned parts. Moreover, the court concluded that it made no difference that the title insurer had split its fee with title agents. In the court's view, the plaintiff's claim raised nothing more than an overcharge, and was therefore barred by Kruse. Once the court dismissed the RESPA claim, it declined to exercise supplemental jurisdiction over plaintiff's state law claims ' which alleged violation of section 349 of the General Business Law.

Conclusion

In light of Lang, then, consumers face an uphill battle in using RESPA to support a class action against title insurers.

Stewart E. Sterk, Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.

Title insurance is a regulated business in New York. Title insurers are required to file their rates with the state insurance department, and are required to adhere to those rates. If the insurers fail to adhere to their filed rates, New York state courts have recognized the possibility of class action relief for consumers. See Piscioneri v. Commonwealth Land Title Ins. Co. (In re Coordinated Title Ins. Cases), 2 Misc. 3d 1007A. See also Good v. American Pioneer Title Ins. Co. , 12 AD3d 401 (upholding denial of title insurers' motion to dismiss). But suppose overcharged consumers seek more than compensatory damages. Can they seek recovery under federal law ' the Real Estate Settlement Procedures Act (RESPA) ' which provides for both treble damages and attorneys fees? In Lang v. First American Title Insurance Co . (NYLJ 9/16/2011), the federal district court for the Western District of New York dismissed a RESPA claim brought as a class action against one New York title insurer.

RESPA Background

Congress enacted RESPA in 1974. The statute, designed to address both the confusion and cost surrounding real estate closings (see 12 USC section 2601), applies to “federally related mortgage loans,” a category that includes mortgage loans on one- to four-family residential properties whenever the loan is made by a lender whose deposits or accounts are insured or regulated by a federal agency (12 USC section 2602). Many of its provisions are designed to force participants in the settlement process to provide more, and more useful, information to borrowers. Section 8 (12 USC section 2607), entitled “Prohibition against kickbacks and unearned fees” extends beyond disclosure requirements, and explicitly bans a number of practices. Section 8(b), the heart of the statute, provides that “[n]o person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”

The Department of Housing and Urban Development (HUD), the federal agency charged with administration of the statute, issued a policy statement in 2001 construing the statute to prohibit unearned fees in three circumstances: 1) when two or more persons split fees for settlement services, any portion of which is unearned; 2) when one settlement service provider marks up the cost of services performed by another provider without adding additional services to justify the markup; and 3) when one service provider charges a fee for no work, or charges a fee “in excess of the reasonable value of goods or services provided.” HUD's policy statement provoked litigation over practices alleged to violate RESPA.

Second Circuit Cases

In Kruse v. Wells Fargo Home Mortgage, Inc. , 383 F.3d 49, plaintiffs contended that Wells Fargo had engaged in two practices that violated RESPA. First, plaintiffs contended that Wells Fargo had marked up the price of services provided by a third party. Second, plaintiffs alleged that Wells Fargo charged fees in excess of the reasonable value of services it provided. The Second Circuit held that only the first of these two practices violated the statute. With respect to the second practice ' charging excessive fees ' the court found no support in the statute to sustain HUD's policy statement. Because the court concluded that the statute was unambiguous ' it did not impose price controls on settlement services ' the court found no reason to defer to HUD's interpretation. On the other hand, with respect to markups, the court found the statute ambiguous, and deferred to HUD's interpretation prohibiting markups.

The Second Circuit again faced a RESPA challenge in Cohen v. JP Morgan Chase & Co. , 498 F.3d 111. In Cohen, plaintiff, suing on behalf of herself and a class, alleged that Chase had charged an unearned “post-closing fee” in violation of the statute. The district court had dismissed the claim, believing that Kruse controlled. The Second Circuit reversed, concluding that the statute was ambiguous with respect to Congress' intent to prohibit unearned fees when those fees where not divided among multiple entities. Because the statute was ambiguous, the court deferred to HUD's interpretation.

The Lang Case

Neither Kruse nor Cohen involved a claim against a title insurer. By contrast, in Lang, plaintiffs contended that although its title insurer had filed a rate schedule representing that it would offer a 50% discount on refinanced mortgages if the policy is issued within 10 years of the original loan and the new mortgage is for less than $475,000, the insurer did not in fact provide the discount. They alleged that the amount charged was in violation of RESPA.

Because Kruse had established that RESPA does not prohibit overcharges, plaintiffs sought to characterize the title insurer's misconduct as a charge for which no services were performed. Plaintiffs argued that the fee should be divided into two parts ' the part that represented the rate the title insurers had filed with the state insurance department, and the part above the filed rate. They contended that the portion above the filed rate was a fee for which no services were performed.

The District Court rejected plaintiff's claim. The court found no support in the statute for dividing a fee into earned and unearned parts. Moreover, the court concluded that it made no difference that the title insurer had split its fee with title agents. In the court's view, the plaintiff's claim raised nothing more than an overcharge, and was therefore barred by Kruse. Once the court dismissed the RESPA claim, it declined to exercise supplemental jurisdiction over plaintiff's state law claims ' which alleged violation of section 349 of the General Business Law.

Conclusion

In light of Lang, then, consumers face an uphill battle in using RESPA to support a class action against title insurers.

Stewart E. Sterk, Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.