The U.S. Supreme Court hears arguments Tuesday in a case testing whether it is illegal for mortgage lenders to tack on fees to closing costs for services that were not provided. The case was brought by three Louisiana couples who claim their lender violated a 1974 federal law aimed at preventing abusive practices in real estate closings.
The borrowers sued their lender, Quicken Loans, contending that the company violated federal law by charging them as much as $5,000 for a “loan discount fee,” a one-time fee normally charged in exchange for a lowered interest rate. That turned out to be something-for-nothing, the borrowers say, since they never got a lowered interest rate. Thus, they argue, Quicken violated the Real Estate Settlement Procedures Act, which bars lenders from collecting “unearned fees.”
Quicken has argued that the law was intended to stop abusive “backroom deals” and kickbacks that were prevalent in the mortgage industry, and that its fees are not covered by the law since they were not split with anyone else. The company has also denied that the fees were unearned, saying that they were “part of the pricing” for the loans.
The families, backed by the Obama Administration, counter that the law forbids both kickbacks and unearned fees, regardless of whether or not they are split. They note that the agency charged with administering the law, the Department of Housing and Urban development, has for nearly four decades been on record as interpreting the statute that way, and they point to pamphlets first issued by the agency in 1976 stating that it is illegal to “charge or accept a fee…where no service has actually been performed.”
In 2010 a federal appeals court in New Orleans rejected the agency’s interpretation and ruled in favor of Quicken. The court said that the 1974 law only bars kickbacks and split fees for services not rendered, and that it doesn’t apply to fees that are not split, even if they are unearned. The families appealed to the U.S. Supreme Court, which hears arguments today, with a decision expected by late June.