Unearned Closing Fee at Issue in Lawsuit

“We now hold that HUD’s Policy Statement reasonably interprets section 8(b) [of RESPA] comprehensively to prohibit unearned fees, whether reflected in a charge divided among multiple parties or an undivided charge from a single lender, as in this case,” declared the U.S. Court of Appeals for the Second Circuit.

The New York appellate court’s holding could leave the question open for judicial review by the U.S. Supreme Court as federal appellate courts have come to differing conclusions. Three circuits — the 8th, 7th and 4th — have read section 8(b) of RESPA narrowly, finding that Congress’ intent was to exclude undivided fees while the 11th Circuit has held that a single party can violate 8(b).

The latest judicial answer to the question came about after New York state homeowner Sylvia Cohen decided to refinance her mortgage in 2003. She received a closing statement listing various fees including a $225 “post-closing fee.” Although Cohen paid the fee, she claimed that Chase provided no services for the charge.

Chase did not return calls for comment and its attorneys declined to be interviewed, but court records indicate the company disputed her contention in court filings.

One year later, Cohen filed a class action claim in the U.S. District Court for the Eastern District of New York and then filed an appeal after the trial court dismissed her lawsuit. The trial court threw out Cohen’s complaint in 2005 on the grounds that it failed to state a claim under RESPA because the fee was similar to an overcharge where, in an earlier decided Second Circuit case, Kruse v. Wells Fargo Home Mortgage Inc., the court decided that overcharges are not prohibited by RESPA.

The trial court also threw out Cohen’s state law claim, finding that she had not successfully made a deceptive practices claim because the facts demonstrated that the fee she challenged had been disclosed.

But, when Cohen’s case came before the appellate court, it disagreed with the trial court’s reliance on Kruse. The appeals court said Kruse did not control because it did not address the critical issue before the Cohen court — whether RESPA’s reference to “any portion, split or percentage of any charge” clearly indicated congressional intent to prohibit unearned fees only when divided among two or more entities.

Finding RESPA to be ambiguous, the Cohen court said it had earlier rejected a legal interpretation that would require two parties. The court then relied upon a HUD policy statement forbidding unearned fees.

The appeals court concluded that Cohen had made a viable claim under RESPA 8(b) by alleging that Chase had improperly collected an undivided, unearned fee.

The appellate court also overruled the dismissal of Cohen’s state claim. The district court had concluded that the $225 post-closing fee could not be misleading because it was disclosed prior to closing. The appellate court said that although New York state law provides support for the trial court’s conclusion, state law cases involving similar claims had not considered fees prohibited under other laws.

The appellate court pointed out that while Cohen might not be successful on the state law claim when it was heard once again by the trial court, that it could not be concluded simply from the fact of disclosure that the charge did not constitute a deceptive practice.

As a result, the appellate court sent the case back to the lower court for reinstatement of the complaint on both the state and federal law claims and for further legal proceedings.

The Department of Justice filed a friend-of-the-court brief for HUD in support of Cohen.