Kruse v. Wells Fargo Home Mortgage, Inc., WfcKruse v. Wells Fargo Home Mortgage, Inc., Wfc
In a complaint filed in the United States District Court for the Eastern District of New York, the plaintiffs allege that certain billing practices of the defendant home-mortgage providers with respect to their provision of real estate settlement services to the plaintiffs were contrary to the Real Estate Settlement Procedures Act,
No 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.
BACKGROUND
According to the complaint, the plaintiffs Wayne A. Kruse, Lisa M. McLeod, and Robert Schill are homeowners who obtained settlement services from the defendants while financing their purchases of homes in Brooklyn, New York. The plaintiffs David and Barbara Legro obtained settlement services from the defendants while refinancing their home in Santa Rosa, California. According to the complaint, the defendants Wells Fargo Financial Services, Inc., and Wells Fargo Home Mortgage, Inc., are wholly owned subsidiaries of the defendant Wells Fargo & Company, which is in turn a wholly owned subsidiary of WFC Holdings Corporation.1
The complaint further alleges that between February and April 2002, each of the plaintiffs, while obtaining federally related home mortgage loans, was required by the defendants to purchase certain “settlement services,” see
The plaintiffs challenged two categories of commercial practices adopted by the defendants relating to the provision of settlement services, which the plaintiffs call “overcharges” and “mark-ups.” “Overcharges” arise out of settlement services provided by the lender itself but charged to consumers seeking home mortgages for substantially more than the provider‘s cost. Specifically, the plaintiffs allege that the defendants performed underwriting services — which in this case consist of analyzing a borrower‘s ability to repay the loan in order to determine whether the Federal National Mortgage Association (“Fannie Mae“) or the Federal Home Loan Mortgage Corporation (“Freddie Mac“) will guarantee to purchase the loan on the secondary market, removing most of the lender‘s risk on the loan — using automated software obtained from Fannie Mae and Freddie Mac at a cost of $20 per loan underwritten. The defendants are said to have charged home mortgage borrowers as much as twenty-five times that amount for the service.
A settlement service provider “marks up” the fee for a settlement service when the provider outsources the task of providing the service to a third-party vendor, pays the vendor a fee for the service, and then, without providing an additional service, charges homeowners seeking mortgages a higher fee for the settlement service than that which the provider paid to the third-party vendor. In this case, the defendants are alleged to have paid third parties to perform tax services, flood certification, and document preparation, and then, without providing further services, to have charged plaintiffs amounts substantially in excess of the amount the defendants paid to the third parties for the services. For example, the plaintiffs alleged that the defendants outsourced document preparation to third parties at a typical per-service cost to the defendants of $20 to $50, and then, without performing any additional services, charged consumers seeking home mortgages $150 to $300 for the service.
On May 24, 2002, relying on a statement of policy issued by the United States Department of Housing and Urban Development (“HUD“) stating that both overcharges and mark-ups violate section 8(b), see Statement of Policy 2001-1, 66 Fed. Reg. 53,052, 53,057-58 (Oct. 18, 2001) (the “Policy Statement“), the plaintiffs filed a putative class action pursuant to
On April 8, 2003, the defendants moved for judgment on the pleadings pursuant to
Having dismissed the federal RESPA claim, the district court declined, pursuant to
The plaintiffs appeal.
DISCUSSION
I. Standard of Review
We review the judgment of the district court de novo, both because it was a judgment on the pleadings rendered pursuant to
II. Framework of the Analysis
The plaintiffs allege that they are the victims of two of the defendants’ practices — overcharges and mark-ups — that they argue violate RESPA § 8(b). In addressing these allegations, we begin as we must with the text of the statute. The initial question is whether or not the statute clearly and unambiguously prohibits the practices of which the plaintiffs complain. “If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984); accord Household Credit Servs., Inc. v. Pfennig, 124 S.Ct. 1741, 1747, 158 L.Ed.2d 450 (2004) (quoting Chevron).
If the provisions of the statute are unclear or ambiguous, then, because the Policy Statement addresses the questions of statutory interpretation here in issue, we must decide whether to defer to HUD‘s reading of them as reflected in the Policy Statement. If we decide that we are to defer, we must then decide the appropriate level of deference. Compare Chevron, 467 U.S. at 843-44, 104 S.Ct. 2778 (calling for mandatory deference, in certain situations, to “permissible” agency interpretations), with Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1944) (requiring deference, in other situations, to the extent of the interpretations’ persuasiveness).
If Chevron deference is required, we must defer to the interpretation HUD advances unless it is “‘arbitrary, capricious, or manifestly contrary to the statute.‘” Household Credit Servs., 124 S.Ct. at 1743 (quoting Chevron, 467 U.S. at 844, 104 S.Ct. 2778); accord Evangelista v. Ashcroft, 359 F.3d 145, 150 (2d Cir.2004) (same). So long as “the agency‘s reading fills a gap or defines a term in a reasonable way in light of the Legislature‘s design, we give that reading controlling weight, even if it is not the answer the court would have reached if the question initially had arisen in a judicial proceeding.” Regions Hosp. v. Shalala, 522 U.S. 448, 457, 118 S.Ct. 909, 139 L.Ed.2d 895 (1998) (citation and internal quotation marks omitted). Were we to conclude that the statute is ambiguous but decide that no deference to the agency‘s interpretation is required, then, of course, we would resolve the ambiguity ourselves using the customary means of judicial statutory interpretation.
III. Overcharges3
The plaintiffs urge us to defer to the view taken by HUD in the Policy Statement. HUD has concluded that charging “unreasonably” high prices for certain settlement services, as the plaintiffs assert the defendants did with respect to services the defendants provided to them, is a violation of section 8(b).4 Under this reading of the statute, the amount by which a fee (or “charge“) for a service exceeds the “reasonable value” of the service provided in return is the “portion, split, or percentage” of the charge that is “other than for services actually performed” and thus in violation of section 8(b).
We do not think that the text of section 8(b) can bear that interpretation. Section 8(b) does prohibit the “giv[ing] and... accept[ing of] any portion, split, or percentage of any [covered] charge made or received ... other than for services actually performed.” RESPA § 8(b),
It would, moreover, be an odd reading of the statute to conclude that it instructs federal courts to award treble damages, see RESPA § 8(d)(2),
We conclude that section 8(b) clearly and unambiguously does not extend to overcharges.
Whether it is appropriate for us to consider RESPA‘s legislative history in determining at the outset whether the statute is clear and unambiguous on this point is not at all clear. See, e.g., Coke, 376 F.3d at 127 (“[T]he Supreme Court has issued mixed messages as to whether a court may consider legislative history at ... step one of Chevron [analysis].“); id. n. 3 (collecting cases).5 We note nonetheless that, as pointed out by Haug v. Bank of America, 317 F.3d at 832, our text-based conclusion is supported by the legislative history of RESPA.
Prior to passage of RESPA, Senator Proxmire submitted a separate bill proposing that HUD be empowered to “establish the maximum amounts of the charges to be imposed upon the borrower and seller for services incident to or a part of a real estate settlement ... which shall be designed to reflect the reasonable charges for necessary services ... and to assure that settlement costs do not exceed such reasonable charges....” A Bill to Regulate Closing Costs and Settlement Procedures in Federally Related Mortgage Transactions, S. 2288, 93d Cong. § 4(a)(1) (1973); see also 119 Cong. Rec. 26,548-49 (1973) (describing Senator Proxmire‘s bill as “direct[ing] HUD to issue regulations to limit the amount of closing costs which can be charged in each section of the country“). Congress did not adopt this explicit price-control proposal. Instead, it directed HUD to report to Congress on “whether Federal regulation of the charges for real estate settlement services in federally related mortgage transactions is necessary and desirable.” RESPA, Pub.L. No. 93-533, § 14(b)(2), 88 Stat. 1724, 1730 (1974);
We thus conclude that we cannot, and we therefore do not, defer to this reading of section 8(b) by HUD. See Chevron, 467 U.S. at 842-43, 104 S.Ct. 2778. Section 8(b) did not impose price controls and therefore does not prohibit “overcharges.” Accord Krzalic, 314 F.3d at 881 (“[RESPA] is not a price-control statute.“); Boulware, 291 F.3d at 268 (“RESPA was meant to address certain practices, not enact broad price controls.“).6
We affirm the judgment of the district court as to the plaintiffs’ overcharges claim.
IV. Mark-Ups
A. The Language of Section 8(b)
The plaintiffs also argue that the district court erred in concluding that the defendants’ mark-ups do not as a matter of law violate section 8(b). The term “mark-ups” as the plaintiffs use it in this context refers to fees that the defendants allegedly charged to the plaintiffs for settlement services provided by third-party vendors in excess of the fees that the third-party vendors charged to the defendants for those services, “[w]ithout performing any additional services.” Compl. ¶ 24. Because HUD‘s Policy Statement interprets section 8(b) to prohibit mark-ups, see Policy Statement, 66 Fed.Reg. at 53,058-59, our initial inquiry is whether the text of section 8(b) is clear and unambiguous on the issue so as to foreclose our deference to the Policy Statement in this regard.
The Fourth, Seventh, and Eighth Circuits have held that the text of section 8(b) clearly and unambiguously does not prohibit mark-ups. Haug, supra; Krzalic, supra; Boulware, supra. These courts reason, inter alia, that the word “and” in section 8(b)‘s phrase “no person shall give and no person shall accept” requires that there be both one or more persons who give and one or more persons who receive a settlement services fee other than for services actually performed for there to be a violation of the statute; so that, unless there is at least one giver and one acceptor who simultaneously violate the law, there can be no violation of section 8(b). See Haug, 317 F.3d at 836 (“Section 8(b) ... unambiguously requires at least two parties to share a settlement fee in order to violate the statute.“); Boulware, 291 F.3d at 266 (“The use of the conjunctive ‘and’ indicates that Congress was clearly aiming at an exchange or transaction, not a unilateral act.“). These courts conclude that reading section 8(b) to apply to mark-ups is therefore absurd because it renders givers of mark-ups — the consumers ostensibly protected by the statute — as well as acceptors — the financial institutions from whose sometime-predatory practices they are being protected — simultaneously guilty of violating the statute. Boulware, 291 F.3d at 265 (“It would be irrational to conclude that Congress intended consumers to be potentially liable under RESPA for paying unearned fees.... [T]he giver in § 8(b) must be some party in the settlement process besides the borrower herself.“); Krzalic, 314 F.3d at 879 (“On the plaintiffs’ understanding, they themselves violated the statute because they gave [the defendant] a portion of the fee charged by the county recorder!“).
In Sosa v. Chase Manhattan Mortgage Corp., 348 F.3d 979 (11th Cir.2003), however, the Eleventh Circuit found nothing absurd about a conclusion that section 8(b) covers mark-ups. “The ‘and’ in subsection 8(b) ... operates to create two separate prohibitions.... Giving a portion of a charge is prohibited regardless of whether there is a culpable acceptor, and accepting a portion of a charge is prohibited regardless of whether there is a culpable giver.” Id. at 982. The lender can thus be liable for a section 8(b) violation while the borrower is not. And if the lender pays a third party for services and, though performing no additional services itself, charges an additional amount to the borrower, it receives that additional amount “other than for services actually performed,” in violation of the statute. See id. at 982-83.7
The words of the statute do not seem to compel either reading. The different interpretations described above derive largely from divergent, but plausible, constructions of the word “and.” We thus conclude, because section 8(b) is not clear and unambiguous with respect to its coverage of mark-ups, that we must determine whether deference is due to HUD‘s interpretation of the statute as expressed in the Policy Statement.
B. Deference to HUD‘s Interpretation of Section 8(b)
The circumstances under which an agency pronouncement is due mandatory, Chevron deference are not entirely clear.8 See Richard J. Pierce, Jr., Administrative Law Treatise § 3.5 (4th ed. Supp.2004) (referring to recent Supreme Court decisions on this issue as “confusing“). But such deference is said to be required “when it appears that Congress delegated authority to the agency generally to make rules carrying the force of law, and that the agency interpretation claiming deference was promulgated in the exercise of that authority.” United States v. Mead Corp., 533 U.S. 218, 226-27, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001). Within this context, formal adjudications and interpretations promulgated by an agency pursuant to notice-and-comment rulemaking are generally accorded Chevron deference. See id. at 230, 121 S.Ct. 2164 (“It is fair to assume generally that Congress contemplates administrative action with the effect of law when it provides for a relatively formal administrative procedure tending to foster the fairness and deliberation that should underlie a pronouncement of such force. Thus, the overwhelming number of our cases applying Chevron deference have reviewed the fruits of notice-and-comment rulemaking or formal adjudication.” (citation and footnote omitted)).
The Policy Statement was not the fruit of notice-and-comment rulemaking. But notice-and-comment rulemaking is not a sine qua non of Chevron deference.
Less formal interpretations may also be entitled to mandatory deference, depending upon to what extent the underlying statute suffers from exposed gaps in policies, especially if the statute itself is very complex, as well as on the agency‘s expertise in making such policy decisions, the importance of the agency‘s decisions to the administration of the statute, and the degree of consideration the agency has given the relevant issues over time. See Barnhart v. Walton, 535 U.S. 212, 122 S.Ct. 1265, 152 L.Ed.2d 330 (2002).
Cmty. Health Ctr. v. Wilson-Coker, 311 F.3d 132, 137-38 (2d Cir.2002); see also Barnhart, 535 U.S. at 221-22, 122 S.Ct. 1265 (noting that “the fact that the Agency previously reached its interpretation through means less formal than ‘notice and comment’ rulemaking does not automatically deprive that interpretation of the judicial deference otherwise its due.” (citation omitted)); Mead, 533 U.S. at 231, 121 S.Ct. 2164 (“[T]he want of [notice-and-comment] procedure[s]... does not decide the case.“). Applying Mead, Barnhart, and Wilson-Coker, we conclude that Chevron deference is due to HUD‘s interpretation of section 8(b) with respect to mark-ups.
First, “it appears that Congress delegated authority to the agency generally to make rules carrying the force of law, and that the agency interpretation claiming deference was promulgated in the exercise of that authority.” Mead, 533 U.S. at 226-27, 121 S.Ct. 2164. Congress provided: “The Secretary [of HUD] is authorized to prescribe such rules and regulations, [and] to make such interpretations ... as may be necessary to achieve the purposes of [RESPA].”
The Department is issuing this Statement of Policy in accordance with
5 U.S.C. 552 as a formal pronouncement of its interpretation of relevant statutory and regulatory provisions. Section 19(a) (12 U.S.C. 2617(a) ) of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2601-2617 ) (RESPA) specifically authorizes the Secretary “to prescribe such rules and regulations [and] to make such interpretations * * * as may be necessary to achieve the purposes of [RESPA].”
Policy Statement, 66 Fed.Reg. at 53,052 (alterations in original). Thus Congress authorized HUD to promulgate rules, regulations, and interpretations with the force of law. We think it clear that the Policy Statement was promulgated in the exercise of that authority.
Second, if the Policy Statement arose out of “the careful consideration the Agency has given the question over a long period of time,” Barnhart, 535 U.S. at 222, 122 S.Ct. 1265, that would suggest that we are required to defer. Indeed, the Policy Statement did.
HUD‘s initial RESPA regulation, known as Regulation X, was adopted in 1976. See 41 Fed.Reg. 22,702-12 (June 4, 1976) (codified with subsequent amendments at
In Echevarria, the Seventh Circuit held that the defendant‘s mark-up of third-party vendors’ fees did not violate section 8(b). It noted, however, that it reached this conclusion in part because, “[a]bsent a formal commitment by HUD to an opposing position, we decline to overrule our established RESPA § 8(b) case law.” Echevarria, 256 F.3d at 630. HUD‘s interpretation of section 8(b) to prohibit mark-ups — that is contained in the Policy Statement, issued in October 2001 — was largely in response to Echevarria. See Policy Statement, 66 Fed.Reg. at 53,052, 53,058 (discussing Echevarria).
On the basis of this history, we disagree with the Seventh Circuit‘s later characterization of the Policy Statement: “One fine day, [it] simply appeared in the Federal Register.” Krzalic, 314 F.3d at 881. The Policy Statement was not a set of off-the-cuff remarks, but a response to what was essentially an invitation by the Echevarria court for HUD to clarify its view on the matter. The fact that HUD explicitly designated its interpretation as a response to a judicial decision is some evidence of careful consideration by the agency. And the fact that the Policy Statement was apparently the culmination of HUD‘s reflections on the meaning of section 8(b) as applied to mark-ups over a period of years is further reason to defer to it.
Third, HUD plainly possesses expertise regarding the market for federally related home mortgage loans. The fact that HUD‘s interpretation here is comfortably within the ambit of that expertise bolsters the argument that we should defer to the Policy Statement. See Barnhart, 535 U.S. at 222, 122 S.Ct. 1265 (listing “the related expertise of the Agency” as a relevant factor in deciding whether to accord Chevron deference); Schuetz v. Banc One Mortgage Corp., 292 F.3d 1004, 1012 (9th Cir.2002) (“Congress authorized the Department to interpret RESPA, HUD has responsibility for enforcing the statute, and it has expertise in the home mortgage lending industry.“), cert. denied, 537 U.S. 1171, 123 S.Ct. 994, 154 L.Ed.2d 913 (2003).
Fourth, our sister circuits have deferred to the Policy Statement, albeit in the course of determining when “yield spread premiums” violate RESPA § 8(a),
After weighing all these circumstances, we accord Chevron deference to HUD with respect to its analysis of the application of section 8(b) to mark-ups. Cf. Boulware, 291 F.3d at 267 (“Deference might well be due Regulation X or HUD‘s statement of policy if § 8(b) were ambiguous.” (citing Chevron, 467 U.S. at 842-43, 104 S.Ct. 2778)); Heimmermann, 305 F.3d at 1262 (stating with respect to the Policy Statement‘s interpretation of section 8(a) that, “[g]iven the express delegation of authority in RESPA, formal notice-and-comment is not needed to extend deference to the [Policy Statement]“). But cf. Krzalic, 314 F.3d at 881 (“If an agency is to assume the judicial prerogative of statutory interpretation that Chevron bestowed upon it, it must use ... something more formal, more deliberative, than a simple announcement.“); id. at 882 (Easterbrook, J., concurring in part and concurring in the judgment) (contending that the Policy Statement is not entitled to Chevron deference because it is insufficiently formal).
C. Application of the Policy Statement
In the Policy Statement, HUD reads section 8(b) to prohibit a “settlement service provider” from “mark[ing]-up the cost of another provider‘s services without providing additional settlement services.” Policy Statement, 66 Fed.Reg. at 53,059. Applying HUD‘s reading of the statute, we conclude that the plaintiffs sufficiently alleged a cause of action when they asserted in their complaint that “[t]hird-party vendors charge Defendants fees to perform ... services. Without performing any additional services, Defendants then charge borrowers a mark-up of these vendors’ fees and pocket the difference as profit.” Compl. ¶ 24. The grant of the motion for judgment on the pleadings as to the plaintiffs’ mark-ups claim was therefore in error.11
Of course, whether the plaintiffs will be able to establish that the defendants in fact charged fees for services “without performing any additional services” — indeed, precisely what “providing additional settlement services” means in the context of this case — are questions that the district court may be required to address in the first instance on the basis of the factual record that is developed before it.
V. Supplemental Jurisdiction over State Law Claims
Because, as discussed above, we reverse the district court‘s dismissal of the plaintiffs’ federal claims with respect to mark-ups and remand the case to the district court, we also vacate the judgment of the district court dismissing plaintiffs’ state law claims “so that the district court may, in its discretion, exercise supplemental jurisdiction.” Valley Disposal, Inc. v. Cent. Vt. Solid Waste Mgmt. Dist., 31 F.3d 89, 103 (2d Cir.1994).
CONCLUSION
For the foregoing reasons, the judgment of the district court is hereby affirmed in part and vacated in part. The case is remanded to the district court for further proceedings consistent with this opinion.
Each party shall bear his, her, or its own costs.