Kruse v. Wells Fargo Home Mortg., Inc.

• Decision Date: 10 September 2004
• Docket Number: No. 03-7665.,03-7665.
• Citation: 383 F.3d 49
• Parties: Wayne A. KRUSE, Lisa M. McLeod, Robert Schill, David Legro, Barbara Legro, on behalf of themselves and all others similar situated, Plaintiffs-Appellants, v. WELLS FARGO HOME MORTGAGE, INC., WFC Holdings Corporation, Wells Fargo & Company, Wells Fargo Financial, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

383 F.3d 49

Wayne A. KRUSE, Lisa M. McLeod, Robert Schill, David Legro, Barbara Legro, on behalf of themselves and all others similar situated, Plaintiffs-Appellants, v. WELLS FARGO HOME MORTGAGE, INC., WFC Holdings Corporation, Wells Fargo & Company, Wells Fargo Financial, Inc., Defendants-Appellees.

No. 03-7665.

United States Court of Appeals, Second Circuit.

Argued: February 11, 2004.

Decided: September 10, 2004.

Appeal from the United States District Court for the Eastern District of New York, Isreal Leo Glasser, J.

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Michael C. Spencer, Milberg Weiss Bershad Hynes & Lerach LLP (Susan M. Greenwood; Craig H. Johnson, Lon D. Packard, Joann Shields, Packard, Packard & Johnson, Salt Lake City, UT; of counsel), New York, NY, for Appellants.

Thomas M. Hefferon, Goodwin Proctor LLP (Leonard F. Lesser, Goodwin Procter LLP, New York, NY, of counsel), Washington, DC, for Appellees.

Christine N. Kohl, U.S. Department of Justice (Michael J. Singer; Peter D. Keisler, Assistant Attorney General; Roslynn R. Mauskopf, United States Attorney for the Eastern District of New York; Richard A. Hauser, Peter S. Race, Joan L. Kayagil, U.S. Department of Housing and Urban Development; of counsel), Washington, DC, for Amicus Curiae the United States.

Before: JACOBS, SACK, and RAGGI, Circuit Judges.

SACK, Circuit Judge.

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, 12 U.S.C. § 2601 et seq. ("RESPA"), in particular RESPA § 8(b) (codified at 12 U.S.C. § 2607(b)). RESPA § 8(b) provides:

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.

Id. § 2607(b). The district court (I. Leo Glasser, Judge), concluding that the practices in question were not prohibited by RESPA, granted the defendants' motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c) and dismissed the complaint.

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 id. § 2602(3),² including "tax service, flood certification, document preparation, and underwriting," Compl. ¶ 23.

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 Federal Rule of Civil Procedure 23 in the United States District Court for the Eastern District of New York. The action was brought by and on behalf of the plaintiffs and similarly situated persons who, on or after January 1, 1995, received automated underwriting scores indicating that their loans would be guaranteed for purchase by Fannie Mae and Freddie Mac, and who paid fees to the defendants for any of the settlement services described above. The plaintiffs assert that the proposed class consists of thousands of residential mortgage borrowers, that common questions of law and fact predominate, and that the plaintiffs' claims are typical of those of the class. The plaintiffs seek treble damages pursuant to RESPA § 8(d)(2) (12 U.S.C. § 2607(d)(2)) for defendants' asserted violations of section 8(b). The plaintiffs also allege unjust enrichment on the part of the defendants, apparently as a supplemental claim under state law, and request disgorgement of funds in an amount equal to the amount by which the defendants were unjustly enriched.

On April 8, 2003, the defendants moved for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c) with respect to the plaintiffs' section 8(b) claim. In a decision delivered orally from the bench on May 16, 2003, an order issued on May 22, 2003, and a judgment entered on May 29, 2003, the district court granted the defendants' motion in its entirety, dismissing the plaintiffs' section 8(b) claim with prejudice. In reaching this decision, the district court relied heavily on the interpretation of section 8(b) advanced by the three federal courts of appeals that had, at the time of the district court's ruling, decided for defendants in litigation in which similar claims were alleged. See Haug v. Bank of Am., 317 F.3d 832 (8th Cir.2003); Krzalic v. Republic Title Co., 314 F.3d 875 (7th Cir.2002), cert. denied, 539 U.S. 958, 123 S.Ct. 2641, 156 L.Ed.2d 656 (2003); Boulware v. Crossland Mortgage Corp., 291 F.3d 261 (4th Cir.2002). The district court agreed with the conclusion of these circuits that section 8(b) unambiguously does not apply to mark-ups and overcharges, and that HUD's interpretation of the section to the contrary was either an impermissible one or entitled to no deference. During the pendency of this appeal, though, the Eleventh Circuit, in Sosa v. Chase Manhattan Mortgage Corp., 348 F.3d 979 (11th Cir.2003), advanced a textual interpretation of section 8(b)'s language at odds with that expressed in Haug, Krzalic, Boulware, and the district court in the instant case.

Having dismissed the federal RESPA claim, the district court declined, pursuant to 28 U.S.C. § 1367(c), to exercise supplemental jurisdiction over the plaintiffs' state-law claims, dismissing them without prejudice.

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 Federal Rule of Civil Procedure 12(c), Hardy v. N.Y. City Health & Hosps. Corp., 164 F.3d 789, 792 (2d Cir.1999), and because it involved questions of statutory construction, United States v. Koh, 199 F.3d 632, 636 (2d Cir.1999), cert. denied, 530 U.S. 1222, 120 S.Ct. 2235, 147 L.Ed.2d 264 (2000). "Moreover, the question of the appropriate level of deference to accord agency regulations is one purely of law, subject to de novo review." Coke v. Long Island Care at Home, Ltd., 376 F.3d 118, 122 (2d Cir.2004).

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....