Culpepper v. Irwin Mortgage Corp.

• Decision Date: 15 June 2001
• Docket Number: No. 99-13725,99-13725
• Citation: 253 F.3d 1324
• Parties: (11th Cir. 2001) JOHN ROBERT CULPEPPER, PATRICIA STARNES CULPEPPER, on behalf of themselves and all others similarly situated, Plaintiffs-Appellees, v. IRWIN MORTGAGE CORPORATION, f.k.a. Inland Mortgage Corporation, Defendant-Appellant. BEATRICE N. HIERS, individually and as a representative of a class of similarly situated persons, Plaintiff-Appellee, v. IRWIN MORTGAGE CORPORATION, f.k.a. Inland Mortgage Corporation, Defendant-Appellant
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1324

253 F.3d 1324 (11th Cir. 2001)

JOHN ROBERT CULPEPPER, PATRICIA STARNES CULPEPPER, on behalf of themselves and all others similarly situated, Plaintiffs-Appellees, v. IRWIN MORTGAGE CORPORATION, f.k.a. Inland Mortgage Corporation, Defendant-Appellant.

BEATRICE N. HIERS, individually and as a representative of a class of similarly situated persons, Plaintiff-Appellee, v. IRWIN MORTGAGE CORPORATION, f.k.a. Inland Mortgage Corporation, Defendant-Appellant.

No. 99-13725

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

June 15, 2001

Appeal from the United States District Court for the Northern District of Alabama. D. C. Docket No. 96-00917-CV-H-S. D. C. Docket No. 98-CV-2187

Before EDMONDSON, COX and GIBSON ^*, Circuit Judges.

COX, Circuit Judge:

This action under § 8 of the Real Estate Settlement Practices Act¹ is now on its second visit to our court. The plaintiffs, who have home mortgage loans from Irwin Mortgage Corporation, claim that certain payments, called "yield spread premiums," that Irwin made to the mortgage brokers who handled the plaintiffs' loan applications are illegal kickbacks or referral fees under § 8. The district court initially granted Irwin summary judgment, and on the action's first trip to this court, we reversed. Culpepper v. Inland Mortgage Corp. (Culpepper I), 132 F.3d 692, 694 (11th Cir. 1998).² (The court then explained in a published order denying rehearing (Culpepper II) that its opinion -- which merely reversed summary judgment -- should of course not be read to require summary judgment in the plaintiffs' favor.³) The panel remanded for further proceedings.

One of those proceedings was a motion for class certification, which the district court granted. The plaintiff class now comprises [a]ll persons who, from April 11, 1995, until this class is certified, [June 22, 1999], inclusive, obtained an FHA mortgage loan that was funded by Irwin Mortgage Corporation wherein the broker was paid a loan origination fee of 1% or more and wherein Irwin paid a "yield spread premium" to a mortgage broker.⁴

Irwin was permitted to appeal this class certification under Fed. R. Civ. P. 23(f). Reviewing the district court's ruling for abuse of discretion only,⁵ we affirm.

Background

The "yield spread premiums" at issue in this case,⁶ as the panel explained more fully in Culpepper I,⁷ are payments from Irwin to its mortgage brokers that the written agreement between them contemplates, but does not define.⁸ Each business day, Irwin distributes a rate sheet to its brokers, listing the terms of the loans Irwin is offering that day. The loans' interest rates are set with reference to a "par rate." If the broker originates a loan at a below-par rate, it gets no compensation from Irwin. On the other hand, originating a loan at an above-par rate garners the broker a yield spread premium, whose amount is determined by a formula that includes the amount of the loan and the difference between the loan rate and the par rate. The formula does not take into account the amount of work the broker actually performed in originating the loan or how much the borrower paid in fees for the broker's services. See Culpepper I, 132 F.3d at 694.

Section 8(a) of the Real Estate Settlement Practices Act (RESPA) prohibits both the giving and acceptance of "any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service . . . shall be referred to any person." 12 U.S.C. § 2607(a). (Lending is clearly a "business incident to or a part of a real estate settlement service." See 12 U.S.C. § 2602(3).) Subsection (c) then qualifies subsection (a)'s blanket prohibition by explicitly sheltering from liability "the payment of a fee . . . by a lender to its duly appointed agent for services actually performed in the making of a loan." Id. § 2607(c)(1)(C). The Senate report accompanying RESPA explains that subsection (c) is there to "specifically set[] forth the types of legitimate payments that would not be proscribed by the section." S. Rep. No. 93-866 (1974), reprinted in 1974 U.S.C.C.A.N. 6546, 6552.

Presented with this § 8 challenge to yield spread premiums, the Culpepper I panel read § 8(a) to prescribe a three-part test for prohibited payments. A payment is prohibited if "(1) a payment of a thing of value is (2) made pursuant to an agreement to refer settlement business and (3) a referral actually occurs." Culpepper I, 132 F.3d at 696. The undisputed facts in this action are that Irwin offered to pay (and did pay) a yield spread premium to the broker here, under their agreement, which led the broker to choose Irwin. Those facts satisfy § 8(a), the panel concluded. That § 8(a) conclusion remains unchallenged on this appeal.

The court went on to reject Irwin's argument that yield spread premiums are nonetheless sheltered by § 8(c). Irwin's payments to brokers, the court concluded, resist characterization as payment for services.⁹ Nothing in their agreement, for instance, suggests that the amount paid is in any way dependent on the services provided; most significantly, nothing in the record suggests that the broker renders less service in originating a below-par loan than it does for an above-par loan, or that Irwin ever inquires into how much work the broker actually did. Rather, the payment rests solely on the value of the referral. Yield spread premiums, the panel concluded, are thus prohibited referral fees -- or at least a jury could so find. Id. at 696-97; Culpepper II, 144 F.3d at 718.

Following this court's opinion in Culpepper I, Congress issued a conference report demanding that HUD "clarify" its position concerning the legality of yield spread premiums. HUD responded with a policy statement, which 24 C.F.R. § 3500.4(a)(1)(ii) imbues with the force of a regulation,¹⁰ that yield spread premiums are not illegal per se, but can nonetheless be illegal. HUD tests their legality in two steps. The first question -- whose interpretation is the crux of this appeal -- is "whether goods or facilities were actually furnished or services were actually performed for the compensation paid." Real Estate Settlement Procedures Act (RESPA) Statement of Policy 1999-1 Regarding Lender Payments to Mortgage Brokers, 64 Fed. Reg. 10080, 10084 (Dep't of Hous. & Urban Dev. March 1, 1999)[hereinafter HUD Statement]. The fact that "services have been actually performed by the mortgage broker does not by itself," HUD explains, "make the payment legal." Id. Rather, an answer of "yes" to the first question leads to the second question, which is "whether the payments are reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed." Id. The remainder of the Statement describes in some detail the application of this rule. The Statement is ambiguous, however, as to the core of the class-certification dispute here, permitting the parties to read it in importantly different ways, as we next explain.

Contentions of the Parties

The parties agree that deciding whether class certification is appropriate -- the ultimate issue in this appeal -- requires us, in the end, to settle on a rule of liability under § 8(a) and (c). The reason is that Irwin attacks only the district court's conclusion that "the questions of law or fact common to the members of the class predominate over any questions affecting only individual members," and that the class is thus certifiable under Fed. R. Civ. P. 23(b)(3). Irwin contends that evidence specific to each plaintiff's loan transaction will predominate at trial, making class treatment improper. Whether transaction-specific evidence is necessary or relevant, of course, depends on the rule of liability. See 2 Weinstein's Federal Evidence § 401.04[3][b] (Joseph M. McLaughlin ed., 2d ed. 1997). Hence we arrive at determining the rule of liability.

The centerpiece of Irwin's argument on this point is that the HUD Statement overrules Culpepper I's interpretation of § 8(c). According to Irwin, the Statement provides a two-step "reasonableness test": (1) whether any services were performed by the broker, and (2) whether the yield spread premium and the fees the borrower pays the broker add up to reasonable compensation for the broker's work. In essence, Irwin says that any payment it makes to any potential referrer is all right, as long as the payment, whatever its reason, would have been reasonable compensation for services, had it been compensation for services.¹¹ Culpepper I, Irwin argues, thus wrongly demands evidence that Irwin pays brokers yield spread premiums in return for service and not merely to reward brokers for high-interest loan referrals. HUD's rule, Irwin continues, demands that legality be tested transaction by transaction, since the amount of work done by the broker (investigation, paperwork, counseling, and so forth) varies from loan to loan.

As a fallback position, Irwin argues that even Culpepper I's test for legality under § 8(c) -- which asks whether the lender and the broker exchanged money for services, not just whether the broker's compensation was reasonable -- requires us to determine whether the borrower and the broker subjectively intended, in each loan transaction, for the yield spread premium to be Irwin's payment for the broker's services.¹² That question, Irwin says, can only be answered with testimony about each loan transaction from its parties.

The plaintiffs counter that Culpepper I and the HUD Statement are consistent. This is so, they say, because the first question in HUD's two-step analysis includes not just whether the broker really worked, but also whether Irwin paid the money specifically for those services and not for the loan referral. HUD's first question would thus be, in substance, no more than a re-articulation of Culpepper I's reason for rejecting Irwin's argument that...