Schuetz v. Banc One Mortg. Corp.

• Decision Date: 10 June 2002
• Docket Number: No. 01-16206.,01-16206.
• Citation: 292 F.3d 1004
• Parties: Bettina J. SCHUETZ, Plaintiff-Appellant, v. BANC ONE MORTGAGE CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

292 F.3d 1004

Bettina J. SCHUETZ, Plaintiff-Appellant, v. BANC ONE MORTGAGE CORPORATION, Defendant-Appellee.

No. 01-16206.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 11, 2002.

Filed June 10, 2002.

Barry G. Reed, Zimmerman Reed, P.L.L.P., Scottsdale, AZ, for the plaintiff-appellant.

Alan H. Maclin, Briggs and Morgan, P.A., St. Paul, MN, for the defendant-appellee.

Appeal from the United States District Court for the District of Arizona; Robert C. Broomfield, District Judge, Presiding. D.C. No. CV-97-02195-RCB.

Before RYMER, KLEINFELD and McKEOWN, Circuit Judges.

OPINION

RYMER, Circuit Judge.

This appeal requires us to decide whether yield spread premiums, which are fees paid by mortgage lenders to mortgage brokers that are based on the difference between the interest rate at which the broker originates the loan and the par, or market rate offered by the lender, are lawful under the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. § 2601 et seq. (West 2001). RESPA prohibits the giving or receiving of fees for referral as part of a real estate settlement service but permits fees that are paid for facilities actually furnished or services actually performed in the making of a loan. RESPA, § 8(a), (c)(2); 12 U.S.C. § 2607(a), (c)(2).

Bettina J. Scheutz obtained a federally related mortgage loan from Banc One Mortgage Corporation through a mortgage broker, Home Mortgage Financial Corporation. She paid Home Mortgage direct fees and Banc One paid it a yield spread premium. She brought a class action challenging the yield spread premium payment as contrary to § 8(a).

We do not write on a clean slate in deciding whether the yield spread premium was a referral, because the Department of Housing and Urban Development (HUD), which is charged with enforcing RESPA, has prescribed a test for determining the propriety of a yield spread premium payment. It asks whether services were actually performed for the total compensation paid to the mortgage broker, and whether that compensation is reasonably related to the services provided. The district court deferred to this test, correctly we believe, and declined to certify a class of borrowers for lack of a common question of fact. It then granted summary judgment in favor of Banc One on Scheutz's claim that its payment of the yield spread premium was really for a referral of business by Home Mortgage. The court concluded that the broker performed services that contributed to the transaction, and that Home Mortgage's total compensation (of which the yield spread premium was a part) was reasonably related to the services provided. We agree with these rulings.

As we have jurisdiction, 28 U.S.C. § 1291, we affirm.

I

When Schuetz found a house that she wanted to buy in the Sun Lakes Country Club development in Sun Lakes, Arizona, she hired Home Mortgage Financial Corporation, a mortgage broker, to arrange a loan. Mortgage brokers are intermediaries who bring borrower and lender together. Borrowers typically approach the mortgage settlement process with a variety of individual characteristics and needs, including their credit rating, income, sensitivity to interest rate variations, and preference for paying charges up front or spreading them out in the form of a higher interest rate. Brokers furnish numerous services to consumers;¹ in Schuetz's case Home Mortgage analyzed her income and debt, explained the loan process and loan products available to her, collected her financial information, obtained a credit report on her behalf, secured an appraisal, prepared her loan package, and submitted it to Banc One. Mortgage brokers are compensated in several ways for their services. Compensation from the borrower to the broker is a direct fee, while money that the borrower pays the lender and the lender pays the broker is an indirect fee. Because lending institutions such as Banc One offer intermediaries options in structuring their compensation, brokers in effect determine their own compensation for any particular transaction by choosing the combination of loan characteristics and prices to offer a consumer.

A broker selects a loan product from among the various loans offered by the lending institutions with which it maintains a relationship. According to Home Mortgage, loans are selected based on the lender's service, turnaround time, ability to make the required funds available, reputation in the community, level of professionalism, reputation with the banking department, competitive rates, underwriting flexibility, and the availability of products.

Home Mortgage obtained Schuetz a 30-year loan in the principal amount of $68,000 with a 7.5% interest rate from Banc One, which is a wholesale lender. This was above Banc One's par rate. "Par rate" refers to the rate at which the lender will fund 100% of a loan with no premiums or discounts to the broker. For each loan product, Banc One estimates the secondary market value of a model loan and derives a "par" price (taking into account its own costs and return requirements) that it uses in developing rate sheets for brokers. If the interest rate on a particular loan exceeds the rate assumed by Banc One's par price model, Banc One will pay the broker a "yield spread premium" equal to the value of the additional interest.

A yield spread premium, or "YSP," is a lump sum paid by a lender to a broker at closing when the loan originated by the broker bears an above-par interest rate. As HUD has explained it:

Payments to brokers by lenders, characterized as yield spread premiums, are based on the interest rate and points of the loan entered into as compared to the par rate offered by the lender to the mortgage broker for that particular loan (e.g., a loan of 8% and no points where the par rate is 7.50% will command a greater premium for the broker than a loan with a par rate of 7.75% and no points). In determining the price of a loan, mortgage brokers rely on rate quotes issued by lenders, sometimes several times a day. When a lender agrees to purchase a loan from a broker, the broker receives the then applicable pricing for the loan based on the difference between the rate reflected in the rate quote and the rate of the loan entered into by the borrower....

Lender payments to mortgage brokers may reduce the up-front costs to consumers. This allows consumers to obtain loans without paying direct fees themselves. Where a broker is not compensated by the consumer through a direct fee, or is partially compensated through a direct fee, the interest rate of the loan is increased to compensate the broker or the fee is added to principal. In any of the compensation methods described, all costs are ultimately paid by the consumer, whether through direct fees or through the interest rate.

1999 Statement of Policy, 64 Fed.Reg. at 10081 (footnotes omitted).

In this case, Schuetz paid her broker direct fees of $1,661.00, consisting of $688.00 for loan origination, $688.00 for loan discount, and $285.00 for processing. Banc One also paid Home Mortgage a yield spread premium of $516.00. This payment was identified on Schuetz's HUD-1 Settlement Statement as "Mortgage Broker fee to Home Mortgage from BANC ONE."²

Scheutz sued Banc One on behalf of a class of borrowers whose loan settlements included a yield spread premium payment, claiming that the YSP violates RESPA because it is a kickback for referral of a federally related mortgage loan.³ She sought class certification, which the district court denied. It concluded that the issue on which this litigation would turn is whether the yield spread premiums paid by Banc One are compensation for facilities or services actually performed, and decided that this issue was too fact intensive to be resolved on a class-wide basis. We declined to take an interlocutory appeal from the order denying certification.

Cross-motions for summary judgment resulted in judgment for Banc One. The district court held that HUD's 1999 Statement of Policy guided the outcome because Congress authorized HUD to promulgate rules and regulations to implement RESPA, and to interpret the statute. Applying HUD's test for legality of yield spread premium payments, the court found it undisputed that compensable services were performed by Home Mortgage and that they were worth what the broker was paid. Accordingly, the court concluded that no RESPA violation occurred.

Schuetz appeals both orders.

II

In a nutshell, Schuetz contends that the direct fees which she paid fully compensated Home Mortgage for the services it performed and that the yield spread premium paid by Banc One, which was not tied to — or in exchange for — any particular services, is necessarily a fee for referral. In her view, HUD and the district court got the liability test wrong, and the Eleventh Circuit got it right in Culpepper v. Irwin Mortgage Corp., 253 F.3d 1324 (11th Cir. 2001). Banc One counters that HUD's test is binding and that courts must defer to it.

The backdrop is cumbersome but important.

A

Congress enacted RESPA in 1974 to protect home buyers from inflated prices in the home purchasing process. It sought to increase the supply of information available to mortgage consumers about the cost of home loans in advance of settlement, and to eliminate abusive practices such as kickbacks, referral fees, and unearned fees. To accomplish the first purpose, the Act requires lenders to provide borrowers with a statement identifying all settlement charges on a standardized form, commonly known as a "HUD-1," 12 U.S.C. § 2603 (West 2001), and with an information booklet prepared by HUD that counsels borrowers on how mortgage transactions work and how to recognize inflated charges. Id. at § 2604.

Sections 8(a) and 8(c)(2) are the provisions primarily at issue in this case. Section 8(a) prohibits fees for referrals. It provides: "No person shall give and no person shall accept any fee, kickback, or thing of value...