Maryland Federal Court Redefines Class to Address Typicality Concerns In Federal Real Estate Settlement Procedures Act (RESPA) Class Action and then Certifies Class Action Alleging Illegal Kickbacks and Payment of Unearned Fees Under RESPA
Plaintiffs filed a class action in Maryland state court against various defendants alleging that they charged excessive fees in connection with mortgage brokerage, title or settlement services and would pay referral fees in violation of the federal Real Estate Settlement Procedures Act (RESPA); defense attorneys removed the class action to federal court. Benway v. Resource Real Estate Serv., LLC, 239 F.R.D. 419, 421 (D. Md. 2006). Plaintiffs moved to certify the lawsuit as a class action; defense attorneys objected that commonality, typicality and adequacy did not exist under Rule 23(a), and that the motion failed to establish that the requirements of Rule 23(b). Id., at 422. The district court granted the motion but limited the scope of the class action. Specifically, the court certified a class action on behalf of “All borrowers who entered into mortgage loan transactions using the services of Resource Real Estate where the HUD-1 Settlement Statement, or other documents in the loan file, included a charge for or payment to Clipper City Settlement Services, Inc.” Id., at 427.
The class action complaint alleged that Resource Real Estate Services provides real estate title and mortgage loan closing services and that Millard Rubenstein is its majority owner and its Managing Member, that Access One Mortgage Group provides mortgage broker services, and that Resource and Access One formed an affiliated business arrangement (ABA) called Clipper City Settlement Services “to appear on mortgage closing documents as an entity which had performed title work or settlement services.” Benway, at 421. The class action alleged “Resource and Access One conducted a scheme to extract referral fees from borrowers using ABAs like Clipper City”; specifically, Access One would refer borrowers to Resource for title work and Resource would perform the title work, but “the loan closing documents would attribute that work to Clipper City, and the fees charged for the work would exceed the customary fees charged by Resource.” Id. Plaintiffs also allege that Resource “would channel a portion of the fees collected by Clipper City to Access One as a referral reward, without notifying the borrower.” Id.
The district court first addressed typicality. Under Rule 23(a)(3), “[t]he claims of the named plaintiffs must be consistent with those of the class,” Benway, at 423. Here, the class action alleges violations of sections 8(a) and 8(b) of RESPA through the use of ABAs as part of “a scheme to overcharge borrowers and to pay kickbacks in exchange for settlement service referrals.” Id. However, section 8(c) provides an exception for an ABA that serves as a “bona fide provider of settlement services.” Id. (citation omitted). To determine whether an ABA satisfies the HUD factors elemental to serving as a bona fide provider under section 8(c), the court must examine “each ABA’s personnel, management structure, physical location, and the manner in which services are provided.” Id., at 424 (citation omitted). Defense attorneys argued that such an examination defeated certification of a class action because “each ABA employs a different number of individuals, has operating licenses for different states, conducts business with a variety of different mortgage brokers, has separate managerial staff, and some of the ABAs differ in the physical location of their office space.” Id. Thus, typicality did not exist.
The federal court agreed that the class, as defined, failed to meet the typicality requirements of Rule 23(a)(3): “Assuming [plaintiffs] could establish the illegitimacy of Clipper City and establish that Clipper City engaged in a consistent scheme to pay kickbacks in exchange for referrals, they would have done nothing to establish the claims of those plaintiffs whose HUD-1 settlement statements did not list Clipper City. . . . Thus, because the validity of each individual ABA must be determined independently under the HUD factors, the claim that Clipper City operated as a ‘sham’ entity is not typical of the claims of members of the prospective class whose HUD-1 settlement statement refers to an ABA other than Clipper City.” Benway, at 424 (citation omitted). However, the court found that this problem was resolved by redefining the scope of the proposed class action so as to limit it to Clipper City. Id. The federal court found that this modification created an issue that was common to the redefined class because the court could determine Clipper City’s eligibility for a section 8(c) exception without conducting a transaction-by-transaction analysis. Id.
Similarly, the district court determined that the commonality requirement for certification of a class action existed because RESPA section 8(a) does not require a transaction-by-transaction analysis of “whether each borrower was affirmatively influenced to use an ABA and whether an actual overcharge for services occurred.” Benway, at 425. Rather, RESPA’s prohibition against kickbacks or unearned fees for referral of business does not require that the consumer be “overcharged” for any fees associated with the loan, “Section 8(a) simply prohibits the payment of fees pursuant to any agreement or understanding for the referral of settlement services.” Id. (citing 12 U.S.C. § 2607(a)). Further, while RESPA section 8(b) does require proof that the consumer was overcharged for a service, the class action complaint adequately alleged that the ABAs were part of a conspiracy to overcharge borrowers, and alleged further that “because the ABAs performed little or no work in providing settlement services, such an overcharge occurred as a matter of course in every settlement transaction.” Id. Whether plaintiffs could prove those allegations was not at issue, only whether the complaint adequately alleged sufficient facts so as to establish commonality among the class members.
As for adequacy of representation under Rule 23(a)(4), defense attorneys argued that plaintiffs were not adequate class representatives because they did not understand the details of their loan transaction. Benway, at 425. The district court rejected the argument, noting that class representatives are not required to have such a detailed understanding but, rather, only “a general knowledge of what the action involves and a desire to prosecute the action vigorously,” id. (citation omitted). Plaintiffs’ deposition testimony established that they have an adequate, general understanding of the case and that they would vigorously litigate the case. Id., at 426.
Finally, the court found that the requirements of Rule 23(b)(3) – which requires predominance and superiority – were satisfied, easily concluding that “[t]he questions of law and fact that are common to the redefined class predominate over any individualized concerns” and that the class action mechanism was “superior” in light of the large number of claimants and the small amount involved for each individual. Benway, at 426-27. Accordingly, the federal court certified the RESPA class action, after modifying the scope of the class as detailed above.
NOTE: Defense attorneys did not contest that the numerosity requirement of Rule 23(a)(1) had been satisfied. Benway, at 424.
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