Court: District Court, E.D. Virginia; February 9, 2012; Federal District Court
Martin P. Kiefaber has initiated a lawsuit against HMS National, Inc. under the Real Estate Settlement Procedures Act (RESPA), alleging that HMS engaged in illegal kickbacks and referral fees to real estate agents to promote its home warranty insurance in real estate transactions. HMS defends its actions by asserting that its payments to brokers for services related to home warranty insurance were lawful. Kiefaber seeks class certification for individuals who purchased home warranty contracts from HMS between October 20, 2009, and December 31, 2011, under specific conditions related to real estate transactions.
The court examines the requirements for class certification as outlined in Federal Rule of Civil Procedure 23(a) and determines that individual factual questions among class members outweigh common issues. Consequently, Kiefaber's motion for class certification is denied. The court highlights that Rule 23(b)(3) requires that common questions of law or fact predominate over individual ones, a more stringent standard than the commonality requirement in Rule 23(a). The predominance inquiry assesses whether the proposed class is cohesive enough for representation in litigation, which is the critical issue in this case.
Under the Real Estate Settlement Procedures Act (RESPA), any fees, kickbacks, or other valuable considerations for referrals related to federally related mortgage loans are prohibited, as stated in 12 U.S.C. 2607(a). However, 12 U.S.C. 2607(c)(2) allows for payments made for bona fide salaries or for goods or services actually rendered. The Department of Housing and Urban Development (HUD) has established a rule concerning payments from home warranty companies (HWCs) to real estate brokers, clarifying that while the sale of home warranties during real estate settlements is subject to prohibitions on referral agreements, brokers can still refer business to HWCs without receiving a fee for such referrals. Fees can be exempt from liability if they are for compensable services that are necessary and distinct from the broker’s primary services.
The Warranty Rule outlines that to determine if a payment from an HWC is an unlawful kickback or a lawful payment for compensable services, specific inquiries must be made regarding the actual services provided. Kiefaber asserts that liability hinges on the HWC's knowledge and intent regarding the payment to brokers. He argues that a plaintiff can demonstrate an unlawful referral payment if it can be shown that the HWC was unaware of whether compensable services were performed prior to payment. Kiefaber maintains that payments should be directly tied to services rendered, not merely for referrals, and claims that HMS must prove a clear connection between services and payment to avoid liability. He believes he can establish class-wide liability by showing that HMS lacks awareness and does not verify whether brokers performed any services before making payments, asserting that this indicates a referral arrangement rather than a legitimate payment-for-services structure, supporting the case for class certification.
HMS argues that a payment to a broker is deemed illegal only if the broker did not provide any compensable services related to the sale of a home warranty, regardless of HMS’s knowledge of such services. To establish HMS's liability for a class member, it must be shown that (1) HMS paid a broker a fee for selling a home warranty at settlement and (2) the broker failed to perform compensable services. HMS claims that this requirement leads to a 'mini-trial' for each class member, making class certification inappropriate. The Warranty Rule does not clarify the liability positions of the parties; however, HUD’s YSP Rule provides guidance on lender payments to mortgage brokers under RESPA. The YSP Rule, established to clarify the legality of yield spread premiums (YSPs), stipulates that the legality of a YSP should be assessed by first determining if compensable services were provided and then evaluating if the broker's compensation was reasonable. It emphasizes that YSPs are not inherently legal or illegal and must be evaluated based on the specific circumstances of each transaction. The YSP Rule also states that it is incorrect to require a clear link between the compensable services rendered and the compensation, prioritizing the provision of services over the parties' intentions regarding the payment.
The Eighth Circuit examined the legality of yield spread premiums (YSPs) under RESPA, ruling that if a broker fee is determined to be a payment for a prohibited referral rather than for legitimate services, it is illegal. However, the court rejected this interpretation, emphasizing that Section 2607(c) permits reasonable payments for actual services rendered, regardless of their connection to loan referrals. The court noted that plaintiffs' arguments misinterpret the statute by focusing solely on prohibitory language while neglecting permissive provisions. Consequently, class certification in YSP cases has been deemed inappropriate by the Eighth and other Circuits.
The Warranty Rule lacks the explicit guidance found in the YSP Rule regarding the legality of payments for home warranties. Nevertheless, the court sees no significant differences between payments made by home warranty companies (HWCs) to real estate brokers and YSPs. Thus, it applies the YSP Rule's analysis to HWCs for assessing liability under Section 2607. To establish liability, a plaintiff must demonstrate that HMS paid a broker for selling a home warranty at settlement without compensable services being provided. HMS argues that compensable services were indeed delivered, and Kiefaber has not proven the absence of such services across the proposed class. Since the determination of compensable services will depend on specific case facts, individual issues overwhelm common ones, leading to the conclusion that class certification is not appropriate under Rule 23(b)(3).
Class certification is deemed inappropriate by the Court, which will issue an order reflecting this decision. A 'yield spread premium' is defined as a payment from a mortgage lender to a mortgage broker for delivering a mortgage above the lender's ‘par rate’ (Heimmermann v. First Union Mortg. Corp., 305 F.3d 1257, 1259 (11th Cir. 2002)). The Court acknowledges ambiguity in sections 2607(a) and (c), thereby granting deference to HUD's interpretations, as established in cases such as Glover (283 F.3d at 961-63), Heimmermann (305 F.3d at 1261), and Schuetz (292 F.3d at 1012-14). HMS has provided exhibits and sworn declarations, including one by broker Allan Prigal, to support its argument that brokers deliver compensable services. These documents detail specific services related to the sale of home warranties, suggesting that some of these services qualify as "compensable."
