DISPOSITION:  [*1]  Plaintiffs Motion for Class Certification DENIED.

 

CASE SUMMARY:

 

 

PROCEDURAL POSTURE: Plaintiff borrowers sued defendant lender alleging that the yield spread premium paid by the lender to a mortgage broker for obtaining an above par interest rate was an illegal kickback or referral fee in violation of Real Estate Settlement Procedures Act of 1974 (RESPA), 12 U.S.C.S. §  2601 et seq. The borrowers moved for class certification pursuant to Fed. R. Civ. P. 23.

 

OVERVIEW: The borrowers used a mortgage broker to help secure financing from the lender. The borrowers contended that the premiums paid by the lender were calculated solely from the rate sheet and based solely on the above par interest rate selected without any reference to the services provided by the broker and without regard to the compensation paid in the form of origination and other fees. The borrowers moved for class certification and alleged that the lender's contested practice was systematic and uniform and the class was limited to borrowers who paid their brokers through origination fees. The court denied the motion for class certification and held the case, as presented, warranted analysis of the reasonableness of each transaction and such an individualized inquiry would render the class action unmanageable and therefore an inferior method of adjudication. Accordingly, class certification was not proper for the class as defined in the complaint because individualized questions predominate over common ones.

 

OUTCOME: The motion for class certification was denied.

 

LexisNexis(R) Headnotes

 

 

Banking Law > Bank Activities > Consumer Protection > Real Estate Settlement Procedures

[HN1] Real Estate Settlement Procedures Act of 1974, 12 U.S.C.S. §  2601 et seq., protects home buyers from unnecessarily high settlement charges caused by certain abusive practices, 12 U.S.C.S. §  2601(a), specifically, kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services.  12 U.S.C.S. §  2601(b)(2). "Settlement" in this context is the process of closing a federally related mortgage, and settlement services are any services provided for a prospective or actual settlement.  24 C.F.R. §  3500.2(b).

 

Banking Law > Bank Activities > Consumer Protection > Real Estate Settlement Procedures

[HN2] See 12 U.S.C.S. §  2607(a).

 

Banking Law > Bank Activities > Consumer Protection > Real Estate Settlement Procedures

[HN3] See 12 U.S.C.S. §  2607(c).

 

Banking Law > Bank Activities > Consumer Protection > Real Estate Settlement Procedures

[HN4] See 12 U.S.C.S. §  2607(b).

 

Banking Law > Bank Activities > Consumer Protection > Real Estate Settlement Procedures

[HN5] With regard to mortgage services, the Real Estate Settlement Procedures Act of 1974, 12 U.S.C.S. §  2601 et seq., does not make yield spread premiums illegal per se.

 

Civil Procedure > Class Actions > Prerequisites

[HN6] Plaintiffs carry the burden of establishing each of the requirements for a class action. A court must conduct a rigorous analysis of the particular facts related to class certification in deciding the motion. If plaintiffs fail to establish any of the requirements, a court must deny the motion for class certification.

 

Civil Procedure > Class Actions > Prerequisites

[HN7] Fed. R. Civ. P. 23 establishes a two-part test for class certification. First, the action must satisfy all elements of Fed. R. Civ. P. 23(a) -- numerosity, commonality, typicality, and adequacy of representation. To satisfy the typicality and adequacy elements, a proposed representative must at least have a claim himself. Additionally, the action must satisfy the requirements of either Fed. R. Civ. P. 23(b)(1), (2), or (3). Under Fed. R. Civ. P. 23(b)(3), the requirements are two-fold: Common questions must predominate over any questions affecting only individual members; and class resolution must be superior to other available methods for the fair and efficient adjudication of the controversy. A court views the standard under Fed. R. Civ. P. 23(b)(3) as determinative of whether class certification of the class as defined is proper in the case.

 

Civil Procedure > Class Actions > Prerequisites

[HN8] While a court should not attempt to consider the merits or the probability of a plaintiffs' success on the merits when considering a class certification, going beyond the pleadings is necessary, as a court must understand the claims, defenses, relevant facts, and applicable substantive law in order to make a meaningful determination of the certification issues.

 

Civil Procedure > Class Actions > Prerequisites

[HN9] Class determination generally involves considerations that are enmeshed in the factual and legal issues comprising a plaintiffs cause of action. Further, evaluation of many of the questions entering into determination of class action questions is intimately involved with the merits of the claims. The typicality of the representative's claim or defenses and the presence of common questions of law or fact are obvious examples. The more complex determinations required in Fed. R. Civ. P. 23(b)(3) class actions entail even greater entanglement with the merits.

 

Banking Law > Bank Activities > Consumer Protection > Real Estate Settlement Procedures

[HN10] In a dispute concerning mortgage broker fees, higher indirect fees are legal only if the total compensation is reasonably related to the services actually performed.

 

COUNSEL: For JERRY M RISHER, CAROL C RISHER, plaintiffs: William J Cook, Ness Motley Loadholt Richardson and Poole, Barnwell, SC. Natale Fata, Huthes Fata Law Firm, Surfside Beach, SC. Timothy E Eble, Timothy E Eble, PA, Mount Pleasant, SC.

 

For CRESTAR MORTGAGE CORPORATION, defendant: Benjamin Rush Smith, III, Nelson Mullins Riley and Scarborough, Columbia, SC. Michael J Agoglia, Morrison & Foerster, San Francisco, CA.

 

JUDGES: PATRICK MICHAEL DUFFY, UNITED STATES DISTRICT JUDGE.

 

OPINIONBY: PATRICK MICHAEL DUFFY

 

OPINION:

ORDER

This matter is before the court upon Plaintiffs Jerry and Carol Risher's Motion for Class Certification pursuant to Rule 23, Federal Rules of Civil Procedure. Defendant Crestar Mortgage Corporation ("Crestar") opposes this motion. For the following reasons, the Plaintiffs' Motion is denied.

I. BACKGROUND

 

A. Mortgage Brokers and the Yield Spread Premium

Plaintiffs are residential home purchasers who used a mortgage broker, the Money Source, to help secure financing from a lender, Crestar, in the purchase of their home. A mortgage broker provides mortgage origination and retail services for a [*2]  fee bringing together borrowers and lenders usually without providing the funds for loans themselves. See, eg., 64 Fed. Reg. 10080. n1 As described by the Department of Housing and Urban Development (HUD), mortgage brokers perform various services such as the following:

 

 

filling out the application, ordering required reports and documents, counseling the borrower and participating in the loan closing. They may also offer goods and facilities, such as reports, equipment, and office space to carry out their functions. The level of services mortgage brokers provide in particular transactions depends on the level of difficulty involved in qualifying applicants for particular loan programs. For example, applicants have differences in credit ratings, employment status, levels of debt, or experience that will translate into various degrees of effort required for processing a loan. Also, the mortgage broker may be required to perform various levels of services under different servicing or processing arrangements with wholesale lenders.

 

Id. For these services, mortgage brokers charge the borrower specific fees. Brokers also sometimes receive payments from [*3]  lenders called yield spread premiums. n2 These payments "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...." as determined by the lender's rate sheets Id. n3 Accordingly, the higher the loan's rate is above par, the higher the premium to the broker. Crestar provides yield spread premiums to its brokers, as it did in the Plaintiffs' transaction, and this practice is the subject of this suit.

 

n1 Mortgage brokers generally allow lenders to provide mortgages wholesale without having to maintain retail offices. Crestar has both retail lender operations and wholesale operations.

n2 Mortgage brokers generally have non-exclusive, contractual relationships with numerous lenders.

n3 The par rate is the rate offered to the broker which requires no discount points from the borrower. A par loan also yields no premiums or discounts to the broker.

 

 

B. Plaintiffs' Loan Transaction [*4]

The Plaintiffs sought financing for their first home in Georgetown, South Carolina from the Money Source in July of 1998. Their mortgage broker was Karl Parker. n4 Plaintiffs' agreed to a loan for $ 75,050 with an interest rate of 7.5%. This interest rate was quoted from Crestar's daily rate sheet and was above par for that time period resulting in a yield spread premium of 2.75% ($ 2,063.88) of the principal amount of the loan. Money Source also charged Plaintiffs' an origination fee of $ 1500 and a $ 350 processing fee. All of these charges were reflected in Plaintiffs' HUD-1 settlement statement, including the yield spread premium. Also, Plaintiffs' signed a "Mortgage Loan Originator Agreement" which stated that a portion of the Money Source's compensation may be paid by the Plaintiffs' and the lender. (Parker Decl. Ex. B.) This agreement also stated "you may be able to pay some or all of our compensation indirectly through a higher interest rate in which case we will be paid directly by the lender." (Id.)

 

n4 The broker's fee was agreed to be 5% of the loan's value. (Parker Decl. P 4.)

 

 [*5]

III. DISCUSSION

 

A. Real Estate Settlement Procedures Act

Plaintiffs contend that the yield spread premium paid by Crestar to the Money Source for obtaining an above par interest rate is an illegal kickback or referral fee which violates the Real Estate Settlement Procedures Act, 12 U.S.C. § §  2601 et seq. ("RESPA"). Congress enacted RESPA in 1974 to [HN1] protect home buyers "from unnecessarily high settlement charges caused by certain abusive practices," 12 U.S.C. §  2601(a), specifically "kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services." §  2601(b)(2). "Settlement" in this context is the process of closing a federally related mortgage, and settlement services are any services provided for a prospective or actual settlement. 24 C.F.R. §  3500.2(b). [HN2] RESPA accordingly states the following:

 

No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service involving a federally [*6]  related mortgage loan shall be referred to any person.

 

§  2607(a). n5 However, [HN3] §  2607(c) exempts payments for goods or services from the above prohibition, as follows:

 

Nothing in this section shall be construed as prohibiting ... the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed...

 

Id. §  2607(c).

 

n5 [HN4] The statute also prohibits the following:

 

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.

 

§  2607(b).

 

Plaintiffs contend that the premiums paid by Crestar are calculated solely from the rate sheet and based solely on the above par interest rate selected without any reference to the services provided by the brokers and without [*7]  regard to the compensation paid in the form of origination and other fees. Thus, Plaintiffs contend that Crestar's yield spread premiums constitute a referral fee or kickback in violation of RESPA. n6 Crestar disagrees arguing that the yield spread premiums are not kickbacks or referral fees because they are designed to allow flexibility on the part of the broker and the borrower to pay the broker's up-front costs. For example, if the borrower does not have the money to pay all of the broker's compensation or other closing costs up-front, then the borrower can select an above par interest rate with a yield spread premium which serves to pay the broker or the needed closing costs. Thus, Crestar argues the yield spread premium only compensates brokers' services and does not constitute a referral fee or kickback in violation of RESPA. n7

 

n6 The court notes that [HN5] RESPA does not make yield spread premiums illegal per se. See, eg., Culpepper v. Inland Mortgage Corp., 144 F.3d 717, 718 (11th Cir. 1998) (Culpepper II).

n7 Crestar's contracts with brokers all provide the following:

 

If the submission of a loan application package to Crestar by Broker results in the closing and funding of a mortgage loan to the applicant by Crestar, then broker shall be entitled to receive a fee in an amount to be determined on a loan-by-loan basis as described in the Broker Manual or elsewhere. Such fee shall be to compensate Broker for its actual services rendered in the origination and processing of the loan application.

 

(Edmunds Decl. Ex. B.)

 

 [*8]

 

B. Class Certification

Plaintiff argue that the Crestar's contested practice is systemic and uniform with these allegedly improper payments occurring in thousands of Crestar loans. Plaintiffs request that this court certify a nationwide class of residential mortgage borrowers whose mortgage brokers were paid yield spread premiums by Crestar in addition to the origination fees paid by the borrowers themselves. Specifically, the class is defined as:

 

all persons who, at any time within one year prior to the filing of the Complaint to the date of class certification, entered into residential mortgage loans with Crestar that were/are subject to RESPA in which the settlement statement reflects that a mortgage broker received or was to receive (1) an origination fee from the borrower; and (2) a yield spread premium, or pricing premium, or other amounts outside of closing, from Crestar.

 

(Compl. P 20.) This definition limits the class to borrowers who paid their brokers through origination fees, and Plaintiff contends that, as to each class member, the HUD-1 settlement statement will reflect that no payments were made by Crestar to the mortgage broker on the borrower's [*9]  behalf.

1. Standard

[HN6] Plaintiffs carry the burden of establishing each of the requirements for a class action. In Re A.H. Robins Co., 880 F.2d 709, 728 (4th Cir.), cert. denied, 493 U.S. 959, 107 L. Ed. 2d 362, 110 S. Ct. 376 (1989). The court must conduct "a rigorous analysis" of the particular facts related to class certification in deciding the motion. See id. If plaintiffs fail to establish any of the requirements, the court must deny the motion for class certification. See Georgine v. Amchem Products, Inc., 83 F.3d 610, 624 (3d Cir. 1996), aff'd sub nom., Amchem Products, Inc. v. Windsor, 521 U.S. 591, 138 L. Ed. 2d 689, 117 S. Ct. 2231 (1997). [HN7] Rule 23 of the Federal Rules of Civil Procedure establishes a two-part test for class certification. First, the action must satisfy all elements of Rule 23(a) -- numerosity, commonality, typicality, and adequacy of representation. Fed. R. Civ. P. 23(a). To satisfy the typicality and adequacy elements, a proposed representative must at least have a claim himself.  McClain v. South Carolina Nat. Bank, 105 F.3d 898, 903 (4th Cir. 1997).

Additionally,  [*10]  the action must satisfy the requirements of either Rule 23(b)(1), 23(b)(2), or 23(b)(3). Under Rule 23(b)(3), which is applicable to the present case, the requirements are two-fold: "Common questions must 'predominate over any questions affecting only individual members'; and class resolution must be 'superior to other available methods for the fair and efficient adjudication of the controversy.'" Amchem, 521 U.S. at 615. The court views the standard under Rule 23(b)(3) as determinative of whether class certification of the class as defined is proper in this case.

2. Predominance

The heart of Crestar's challenge to class certification is Plaintiffs' ability to satisfy the predominance requirement of Rule 23(b)(3). This requirement has been the determinative issue in many of the cases that have dealt with class certifications in actions such as this one challenging yield spread premiums under RESPA. The resolution of this issue hinges upon the proper legal standard to apply for determining liability under RESPA and that standard's attendant proof. [HN8] While the court should not attempt to consider the merits or the probability of Plaintiffs' success on the merits [*11]  when considering a class certification, "going beyond the pleadings is necessary, as a court must understand the claims, defenses, relevant facts, and applicable substantive law in order to make a meaningful determination of the certification issues." Castano v. American Tobacco Co., 84 F.3d 734, 744 (5th Cir. 1996) (footnote omitted). n8

 

n8 As the United States Supreme Court stated in Coopers & Lybrand v. Livesay, 437 U.S. 463, 57 L. Ed. 2d 351, 98 S. Ct. 2454 (1978), "the [HN9] class determination generally involves considerations that are 'enmeshed in the factual and legal issues comprising the plaintiffs cause of action.'" Id. at 469. Further, 'evaluation of many of the questions entering into determination of class action questions is intimately involved with the merits of the claims. The typicality of the representative's claim or defenses . . . and the presence of common questions of law or fact are obvious examples. The more complex determinations required in Rule 23(b)(3) class actions entail even greater entanglement with the merits.'" Id. at 469 n. 12.

 

 [*12]

Crestar urges that the proper test for liability under RESPA requires an individualized consideration of whether a yield spread premium was in fact compensation for the broker's services, and if it was, whether the total compensation to the broker is reasonably related to the those services. Accordingly, class certification is improper in this case as it requires a case-by-case analysis of each transaction in order to determine liability. Conversely, Plaintiffs contend that an individualized analysis is unnecessary because Plaintiffs seek to prove there was no link whatsoever between yield spread premiums paid by Crestar and any goods or services provided by the broker. Thus, a determination of the reasonableness of each transaction would be unnecessary.

The theories purported by both parties as the proper test for determining a violation of RESPA are based in part on the divergent decisions of numerous courts which have considered this issue. The great majority of these courts have adopted a test similar to the test urged by Crestar requiring an individualized analysis of each transaction. See (Def.'s Mem. in Opp. at 18 n.21.) While the sheer number of courts subscribing to [*13]  Crestar's approach suggests that some strength of logic supports that approach, this fact is in no way determinative of this issue. Accordingly, the court will endeavor to determine the proper test under RESPA, the attendant proof required for that test, and whether Plaintiffs' case warrants class certification in light of those concerns.

Plaintiffs rely heavily on the Eleventh Circuit's decision in Culpepper v. Inland Mortgage Corp., 132 F.3d 692 (11th Cir. 1998), as support for their contention that class certification is proper where it is shown there is absolutely no link between a yield spread premium and services provided by the broker. n9 While not addressing the class certification issue, the court did consider the elements required to prove a violation under RESPA. n10 The court first determined whether the yield spread premium was a referral fee as contemplated in §  2607(a).  Id. at 695. The court stated that violation under §  2607(a) occurs 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." Id. at 696. Finding that the referral [*14]  had occurred, the court then considered whether the payment fell within one of the exceptions of §  2607(c) for fees for goods or services. Id. As the transaction before the court was table-funded, n11 it concluded that the yield spread premium could not be a payment for a good-the loan itself. Id.

 

n9 Currently, the Eleventh Circuit is the only federal appellate court to have considered the issue of yield spread premiums.

n10 The court was reviewing the trial court's grant of summary judgment in favor of the lender.

n11 Table-funded transactions are characterized by the fact that the lender owns the loan from the outset and never buys it from the broker.

 

Most relevant to the case at bar, the Culpepper court next determined whether the yield spread premium was a payment for services. The court noted that while the broker had undoubtedly provided valuable services to the borrowers, the premium was not payment for those services for two reasons. Id. First, the borrowers had compensated [*15]  their mortgage broker by paying a 1% loan origination fee, and no evidence suggested that this fee was not intended to be the broker's full compensation. Id. Second, the court focused on the undisputed fact that the payment of the premium was not tied to the quantity or quality of the services the broker provided.  Id. at 697. n12 Accordingly, the court found that the premium was not payment for services.

 

n12 The court went on to state: "[the broker] expends the same amount of effort and provides the same quality and quantity of services whether it originates an above par loan, a par loan, or a below par loan. Because [the broker] receives a yield spread premium only when it originates an above par loan, the premium cannot be characterized as payment for originating the loan." Id.

 

Finally, the court held that the RESPA market value test was inapplicable based on its analysis that the yield spread premium did not compensate the broker for any good or service at all. Id. This [*16]  test is found in RESPA's implementing regulations and states: "If the payment of a thing of value bears no reasonable relationship to the market value of the goods or services provided, then the excess is not for services or goods actually performed or provided." 24 C.F.R. §  3500.14(g)(2). n13 The court held the following:

 

The market value test is useful only if the payment is for a good or service in the first instance and a determination must be made whether the payment is so excessive that the excess should be characterized as a referral fee. Here, Inland paid Premiere only for the referral of the loan. Thus, the market value test is inapplicable.

 

Id.

 

n13 HUD, the federal agency charged with administering and interpreting RESPA, see 12 U.S.C. §  2618(a), adopted Regulation X as its interpretation of RESPA. See 24 C.F.R. §  3500.1, et seq. Congress has authorized HUD to prescribe rules and regulations to interpret RESPA as may be necessary to achieve the statute's purpose. See 12 U.S.C. §  2617(a); 12 U.S.C. §  2602(6). Pursuant to the Supreme Court's directive, an agency's interpretation of the statute it is charged with administering shall be given "controlling weight" unless said interpretation is "arbitrary, capricious, or manifestly contrary" to the statute.  Chevron, U.S.A., Inc. v. Natural Resources Defense Counsel, Inc., 467 U.S. 837, 844, 81 L. Ed. 2d 694, 104 S. Ct. 2778 (1984). Section 3500.14 of Regulation X deals specifically with RESPA's prohibition against kickbacks and unearned fees.

 

 [*17]

Plaintiffs' interpretation of the Culpepper court's analysis in large part forms their espoused standard. Plaintiffs interpret Culpepper as establishing a two-prong standard. Under the first prong, the fact finder must determine whether the payment of a yield spread premium was made in exchange for, or was tied to, goods or services rendered. If not, the payment violates RESPA and ends the inquiry. However if the premium was tied to goods or services, then the fact finder proceeds to the second inquiry to "whether a payment for a good or service is so excessive that part of the payment actually may constitute a prohibited referral fee." 132 F.3d at 697.

This standard, or one similar to it, has been adopted by several courts. See, eg., Dujanovic v. MortgageAmerica 185 F.R.D. 660, 669; Mulligan v. Choice Mortgage Corp., 1998 U.S. Dist. LEXIS 13248, 1998 WL 54431 (D.N.H. Aug. 11, 1998) Heimmermann v. First Union Mortg. Corp., 188 F.R.D. 403, 406. However, the court finds that this interpretation of Culpepper fails to recognize a key point in Culpepper-the court's determination that no evidence suggested the origination fee paid was not intended to fully compensate the broker. n14 Clearly, when [*18]  a broker agrees to be compensated fully by the origination or other fees and then obtains a yield spread premium with no relation to any additional services provided in addition to those fees, that broker is obtaining a payment with no link to the services it provided. Such was the case in Culpepper and that circumstance renders the market value test inapplicable. However, this holding does not apply to a situation in which the origination fee or other fees charged by the broker do not constitute the broker's full compensation. In this situation, a yield spread premium which makes up the difference between the fees paid by the borrower to the broker and the value of the broker's services would not necessarily violate RESPA.

 

n14 Regarding this matter, the Culpepper court recognized the following:

 

Mortgage transactions are structured in a variety of ways, and the holding here is highly dependent upon the facts of this financial transaction. We simply note that the particular facts here do not support the conclusion that the yield spread premium in this case was paid as compensation for the services Premiere [the broker] provided to the Culpeppers.

 

 132 F.3d at 697 n.5.

 

 [*19]

Thus, the more accurate standard as established in Culpepper first considers whether the borrower is compensating the broker solely by paying fees directly to the broker. If so, then any yield spread premium on top of those fees must be tied directly to some additional service provided by the broker or it would violate RESPA without reference to the market value test. However, if the origination and other fees paid by the borrower were not contemplated as the broker's full compensation, then the market value test is applicable to any yield spread premium given to the broker in order to determine if that premium payment exceeds what would be the broker's total compensation for the actual services provided. Any amount in excess of the warranted total compensation would violate RESPA.

This standard derived from Culpepper is in accord with the standard espoused by Crestar found in the HUD Policy Statement 1999-1, 64 F.R. 10080. This Policy Statement noted that in determining whether payments from lenders to brokers are permissible under RESPA, "the threshold question is whether there were goods or facilities actually furnished or services actually performed for [*20]  the total compensation paid to the mortgage broker." Id. at 10085. However, a lender's payment to the broker is not valid merely because services have been actually performed by the mortgage broker. Id. "The next inquiry is whether the payment is reasonably related to the value of the ... services that were actually performed." Id. at 10086. Determining whether a payment bears a reasonable relationship to the broker's services "the payments must be commensurate with that amount normally charged for similar services, goods or facilities." Id. n15 When applying this test, "the totality of the compensation to the mortgage broker for the loan must be examined." Id. n15 This total compensation includes such payments as the direct origination fee and other fees paid by the borrower to the broker, as well as payments (indirect fees) made by the lender to the broker. "In applying this test, . . . higher interest rates alone cannot justify higher total fees to mortgage brokers." Id. Thus, [HN10] higher indirect fees are legal only if the total compensation is reasonably related to the services actually performed. Id.

 

n15 This analysis requires careful consideration of fees paid in relation to price structures and practices in similar transactions and in similar markets." Id. Clearly, settlement costs vary in different markets. Id. n.7. [*21]

 

 

n16 The court notes HUD's recognition "that some of the goods or facilities actually furnished or services actually performed by the broker in originating a loan are "for" the lender and other goods or facilities actually furnished or services actually performed are "for" the borrower." Id. The Statement reveals further the "HUD does not believe that it is necessary or even feasible to identify or allocate which facilities, goods or services are performed or provided for the lender, for the consumer, or as a function of State or Federal law. All services, goods and facilities inure to the benefit of both the borrower and the lender in the sense that they make the loan transaction possible." Id.

 

This above defined test is consonant with the Culpepper decision, and numerous courts have adopted this test as the proper standard. See, eg., Levine v. North American Mortgage, 188 F.R.D. 320, 327-28 (D. Minn. 1999); Schmitz v. Aegis Mortgage Corp., 48 F. Supp. 2d 877, 878 (D. Minn. 1999); Briggs, 188 F.R.D. 645 (M.D. Ala. 1999). n17 However,  [*22]  Plaintiff contends that this interpretation of the HUD standard is deficient in that it allows lenders to only show that the broker performed some services in the transaction for anyone in order to trigger the reasonableness assessment. See, eg., Glover v. Standard Federal Bank, 2000 U.S. Dist. LEXIS 20670, No. 97-2068 (D. Minn. March 22, 2000 1999). Instead, Plaintiffs' contend that the HUD test must be viewed in the same manner as the test Plaintiff espouses above. First, the payments must be directly tied to goods, services, or facilities provided to the payor. Then, if and only after that test is met, the payments are still not legal unless the amount of the payment is reasonably related. However, Plaintiffs' standard is based in large part on a misinterpretation of Culpepper as described above. Further, this standard depends upon the assumption that the payor must directly receive substantial services for which the payment serves as compensation.

 

n17 Despite being adopted by numerous courts, this Policy Statement does not receive the deference accorded HUD's implementing regulations of RESPA, but instead is entitled to consideration only to the extent that those interpretations have the power to persuade.  Christensen v. Harris County, 529 U.S. 576, 587, 146 L. Ed. 2d 621, 120 S. Ct. 1655 (2000). However, in so far as this Policy Statement illustrates what the court views as the true standard espoused in Culpepper, the court finds it persuasive.

 

 [*23]

However, this premise is not established by RESPA nor Culpepper and the court disagrees with Plaintiffs' contention. While requiring payments to be directly tied to each service, or reflecting a quid pro quo relationship, may have the effect of limiting the possible abuses of the yield spread premium system, neither the statute nor the cases which this court has found persuasive require such a showing. n18 As stated above, RESPA's purpose is to prevent "unnecessarily high settlement charges caused by certain abusive practices," 12 U.S.C. §  2601(a), specifically "kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services." §  2601(b)(2). This purpose is served if a broker is paid no more than what is agreed to as its full compensation, whether that compensation is paid completely by the borrower or the lender. If the broker is not receiving more than valid compensation, then it cannot be said to be receiving a kickback or referral fee because it obtains no added benefit. In fact, when used in a proper manner, allowing the yield spread premium to supplement the borrower's ability to pay the broker's cost clearly [*24]  benefits all parties involved. The court recognizes that the yield spread premium system is susceptible to abuse on the part of brokers, especially if the lender does not itemize and account for the actual services provided by the broker. However, the susceptibility of abuse alone does not lead to the conclusion that lenders are engaged in a referral or kickback scheme. That conclusion can be reached only after it is clear that the yield spread premium or any payments on the part of the lender to the borrower cause the amount received by the broker to exceed what was intended to be the full and reasonable compensation of the broker. n19 Whether the direct fees paid by the borrowers to their brokers were intended to be the brokers' full compensation cannot be determined solely by the general proof, such as the HUD-1 settlement documents, offered by the Plaintiffs as common to the class. See, eg.  Taylor v. Flagstar Bank, 181 F.R.D. 509, 524 ("There is simply no way of knowing from the face of the HUD-1 that the yield spread premium payment was not for services rendered".) n20 In this case, Crestar has offered evidence that the origination and application fee alone were not intended to [*25]  be the broker's full compensation. (Parker Decl. PP 4, 7.) Thus this case, as presented, warrants analysis of the reasonableness of each transaction. Such an individualized inquiry would render the class action unmanageable and therefore an inferior method of adjudication. See Zimmerman v. Bell, 800 F.2d 386, 390 (4th Cir. 1986). Accordingly, class certification is not proper for the class as defined in the Complaint because individualized questions predominate over common ones. n23 Because the court has found this issue dispositive, it need not address the other requirements under Rule 23.

 

n18 This conclusion applies equally to Plaintiffs' contention that Crestar's failure to quantify and itemize the services for which it was paying the brokers in the documents common to the class transactions demonstrates that Crestar was providing a referral fee. This contention simply is not tenable if the total compensation of the brokers did not exceed what was agreed to and what was reasonable.

Further, Plaintiffs' reliance on the following regulation as support for its position is misplaced:

 

When a person in a position to refer settlement service business, such as an attorney, mortgage lender, real estate broker or agent, or developer or builder, receives a payment for providing additional settlement services as part of a real estate transaction, such payment must be for services that are actual, necessary and distinct from the primary services provided by such person.

 

 24 C.F.R. §  3500.14(g)(3). This statement merely lends support to this court's interpretation of the RESPA scheme and Culpepper as it shows that if one receives a payment on top of what they received as their full compensation for their primary services, then that payment must track actual and necessary services provided by that person. [*26]

 

 

n19 The court also notes Plaintiffs' argument that the test adopted by this court allows a post hac rationalization for payments by lenders which in turn allows lenders to explain away blatant pay-offs because the lenders need not show the direct tie between the particular service and the payment. See Heimmermann v. First Union Mortg. Corp., 188 F.R.D. 403, 406. This argument is unavailing as the test adopted by this court does not allow for any payments, from whatever source, to exceed the reasonable and full compensation of the broker. Thus, the adopted test prevents the improper benefit which inures to brokers in a kickback scheme.

n20 This conclusion does not preclude the possibility that some class could be defined and the alleged violation of RESPA shown by using additional documents common among the class transactions, such as the agreement between the broker and the borrower establishing the broker's fee, along with those documents proposed by Plaintiffs.

n21 The court also notes Plaintiffs' additional contention in its supplemental brief that the payment of Crestar's administrative fee by the borrower on behalf of the broker in and of itself violates RESPA as well as supports Plaintiffs' position regarding the present class certification. However, the court does not view this issue as properly before the court based on the pleadings and the Plaintiffs' present motion.

 

 [*27]

IV. CONCLUSION

It is, therefore,

ORDERED, for the foregoing reasons that Plaintiffs Motion for Class Certification is DENIED.

AND IT IS SO ORDERED.

PATRICK MICHAEL DUFFY

UNITED STATES DISTRICT JUDGE

 

Charleston, South Carolina

March 30th, 2001

 

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Reproduced by Morrison & Foerster LLP with the permission of LexisNexis. Copyright 2001, LexisNexis, a division of Reed Elsevier Inc. No copyright is claimed as to any part of the original work prepared by a government officer or employee as part of that person’s official duties.