LAW: Judgments
U.S. Court of Appeals, 2nd Circuit, 2004
Kruse v. Wells Fargo Home Mortgage Inc.
Markups illegal, overcharges OK
A federal appellate court has supported a U.S. Department of Housing and Urban Development statement of policy that markups on loan-related services provided by third parties are illegal unless additional settlement services are provided.
Five buyers brought a class-action suit against a lender and affiliated entities for allegedly overcharging and marking up fees assessed for loan services such as document preparation and flood certification. A markup involves adding costs to a fee charged by a third-party service provider. An overcharge occurs when a provider charges an amount for a service that’s significantly higher than the common industry cost.
The trial court ruled in favor of the lender, but the 2nd Circuit Court of Appeals partially reversed that decision. Even though the lender overcharged for doing credit searches by as much as 10 times, the appeals court found such overcharges didn’t violate the Real Estate Settlement Procedures Act. Indeed, the court stated that legislative history showed Congress had excluded language from RESPA that would have regulated prices. In this ruling, the court rejected HUD’s 2002 interpretation of Section 8(b) of RESPA, which states that overcharges are illegal.
Next the court considered whether the brokerage’s markup of fees violated the HUD interpretation that all markups were illegal. The court found that other federal appeals courts had disagreed over the interpretation. Three courts had ruled that a violation of Section 8(b) occurred only if third parties had split the amount of the markup. Another court had declared that any markup violated Section 8(b). Because of this ambiguity, the court ruled it would defer to HUD’s interpretation that the markup was illegal unless additional settlement services had been provided by the lender.
Illinois Appellate Court, 2004
Jameson Realty Group v. Kostiner
Liquidated damage clause guarantees fee
A brokerage entered into a listing agreement with a developer to sell the remaining units in a condo property. The one-year agreement contained a liquidated damage provision giving the brokerage the right to collect damages on any unsold units—at a specified commission rate and unit price structure—if the listing was terminated before the one-year period.
After six months, the project manager terminated the agreement, although 13 units remained unsold. To secure its commission on the unsold units, the brokerage sued for breach of contract.
The trial and appellate courts found in favor of the brokerage. The appeals court determined that a liquidated damage clause is enforceable only if the parties agree in advance to the amount of the damages, the damages bear a relationship to the monies lost through the contract termination, and the actual damages might be uncertain and difficult to prove.
The court decided because it would be difficult to establish exactly when and for how much the unsold units might have been sold, a liquidated damage clause was appropriate, and the brokerage was entitled to collect damages.
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