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Heimmermann v. First Union Corp.: Culpepper Overruled

Joining a recent judicial trend, the Eleventh Circuit has overruled its earlier decision in the Culpepper case that had allowed a class-action lawsuit to proceed for payment of a yield-spread premium by a mortgage lender to a mortgage broker. In reaching its decision, the court relied upon a 2001 "Statement of Policy" ("SOP") issued by the United States Department of Housing and Urban Development ("HUD") clarifying what payments violate the Real Estate Settlement Procedures Act ("RESPA").

With similiar facts as the Culpepper cases (click here to read Culpeper summaries), First Union Mortgage Company ("Lender") appealed a lower court's ruling allowing a class-action lawsuit to proceed against it for its payment of yield-spread premiums to mortgage brokers. The lawsuit alleged that the Lender's payments to mortgage brokers who brought the Lender loans that exceeded the Lender's daily par rate were illegal referral fees barred by RESPA. These payments are based on the amount each loan exceeded the Lender's daily par rate, with the difference between the two referred to as the "yield-spread premium." The lawsuit against the Lender alleged RESPA violations because this payment was not a payment for a service but instead a payment for referring an above par loan to the Lender.

RESPA is designed to protect consumers from the payment of kickbacks or referral fees in the real estate market, and the statute specifically prohibits the payment of referral fees 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." RESPA contains specific exceptions for payments for goods and services. In Culpepper, the Eleventh Circuit had allowed a similar lawsuit to proceed as a class action, determining that a case-by-case analysis of each payment made by a lender was not necessary to determine if RESPA had been violated. Following the court's decision, HUD issued a SOP in 2001 clarifying a 1999 SOP that the Culpepper court had relied upon in reaching its decision.

Upon consideration of the 2001 SOP, the United States Court of Appeals for the Eleventh Circuit reversed the trial court's grant of class certification, overruling its earlier decision in Culpepper. The Lender argued to the court that its decision in Culpepper was contrary to the language contained in the 2001 SOP. HUD's policy statement set forth a two-step analysis for determining whether a yield-spread payment was an illegal kickback, with the first question being "whether the goods and services were actually furnished or services were actually performed for the compensation paid." If the first question is answered "yes," then the next question is "whether the payments are reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed." The first test requires an analysis of whether a good or service has been provided to the borrower. As long as some good or service has been provided, then the payment will satisfy this test. The next test is to determine whether the yield-spread premium is "reasonably" related to the total amount of goods or services furnished. Under the HUD clarification in the 2001 SOP, the services provided by a mortgage broker would be part of this analysis and also the market rates for these types of services should be considered when determining the reasonableness of the payments. Based on this language, the court found that the 2001 SOP required a case-by-case determination whether each yield-spread premium payment constituted an illegal referral fee under RESPA and therefore was not appropriate for class-action certification.

The court rejected the arguments made by the class representative against the denial of class certification. First, the court rejected the argument that it couldn't retroactively apply the 2001 SOP to earlier transactions. The court stated the SOP isn't a law but is instead an interpretation of RESPA, a statute which has remained unchanged over this period. Second, the court ruled that the 2001 SOP was entitled to deference by the court because the Congress authorized HUD to make RESPA "interpretations" in the RESPA legislation and HUD's interpretation in the 2001 SOP did not conflict with the express language of the RESPA statute. Thus, the court overruled Culpepper and reversed the trial court's grant of class certification.

Heimmermann v. First Union Corp., 305 F.3d 1257 (11th Cir. 2002).

Editor's Note: Other courts looking at the 2001 SOP have reached a similiar conclusion that class action lawsuits are an inappropriate vehicle for RESPA yield-spread premium lawsuits. See Schuetz v. Banc One Mortgage Corp., 292 F.3d 1004 (9th Cir. 2002); Glover v. Standard Fed. Bank, 283 F.3d 953 (8th Cir. 2002); Bjustrom v. Trust One Mortgage, 178 F. Supp 2d 1183 (W.D. Wash. 2001) (click here to read summary).