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McCarrick v. Polonia Federal S&L: RESPA Differentiates Between Kickbacks and Services

In McCarrick v. Polonia Federal S. & L. Ass'n, a federal District Court in Pennsylvania addressed alleged violations of 12 U.S.C. section 2607 (section 8 of the Real Estate Settlement Procedures Act of 1974 (RESPA)). The court held that the defendant was not liable for RESPA violations, as the actions taken by the plaintiff's real estate broker constituted services, not kickbacks, and there was no referral arrangement between the broker and the defendant.

McCarrick agreed to buy a three-story building consisting of a grocery store on the first floor and two floors intended to be used as a residence. The agreement was written by Karatnjchy, a licensed broker, who was McCarrick's agent. The agreement provided that a mortgage application was to be made by Pepe, McCarrick's attorney. Pepe did not seek a mortgage and McCarrick then engaged Karatnjchy to obtain a loan and title insurance for McCarrick. For this service, McCarrick agreed to pay a fee equal to 1% of the loan. Karatnjchy submitted a loan application to Polonia Federal S & L Association (Polonia) and ordered title insurance from Commonwealth. After McCarrick's loan for $48,000 was approved, Karatnjchy sent a letter advising McCarrick that financing and title insurance had been obtained. The letter included a fee for services of $480 and reimbursement of $150 for title insurance. Neither McCarrick nor Pepe voiced disagreement as to the terms of the agreement for services.

Thereafter, Pepe notified Polonia that settlement had been scheduled. Francek, president of Polonia, told Pepe that unless McCarrick paid Karatnjchy's fee, Polonia would not appear at settlement and place the mortgage. There was no evidence that Polonia took any other action to coerce payment of Karatnjchy's fee. At the closing, McCarrick and the seller split the $480 fee. McCarrick sued Polonia, alleging that the fee paid by McCarrick to Karatnjchy was coerced by Polonia and represented a form of kickback in violation of RESPA.

The district court noted that section 8 of RESPA prohibits the giving or taking of "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 related mortgage loan shall be referred to any person." However, Congress sought to exempt certain transactions from being characterized as an illegal kickback. The transactions specifically exempted were "payments to any person which represented a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed" by that person.

The district court applied this law to the facts and found that the payments made to Karatnjchy did not fall within the acts prohibited by RESPA, but rather constituted services which were exempted from RESPA. The court based this finding on the following: (1) McCarrick enlisted Karatnjchy to obtain a mortgage after Pepe could not obtain a commitment; (2) McCarrick was informed by letter that a 1% fee was expected for "services in obtaining the loan"; (3) there was no evidence of a scheme by Polonia and Karatnjchy which involved the payment of a commission for referral of business; (4) there was no evidence that Karatnjchy was in any way associated with Polonia; and (5) Karatnjchy performed valuable services for McCarrick by obtaining a mortgage and title insurance. On these facts, the court concluded that the fee paid by McCarrick to Karatnjchy was a fee for services rendered and not a kickback within the meaning of RESPA.

McCarrick v. Polonia Federal S. & L. Ass'n, 502 F. Supp. 654 (E.D. Pa. 1980).