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US v. Graham Mortgage Co.: Making a Mortgage Loan -- A "Settlement Service" under RESPA?

In U.S. v. Graham Mortgage Corp., a 1984 case, the Sixth Circuit addressed alleged violations of 12 U.S.C. section 2607(a) (section 8(a) of the Real Estate Settlement Procedures Act of 1974 (RESPA)). The court reversed the criminal conviction of the appellants, as it found that the plain language and legislative history of RESPA did not indicate an intent to include the making of a mortgage loan within the definition of "settlement services."

Chapin and Heinz were officers of Graham Mortgage Corp. (GMC), a mortgage banking business. Colbert was the president of Rose Hill Realty (Rose Hill), a real estate brokerage which also purchased, rehabilitated, and resold houses. From 1975 to 1979, GMC provided Rose Hill with interim financing on its rehabilitation activities. In 1983, Chapin, Heinz, GMC, and Colbert were indicted for allegedly giving and accepting kickbacks in violation of section 8(a), and conspiracy to violate section 8(a). The indictment was based on an arrangement whereby for each loan it received, Rose Hill would refer to GMC two mortgage loan applicants from its brokerage business and one from the rehabilitation business. In turn, when making FHA or VA loans on Rose Hill rehabilitation projects, GMC would charge Rose Hill fewer points than it would to other sellers. To recoup this lost income, GMC increased the points charged to sellers of residences referred by Rose Hill and financed by FHA or VA loans.

The district court made an initial finding before trial that the making of mortgage loans constituted a "settlement service" under RESPA. The defendants thereafter pleaded guilty to the conspiracy count in exchange for dismissal of the substantive claims. Chapin, Heinz, and GMC appealed district court's finding that the making of a mortgage loan constituted a settlement service.

The Sixth Circuit noted that in reviewing a question of statutory interpretation, it first turns to the language of the statute, but when that language is ambiguous, it must turn to the legislative history. The court added that if the legislative history fails to clarify the statute, the "rule of lenity" compels construction in favor of the defendants. The court observed that "section 8(a) of RESPA prohibits the payment or receipt of fees, kickbacks, or things of value in exchange for referrals of 'business incident to or part of a real estate settlement service involving a federally related mortgage loan.'" Section 3(3) of RESPA defines "settlement services" as "any service provided in connection with a real estate settlement including, but not limited to, the following: title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, and the handling of the processing, and closing of settlement. . . ."

The Sixth Circuit refuted the government's contention that the plain language, legislative history, and administrative interpretation of "settlement services" included making mortgage loans. Regarding the plain language argument, the court found the issue before it was whether the making of a loan constituted the provision of a service "in connection with a real estate settlement." The court was unable to find a plain meaning of the term "settlement services," so it turned to an analysis of the list of services found in section 3(3). The court found that the common thread among the services was that each was an ancillary service, which unlike the making of a loan, was not directly related to the closing of a real estate sale covered by RESPA. Thus, the plain meaning did not indicate that making loans constituted settlement services.

The Sixth Circuit then analyzed the legislative history of section 8(a). The rationale behind the passage of RESPA was a congressional intent to end abuses in the real estate business, including kickbacks and inflationary referral fees in connection with mortgage settlements. The court examined the House and Senate Bills regarding the definition of settlement services, and found no evidence of an intent to include real estate financing in its definition. Rather, the court found that in settling on the Senate version, which was broader in scope, Congress intended to expand coverage to the activities of real estate salespeople and brokers. The court concluded that the legislative history lacked the clarity and force to compel the conclusion that Congress intended to treat the making of a mortgage loan as a settlement service when it enacted RESPA.

The Sixth Circuit then analyzed the interpretations of RESPA, which were illustrated in regulations created by HUD. The court noted that normally, authoritative administrative constructions should be given deference, but that the weight of such constructions depends on several factors, including its consistency with earlier and later pronouncements. The court refused to defer to these interpretations, as it found that HUD's previous rulings failed to adhere to a consistent position on the issue of making mortgage loans.

In conclusion, the Sixth Circuit noted that because RESPA was ambiguous as to whether making loans was a settlement service, and because the legislative history did not direct any resolution of that issue, the rule of levity mandated judgment for the appellants. Thus, the district court decision was reversed.

NOTE: In 1992, Congress amended the definition of "settlement services" to add the following: "the origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of loans)." The effective date of the amendment was October 28, 1992 (See 12 U.S.C.A. section 2602(3)).

U.S. v. Graham Mortgage Corp., 740 F.2d 414 (6th Cir. 1984).