Howland v First American Title Ins. Co. (Fed)

Summary: Class certification is inappropriate for overcompensation violations of RESPA; a case-by-case examination is required to determine violations.

Howland v First American Title Ins. Co., 672 F3d 525 (7th Cir., 2012).

Facts: First American Title Insurance Company (First American) sells title insurance to consumers directly and through the use of attorney-title agents. First American maintains a “title plant,” which is a database of up-to-date records and documents. First American’s attorney-title agent program operates as follows: For orders upon which the attorney-agent will determine insurability of title, First American provides the attorney-agent with a search package containing raw data from the title plant, plus a summary sheet that contains essential information including a legal description, last known grantee, and potential issues identified by First American. The attorney-agent then conducts a title examination, and if the summary sheet does not need to be amended, the attorney-agent signs it. First American then issues a title insurance commitment based upon the information on the summary sheet.The attorney agent occasionally performs other work such as clearing obstacles and waiving exceptions on First American’s behalf.

On May 9, 2007, Douglas Sharbaugh (Sharbaugh) filed suit against First American alleging that the above practices constituted an illegal kickback in violation of the Real Estate Settlement Procedures Act (RESPA).  Janice Howland (Howland) replaced Sharbaugh as the named plaintiff.   Howland moved for the district court to certify a class “of all people who purchased, sold or mortgaged real property in the State of Illinois and who paid for a title insurance policy from [First American], any part of which premium was then shared with an attorney who did not perform ‘core title agent services' separate from attorney services in exchange for such fee.”  The district court denied certification on the basis that there was a necessary transaction-specific inquiry into whether the compensation was unreasonably high and amounted to a kickback. Howland amended the complaint further limiting the class to people who received a summary sheet without changes or additions and First American paid full compensation to the attorney-agent.  The district court denied the second motion for class certification. Howland resolved her individual claim but maintained to right to appeal.  Putative class member Scott Tegtmeyer was granted leave to intervene. Howland appealed.

Holding: Affirmed. To certify a class under Rule 23(b)(3), Howland needed to establish that the elements of 23(a) were met, including the existence of common issues that predominate over the individual ones, and that a class action would be a better method for adjudicating the claims. Although the district court did not inquire into whether the criteria of Rule 23(b)(3) and Rule 23(a) were met, its holding that individual inquiries would be necessary lead it to the only reasonable conclusion.

RESPA prohibits any kickback as well as the receipt of payment of any “portion, split, or percentage of any charge made . . . other than for services actually performed.” 12 USC § 2607(a), § 2607(b).  Section 8(b) prohibits duplicative charges and charges where only nominal services were performed. See 24 CFR § 3500.14(c). There are two exceptions to this rule. Section 8(c)(1)(B) protects payments “by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance.” Id. § 2607(c)(1)(B).  Section 8(c)(2) protects “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)(2). However, if the title agent is also an attorney, that person may not receive compensation unless core title services separate from the attorney services are performed. 24 CFR § 3500.14(g)(3).  The Department of Housing and Urban Development (HUD) has cautioned that, in its opinion, an attorney does not qualify under the Section 8(c)(1)(B) exception if the title insurance company performed any of the core services. See HUD, RESPA Statement of Policy 1996-4, 61 Fed. Reg. 49398 (Sept. 19, 1996). This means that a letter which would legally constitute a commitment when countersigned by an attorney-agent (pro forma commitment) would be a violation of RESPA. Id. at 49399.  HUD further stated that a failure to qualify for the Section 8(c)(1)(B) exception does not preclude payment for service provided under Section 8(c)(2). Id. at 49400.

The court of appeals analogized kickbacks to yield spread premiums, in which the payment from a lender to a broker was based upon the difference in the rate accepted by the borrower and the par rate of the lender. The Eleventh Circuit and Sixth Circuit have agreed with HUD’s position that these types of transactions are not per se illegal and require inquiry into the individual cases. 

The court of appeals broke Howland’s argument into two possibilities. Either attorneys are providing no services or the attorneys are overcompensated. While the former might allow for class certification, Howland would need to offer evidence of this, and not mere allegations. The court found that the lack of changes to the search summary sheet did not indicate that no work was performed; the attorney agent may have arrived at the same result or may have cleared any obstacles. 

Alternatively, if the attorneys are overcompensated, individual inquires would be necessary and therefore, class certification would be inappropriate. Whether a search summary sheet was a pro forma contract was a common question for a class. First American’s argument that the summary sheet is merely title evidence would indicate that it was not a pro forma contract and would be be permissible under HUD’s interpretation.

Howland argued that First American violated RESPA per se by paying the full contracted amount because the full amount is for the core title services and the agent is limited to core title services, therefore any attorney paid the full amount is necessarily paid more than the reasonable value of their services. The court of appeals rejected the argument finding that this argument conflates core title services with the parameters of the contract. The contract does not establish that “the compensation generally paid to agents in the area who perform all core title agent services.” 61 Fed. Reg. at 49400.  Furthermore, 61 Fed. Reg. at 49400 does not require that the attorneys perform all the core title services in order to qualify for the safe harbor. This argument would establish that First American pays attorney title agents to perform title examinations. HUD’s 1996 policy is not a per se rule.  While summary sheets may be veiled pro forma commitments, this requires a case by case examination, and therefore a class act would be inappropriate. For those reasons the court of appeals affirmed the holding of the trial court.

Opinion Year: 
By: ATG Underwriting Department | Posted on: Fri, 07/13/2012 - 2:29pm