Congressman Robert L. Ehrlich Jr. (R-Maryland) has played a lead role in trying to win some relief for the industry froth the ongoing threat of class-action suits under the Real Estate Settlement Procedures Act (RESPA). The Baltimore native, an attorney, has served in the House since January 4, 1995. Rep. Ehrlich serves on the Committee on Banking and Financial Services, the Committee on the Budget and the Committee on Government Reform and Oversight.
We reached him at his Capitol Hill office shortly alter he had succeeded in getting some pivotal language on RESPA inserted in the HUD, VA and independent agencies appropriations conference report. Here is what he had to say about the damage being done by the ongoing uncertainty about RESPA, and what he's trying to do to fix it.
Q: What is the status of H. R. 1283, the RESPA Class Action Relief Act, and what prompted you initially to get involved with that legislation?
A: Let me take the second part first. I championed a number of tort-reform initiatives in the state legislatures during my years on the House Judiciary Committee in the Maryland General Assembly. So I was known as a tort reformer as I came to Congress in 1995. I was also known as someone who was very close to the interests of small business. Small-business people had formed my core constituency in all my races, particularly my first race in Congress. We were then approached by a number of mortgage brokers with respect to this issue.
I should also add, my professional career was as an attorney representing small businesses in litigation.
When you combine all those factors - my career; my philosophical predisposition; the need; and a guy named John Councilman, a now famous mortgage broker constituent from Baltimore, who brought this issue to my attention - the bill grew out of all those factors. So I was the logical person to take the lead on this issue.
Q: Who have you converted to the cause?
A: Well, we're in the process of converting the world. J.P. [Scholtes] of my staff has done a lot of the grunt work on this bill, securing the co-sponsorships. I guess the way to answer your question is, if you look at the cosponsorships, we started from ground zero. We are now up to 133 cosponsors, which is terrific.
Now, what you may not know, however, is that we have already achieved today - actually, about two hours ago - significant success. We [had] language placed in the FY '99 VA HUD appropriations bill on this issue [see box for full text of language]. Basically what it directs HUD to do is come out with a rule within 90 days that these fees are legal. The bottom line to this issue in the short term is this language. All we've been asking for from day one is for HUD to promulgate a regulation that makes sense.
Q: And what has been the problem preventing HUD from doing that?
A: Well, I could answer that any number of ways, but it's HUD. For some reason HUD, when they came out with their interim rule, which was a mess, that generated over 9,000 individual responses from folks in the business across the country. They seemed to be in a quandary as to what to do. I don't know what forces are at work other than - the only force I care about is we have legitimate businesspeople out there now facing class actions, facing the prospect of having their businesses shut down for no good reasons. There are legitimate lawsuits out there. I represented plaintiffs once in a while, and there are legitimate causes of action. This, however, is not one.
RESPA is a statute in need of a fix. The anti-kickback provision most particularly is in need of a fix. The fact of these lawsuits is quite unfortunate for legitimate, honest businesspeople, and HUD should not be in business to feed a narrow class of plaintiffs' attorneys' ability to send their kids to college on filing class actions.
Q: So what is the status of your bill?
A: The bill is probably not going to get passed. We've achieved an interim victory with this language in the VA HUD appropriations. Hopefully, this will lead to a rule which will render my bill moot. And, in the 106th Congress, we will have fundamental RESPA reform.
Q: You predict that RESPA reform is going to get through both houses?
A: Well, I predict that it's going to be high on the agenda, and I predict that it could get through both houses. But we knew in the 105th it could not occur, hence my bill. But in the 106th, I believe it's going to have a lot of momentum as we begin.
Q: What are you hearing from mortgage bankers and brokers as to how urgently they need this legislative relief?
A: They're scared to death, and they should be. They're scared to death because they know that these frivolous lawsuits put their business at risk for no good reason.
Q: Have you heard any dollar figures as to how much has been lost as a result of these RESPA-related class-action suits?
A: The reason I stay away from dollar figures is this: In my law practice, I would settle cases. And a defendant in a case, typically - if it was a frivolous case - oftentimes would want to settle a case simply because it was more expensive to go forward. So you have somebody who, in many cases, did nothing wrong paying a settlement and paying my fee. Now, it's not counted as a case because it got settled, but the opportunity costs of that money is very real. So I stay away from numbers because numbers would have to include the opportunity costs of all the dollars that go into defending or settling frivolous lawsuits, paying attorneys, paying costs of discovery. It's a real problem.
Q: What do you think would be the ideal remedy for these RESPA class-action suits? Is it a moratorium? Is it a policy statement from HUD?
A: A rule that basically directs HUD or represents the view of the federal government that yield spread premiums are not illegal, period.
Q: Would that even be better than a Supreme Court decision?
A: Well, courts interpret the law. I suspect that even if we get the rule, there may be some enterprising class attorney out there who will file a anti-kickback cause of action on some view of a particular set of facts. And in that case, the courts would have to rule. But certainly this will freeze these frivolous class actions. [What is needed is a] good rule, a rule that should have been promulgated a couple of years ago.
Q: This latest court case in New Hampshire - Mulligan v. Choice Mortgage Corp. - where a judge in the U.S. District Court for the State of New Hampshire certified a class in a RESPA class-action suit, signals this litigation isn't over yet.
A: Yes, that's given a renewed impetus to this, obviously.
Q: That clearly is a very negative signal to send to the mortgage business. Do you think it's going to kick up a whole new round of suits?
A: Absolutely. That's why this [conference report] language at this point in time is so important.
Q: Do you think just the existence of the conference report language will put a chill on the bar from bringing further suits?
A: When the Appropriations Committee directs an agency to do this, they do it.
Q: And you made a distinction there when you said HUD needed to issue "a good rule." What would be in a good rule?
A: Well, obviously the interim rule they promulgated last time didn't fix the problem. In fact, it made things even more difficult. A rule . . . with respect to the fact that yield spread premiums are for legitimate services rendered, and as a result, they are legal. They should not form the basis for any civil cause of action.
Q: Will the new language in the appropriations conference report do the trick in stopping the tide of class-action suits?
A: Frankly, I hove my bill, but if I couldn't get my bill, this may in the end work out even better.
Q: Any final thoughts on this?
A: The reason we have 133 sponsors is our staff has worked so well with small-business people called mortgage brokers around the country. We got to know a lot of them. In every business for the most part there are really good people. We've met an awful lot of fine people who are out there supplying a service and making a buck. That's what Congress should be about, allowing people to do that and not penalizing them for doing it.
CONFERENCE REPORT ON RESPA RULE
The following is the official language referring to the HUD rule that was included in the conference report for the Fiscal Year 1999 VA, HUD and Independent Agencies Appropriations Bill:
"The conferees are concerned that HUD has invested considerable time and resources in developing a policy statement that clarifies its position on lender-paid mortgage broker fees and their legality under the Real Estate Settlement Procedures Act. Congress never intended payments by lenders to mortgage brokers for goods or facilities actually furnished or for services actually performed to be violations of subsections (a) or (b) (12 U.S.C. Sec. 2607) in its enactment of RESPA. Publishing a policy statement could provide invaluable guidance to consumers, brokers, and the courts. The conferees are concerned about the legal uncertainty that continues absent such a policy statement. The conferees direct HUD to clarify its position on lender payments to mortgage brokers within 90 days after the enactment of this appropriation Act. The conferees expect HUD to work with representatives of industry, Federal agencies, consumer groups, and other interested parties on this policy statement."…