FILED U.S. COURT OF APPEALS ELEVENTH CIRCUIT JUNE 15, 2001 THOMAS K. KAHN CLERK [PUBLISH]

IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT

________________________ No. 99-13725

________________________
D. C. Docket No. 96-00917-CV-H-S

JOHN ROBERT CULPEPPER, PATRICIA STARNES CULPEPPER, on behalf of themselves and all others similarly situated, Plaintiffs-Appellees,

versus IRWIN MORTGAGE CORPORATION, f.k.a. Inland Mortgage Corporation, Defendant-Appellant.

* * * * * * * * * * * * * * * * * * * ** Honorable John R. Gibson, U. S. Circuit Judge for the Eighth Circuit, sitting by designation.

1 12 U.S.C. § 2607. 2 D. C. Docket No. 98-CV-2187 BEATRICE N. HIERS, individually and as a representative of a class of similarly situated persons, Plaintiff-Appellee,

versus IRWIN MORTGAGE CORPORATION, f.k.a. Inland Mortgage Corporation, Defendant-Appellant.

________________________ Appeal from the United States District Court for the Northern District of Alabama

_________________________ (June 15, 2001) Before EDMONDSON, COX and GIBSON * , Circuit Judges. COX, Circuit Judge: This action under § 8 of the Real Estate Settlement Practices Act 1 is now on its second visit to our court. The plaintiffs, who have home mortgage loans from Irwin Mortgage Corporation, claim thatcertain payments, called “yield spread2 Inland Mortgage Corporation has become Irwin Mortgage Corporation since the first appeal.
3 Culpepper v. Inland Mortgage Corp. (Culpepper II), 144 F.3d 717, 717-18 (11th Cir. 1998).
4 (R.1-59 at 2.) 3 premiums,” that Irwin made to the mortga ge brokers who handled the plaintiffs’ loan applications are illegal kickbacks or refe rral fees under § 8. The district court initially granted Irwin summary judgment, and on the action’s first trip to this court, we reversed. Culpepper v. Inland Mortgage Corp. (Culpepper I) , 132 F.3d 692, 694 (11th Cir. 1998). 2 (The court then explained ina published order denying rehearing ( Culpepper II ) that its opinion — which merely reversed summary judgment — should of course not be read to require summary judgment in the plaintiffs’ favor. 3 ) The panel remanded for further proceedings. One of those proceedings was a moti on for class certification, which the district court granted. The plaintiff class now comprises [a]ll persons who, from April 11, 1995, until this class is certified, [June 22, 1999], inclusive, obtained an FHA mortgage loan that was funded by Irwin Mortgage Corporation wherein the broker was paid a loan origination fee of 1% or more and wherein Irwin paid a “yield spread premium” to a mortgage broker. 45 Heaven v. Trust Co. Bank, 118 F.3d 735, 737 (11th Cir. 1997).
6 We do not pretend to define, or address inthis opinion, all of the payments that lenders and brokers may refer to as “yield spread premiums.”
7 See Culpepper I , 132 F.3d at 694.
8 The form “Revised Loan Broker Agreement” between Irwin and both the brokers involved in this case makes only one explicit men tion of yield spread premiums, in a section setting the price for repurchase of a loan by the br oker back from Irwin. Thatprice, the agreement provides, includes “[a]ny yield spread premium . . . or other amounts previously paid by Irwin to Broker for the Loan.” (1st Supp. R.-Pls.’ Evid. Submiss. Supp. Mot. Class. Cert. Ex. D. § 10.) 4 Irwin was permitted to appeal this class certification under Fed. R. Civ. P. 23(f). Reviewing the district court’s ruling for abuse of discretion only, 5 we affirm. Background The “yield spread premiums ” at issue in this case, 6 as the panel explained more fully in Culpepper I , 7 are payments from Irwin to its mortgage brokers that the written agreement between them contemplates, but does not define. 8 Each business day, Irwin distributes a rate sheet to its brokers, listing the terms of the loans Irwin is offering that day. The loans’ interest rate s are set with reference to a “par rate.” If the broker originates a loan at a below- par rate, it gets no compensation from Irwin. On the other hand, originating a loan at an above-par rate garners the broker a yield spread premium, whose amount is determ ined by a formula that includes the amount of the loan and the difference between the loan rate and the par rate. The formula does not take into account the amount of work the broker actually performed in5 originating the loan or how much the borrowe r paid in fees for the broker’s services. See Culpepper I , 132 F.3d at 694. Section 8(a) of the Real Estate Settle ment Practices Act (RESPA) prohibits both the giving and acceptance of “any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherw ise, that business incident to or a part of a real estate settlement service . . . shall be referred to any person.” 12 U.S.C. § 2607(a). (Lending is clearly a “business in cident to or a part of a real estate settlement service.” See12 U.S.C. § 2602(3).) Subsection (c) then qualifies subsection (a)’s blanket prohibition by explicitly sheltering from liability “the payment of a fee . . . by a lender to its duly appointed agent for services actually performed in the making of a loan.” Id. § 2607(c)(1)(C). The Senate report accompanying RESPA explains that subsection (c ) is there to “specifically set[] forth the types of legitimate payments that would not be proscribed by the section.” S. Rep. No. 93-866 (1974), reprinted in 1974 U.S.C.C.A.N. 6546, 6552. Presented with this § 8 challenge to yield spread premiums, the Culpepper I panel read § 8(a) to prescribe a three-parttest for prohibited payments. A payment is prohibited 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.” Culpepper9 Irwin devotes a surprising amount of its brief to challenging this conclusion about the merits. The question of whether Irwin’s yield spread premiums are, or could be, § 8 kickbacks is not relevant to this appeal, which is about the propriety of class certification. 6 I

, 132 F.3d at 696. The undisputed facts in this action are that Irwin offered to pay (and did pay) a yield spread premium to the broker here, under their agreement, which led the broker to choose Irwin. Those facts satisfy § 8(a), the panel concluded. That § 8(a) conclusi on remains unchallenged on this appeal. The court went on to reject Irwin’s ar gument that yield spread premiums are nonetheless sheltered by § 8(c). Irwin’s payments to brokers, the court concluded, resist characterization as payment for services. 9 Nothing in their agreement, for instance, suggests that the amount paid is in any way dependent on the services provided; most significantly, nothing in the record suggests that the broker renders less service in originating a below-par loan than it does for an above-par loan, or that Irwin ever inquires into how much work the broker actually did. Rather, the payment rests solely on the value of the re ferral. Yield spread premiums, the panel concluded, are thus prohibited referral fees — or at least a jury could so find. Id. at 696-97; Culpepper II , 144 F.3d at 718. Following this court’s opinion in Culpepper I , Congress issued a conference report demanding that HUD “clarify” its position concerning the legality of yield10 The Secretary of Housing and Urban De velopment has power under 12 U.S.C. § 2617 to issue interpretive regul ations, and has done so. See24 C.F.R. pt. 3500. None of those regulations add anything to the statute that is pertinent to the issues presented in this case. 7 spread premiums. HUD responded with a policy statement, which 24 C.F.R. § 3500.4(a)(1)(ii) imbues with the force of a regulation, 10 that yield spread premiums are not illegal per se, but can nonetheless be illegal. HUD tests their legality in two steps. The first question — whose interpretation is the crux of this appeal — is “whether goods or facilities were actuallyfurnished or services were actually performed for the compensation paid.” Real Estate Settlement Procedures Act (RESPA) Statement of Policy 1999-1 Regarding Lender Payments to Mortgage Brokers, 64 Fed. Reg. 10080, 10084 (Dep’t of Hous. & Urban Dev. March 1, 1999)[hereinafter HUD Statement]. The f act that “services have been actually performed by the mortgage broker does not by itself,” HUD explains, “make the payment legal.” Id. Rather, an answer of “yes” to the first question leads to the second question, which is “whether the paym ents are reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed.” Id. The remainder of the Statement describes in some detail the application of this rule. The Statement is ambiguous, however, as to the core of the8 class-certification dispute here, permitting the parties to read it in importantly different ways, as we next explain. Contentions of the Parties The parties agree that deciding whether class certification is appropriate — the ultimate issue in this appeal — requires us, in the end, to settle on a rule of liability under § 8(a) and (c). The reason is that Irwin attacks only the district court’s conclusion that “the questions of law or fact common to the me mbers of the class predominate over any questions affecting only individual members,” and that the class is thus certifiable under Fed. R. Civ. P. 23(b)(3). Irwin contends that evidence specific to each plaintiff’s loan transacti on will predominate at trial, making class treatment improper. Whether transaction-sp ecific evidence is necessary or relevant, of course, depends on the rule of liability. See2 Weinstein’s Federal Evidence § 401.04[3][b] (Joseph M. McLaughlin ed ., 2d ed. 1997). Hence we arrive at determining the rule of liability. The centerpiece of Irwin’s argument on th is point is that the HUD Statement overrules Culpepper I ’s interpretation of § 8(c). According to Irwin, the Statement provides a two-step “reasonableness test”: (1) whether anyservices were performed by the broker, and (2) whether the yield sp read premium and th e fees the borrower11 This is roughly how many of the district c ourts that have denied class certification in yield spread premium cases have described the rule. See, e.g. , Schmitz v. Aegis Mortgage Corp. , 48 F. Supp. 2d 877, 882 (D. Minn. 1999); Levinev. N. Am. Mortgage Co., 188 F.R.D. 320, 327 (D. Minn. 1999); Taylor v. Flagstar Bank, 181 F.R.D. 509, 521 (M.D. Ala. 1998). 9 pays the broker add up to reasonable compensation for the broker’s work. In essence, Irwin says that any payment it makes to any potential referrer is all right, as long as the payment, whatever its reason, would have been reasonable compensation for services, had it been compensation for services. 11 Culpepper I , Irwin argues, thus wrongly demands evidence that Irwin pays brokers yield spread premiums in return for service and not merely to rewardbrokers for high-interest loan referrals. HUD’s rule, Irwin continues, demands th at legality be tested transaction by transaction, since the amount of work done by the broker (investigation, paperwork, counseling, and so forth) varies from loan to loan. As a fallback position, Irwin argues that even Culpepper I ’s test for legality under § 8(c) — which asks whether the le nder and the broker exchanged money for services, not just whether the broker’s compensation was reasonable — requires us to determine whether the borrower and the broker subjectively intended, in each loan transaction, for the yield spread premium to be Irwin’s payment for the broker’s12 This view also has some district court support. See Chandler v. Washtenaw Mortgage Co. , No. 94-A-1418-N, ms. op. at 3 (M.D. Ala. July 29, 1998). 10 services. 12 That question, Irwin says, can only be answered with testimony about each loan transaction from its parties. The plaintiffs counter that Culpepper I and the HUD Statement are consistent. This is so, they say, because the first question in HUD’s two-step analysis includes not just whether the broker really worked , but also whether Irwin paid the money specifically for those services and not fo r the loan referral. HUD’s first question would thus be, in substance, no more than a re-articulation of Culpepper I ’s reason for rejecting Irwin’s argument that yiel d spread premiums, even if otherwise prohibited by § 8(a), are protected compensation for services under § 8(c). Whether we use the first question in the HUD test or adhere to Culpepper I ’s reasoning, the plaintiffs say, the result is the same. A nd that result obviates Irwin’s asserted need to probe the reasonableness of the tota l broker compensation in any individual transaction. Moreover, the plaintiffs add, it would be absurd to judge the nature of the payment on the basis of the broker and borrower’s intent in a particular transaction, and thus Irwin’s fallback argum ent is meritless. The plaintiffs conclude that there is accordingly no need to look at any individual transaction to determine liability, and that class certification is therefore appropriate.13 Schmitz v. Aegis Mortgage Corp., 48 F. Supp. 2d 877, 882 (D. Minn. 1999). 11 These arguments framing the debate, we turn to determining the rule of liability prescribed by the HUD Statement.
Discussion We agree with the plaintiffs’ view of the rule of liability. Reaching that conclusion requires us to answer two questi ons. The first is interpretation of the HUD Statement: What does “for compensation paid” mean when HUD asks us in the first step of its two-step test to determine “whether goods or facilities were actually furnished or services were actua lly performed for the compensation paid”? HUD Statement at 10084. On one hand, if “for compensation paid” means “in exchange for compensation paid,” then the pl aintiffs correctly assert that the inquiry in this step includes not only whether the broker performed services, but also whether the broker performed the services as part of a services-for-money exchange. On the other hand, if “for compensation pa id” means nothing at all, or if the phrase means “in connection with the loan transac tion,” as one district court has read it, 13 then Irwin is right that all we need to know for the first step is whether the broker did any work on a particular transacti on. (They would also be right that Culpepper I12 is possibly no longer good law, and we woul d have to decide whether it would nonetheless be law of this case.) The second question arises from Irwin’s fallback argument: Does the borrower and broker’s subjective intent de termine whether Irwin’s payment to the broker is part of a services-for-money exchange? This question turns more on interpretation of Culpepper I because the HUD Statement is silent. What does “for compensation paid” mean? Three reasons persuade us that th e plaintiffs’ construction of the HUD Statement, and their explanation of how it fits with Culpepper I , is superior to Irwin’s.
First , Irwin’s preferred construction of HUD’s language simply does not fit the language, while the plaintiffs’ proposed r eading fits very well. To begin with, it would be anomalous to ignore “for compensation paid” as sloppy drafting on HUD’s part. Rational agency regulations have the force of law, and it is a “cardinal principle of statutory construction that we must ‘give effect, if possible, to every clause and word of a statute.’” Williams v. Taylor , 120 S. Ct. 1495, 1519 (2000) (quoting United States v. Menasche , 348 U.S. 528, 538-39, 75 S. Ct. 513, 520 (1953)) (internal quotation omitted)). To give the phrase the meaning that Irwin13 would assign to it, moreover, (“in conn ection with the loan transaction”) is impossible with our, and possibly any ordinary, use of the English language. On the other hand, the plaintiffs’ suggestion that “for compensation paid” means “in exchange for compensation paid” is semantically very plausible. SeeWebster’s Third International Dictionary 886 (unabridged ed. 1981) (defining “for” to mean “in exchange as the equivalent of” or “in requital of”). Second, Irwin’s reading of the Statement is not only inconsistent with the Statement itself; it also would make the Statement clash with § 8(c)’s language. Section 8(c) authorizes “the payment of a fee . . . by a lender . . . for services actually performed.” 12 U.S.C. § 2607(c)(1)(C). As we pointed out in discussing the HUD Statement’s own language, the preposition “for” connotes an exchange. The word “fee,” moreover, implies a planned money- services exchange even more strongly than “compensation.” CompareBlack’s Law Dictionary 629 (7th ed. 1999) (“fee” means “a charge for labor or services”) with id. 277 (“compensation” means both “damages” and “[r] emuneration . . . in return for services rendered; esp., salary or wages”). The statute itself thus implies very strongly that only payments whose reason is compensation for services fall with in § 8(c)’s safe harbor, and we hesitate14 to read the HUD Statement to stray fro m the statute by imposing no such limit on legality. Third, accepting Irwin’s view would have the HUD Statement create an inconsistency between § 8(a)’s liability te st and § 8(c)’s exclusion from liability. Everything about § 8(c) suggests that it is an interpretive gloss on § 8(a) rather than a list of exemptions bestowed upon othe rwise illegal conduct. Section 8(c)’s language starts with “[n]othing in this s ection shall be construed as prohibiting,” not with “notwithstanding § 8(a)” or any other plain exception language. 12 U.S.C. § 2607(c). The Senate report explains that § 8(c)’s purpose was to “set[] forth the types of legitimate payments that would notbe proscribed” by § 8(a). S. Rep. No. 93-866 (1974), reprinted in 1974 U.S.C.C.A.N. 6546, 6552. And HUD introduces its regulatory list of payments that are proper under § 8(c) with the phrase “Section 8 of RESPA permits,” not some language of exception. 24 C.F.R. § 3500.14(g)(1). If § 8(c) is only a gloss on § 8(a), making clear what § 8(a) allows in certain contexts, we should avoid reading § 8(c) to bless conduct that § 8(a) plainly outlaws. That is exactly what Irwin’s reading of the HUD Statement would do. The crux of § 8(a)’s liability test, even when the suspected referral fee is dressed up as something else, is whether the payment is to compensate a referrer for referrals; the15 answer to that question lies in the terms of the agreement between the referrer and the recipient of the referral. See, e.g. , 24 C.F.R. pt. 3500 app. B exs. 1, 2, 6 (noting explicitly in the examples that the parties are swapping value for referrals); Lawyers Title Ins. Corp. v. Dearborn Title Corp. , 118 F.3d 1157, 1162 (7th Cir. 1997) (focusing on the reason for a rent payment — whether it was to secure referrals or for other reasons — in determining § 8(a) liability, without asking whether the total rent was reasonable); Aiea Lani Corp. v. Ha w. Escrow & Title, Inc. , 647 P.2d 257, 262 (Haw. 1982) (asking only if the reason for a reduced title insurance premium was in exchange for referrals, not whethe r the premium was otherwise reasonable). Under § 8(a), a payment whose reason is to compensate for referrals is illegal, period. If Irwin has read the HUD Statement correctly, however, HUD has now decided that § 8(c) deems somesuch referral fees legal — that is, referral fees that are paid by lenders and that would be reas onable service fees, if that’s what they were. The plaintiffs’ reading of the HUD St atement, by contrast, keeps § 8(c) as a gloss on § 8(a): Paying referral fees may be prohibited (as § 8(a) provides), but paying service fees is not (as § 8(c) provi des), unless of course the lender pays so much that we can legitimately suspect a disguised referral fee. We prefer this reading of the HUD Statement, which pres erves the harmony of § 8(a) and 8(c).16 The structure and language of the HUD Statement and of RESPA § 8 thus support the plaintiffs’ proposed rule of liability far better than Irwin’s. Irwin maintains nonetheless that accepting the plaintiffs’ view runs afoul of HUD’s remark that yield spread premiums are not “illegal per se .” HUD Statement at 10084 (italics in original). We do not think so. Our speculation on the outcome of other cases is of course dicta, but there is no reason to think that under the HUD Statement and Culpepper I a yield spread premium could not pa ss muster if the agreement to pay it bore the hallmarks of a fee-for-service exch ange — if, for instance, Irwin required brokers to present a bill showing the serv ices rendered, and how much the broker had collected in fees from the borrower, orif Irwin followed the advice of the Senate report to “persons and companies that provi de settlement services” that they “ensure that any payments they make . . . are not out of line with the reasonable value of the services received.” S. Rep. No. 93-866 (1974), reprinted in 1974 U.S.C.C.A.N. 6546, 6551. So our holding is consistent not only with this remark by HUD, but also with Culpepper II ’s similar observation about its holding. See 144 F.3d at 718. We accordingly hold that the first step in the test for liability under § 8 is not only whether the broker performed some of the services described in the HUD Statement, but also whether the yield spr ead premium is payment for those services14 The plaintiffs do have a fallback position, wh ich is reflected in the class definition and which we need not discuss here, that FHA regulations applicable to FHA loans make any compensation to the broker over 1% of the loan value per se unreasonable. 17 rather than for a referral. The core theory of the plaintiffs in this case is that Irwin’s yield spread premiums are referral fees, and that we therefore need not reach the second step, which is whether the broker’s total compensation was reasonable. 14 Because the plaintiffs could thus prevail so lely by showing that Irwin’s yield spread premiums are referral fees, and not service fees, class treatment under Fed. R. Civ. P. 23(b)(3) is appropriate unless that thre shold question itself demands loan-by-loan evidence. Which brings us to the defendants’ fallback argument. How do we tell whether there is a services-for-money exchange? That argument, as we explained above, is that the nature of the yield spread premium is a product of the subjective in tent of the broker and borrower. That intent, Irwin continues, must be ascerta ined loan-by-loan because each loan of course has a different borrower. The plaintiffs counter that Culpepper I ’s analysis suggests that the standardized terms under which Irwin pays yield spread premiums can by themselves prove that yield spr ead premiums are fees for referrals. We agree with the plaintiffs that Culpepper I does not imply Irwin’s proposed rule, which (because of the element of a third party’s subjective intent) would put18 Irwin in the bizarre position of not knowi ng whether its conduct was illegal when it committed it. Irwin’s best source for the rule in Culpepper I is a single remark: “No evidence suggests that [the fee paid by the Culpeppers to their broker, Premiere] was not intended by both Premiere and the Culpe ppers to compensate Premiere fully for the work it did for the Culpeppers.” 132 F.3d at 696. This sentence does not, read in context, necessarily imply that broke r and borrower intent ultimately determines whether Irwin’s payment of a yield spreadpremium is for services or referrals. Culpepper I ’s holding is that the terms of the implicit yield-spread-premium deal between Irwin and its brokers permit a jury to find that the premiums are referral fees. The panel reviews those terms and concludes in effect that a jury could reasonably infer that Irwin is really buyi ng referrals. After all, Irwin may not know what services it has received when it pays the premium, but it does know that it has gotten a referral. The remark on which Irwin relies is best read in this context as a record observation. The court is merelyimplying that on the present record, Irwin looks to be wrong that, because brokers rely on the premiums for compensation, Irwin is buying services. We prefer not to take this remark out of context and promote it into an element of liability.15 Irwin argues briefly that the plaintiff B eatrice Hiers is not an adequate class representative because, having paid less than 1% of her loan value as a broker fee, she is not a member of the presently defined class. The Culp eppers’ adequacy is uncha llenged, and this issue about Hiers does not therefore affect the outcome of the appeal. Because the district court’s certification order does not address the question of Hiers’s adequacy, we leave the question open for the district court to c onsider in the first instance. 19 We therefore adopt the sounder rule, the one that Culpepper I ’s reasons for denying summary judgment plainly imply, that the terms and conditions under which a lender pays the broker a yield sp read premium can determine whether the yield spread premium is compensation for re ferring loans rather than a bona fide fee for services. There is no suggestion fro m the evidence or the argument here that Irwin negotiates yield spread premiums loan-by-loan, rather than paying them according to terms and conditions common to all the loans. Nor does Irwin contend that it intends some yield spread premiums to pay for services and others to pay for referrals. Given the test for liability th at we interpret the HUD Statement and Culpepper I to impose, in these circumstances the district court acted within its discretion in determining that common questions of law and fact predominate and that class certification is thus appropr iate under Fed. R. Civ. P. 23(b)(3). 15
Conclusion For the foregoing reasons, the district court’s certification of the described class is affirmed.20 AFFIRMED.21 EDMONDSON, Circuit Judge, concurs in the judgment.