The source of the court’s confusion is fairly clear. AHL incorporated the arguments of
Citi in its motion. However, Count VII is only directed against AHL, and Citi did not directly
address the claim ( nor would Citi have standing to). What AHL apparently intended was to
incorporate the arguments against the 1% cap, which would also apply to Count VII’s restitution
claim. While this presentation was a bit casual, given that both sides exhaustively addressed that
applicability of the 1% cap, and that it would make little sense to permit a claim that had been
fatally undermined by the court’s prior analysis to survive, Count VII is dismissed.
6. Breach of Contract

In Count VIII, Plaintiffs maintain that Citi violated the relevant contracts (mortgage and
note) by paying compensation in excess of the 1% limit permitted by HUD. Citi argues that the
claim must be dismissed because paying a YSP does not violate the 1% ceiling, no section of the
contracts was violated, the contracts contain no restriction on fees paid to mortgage brokers, and
the only restrictions in the documents relate to what Citi can charge not pay. Plaintiffs respond
that, pursuant to {8 of the mortgages (Amended Complaint, Exhibits B & F), the lender can only
collect “fees and charges authorized by the secretary,” and that the contracts incorporate the 1%
ceiling provided for by law.

Plaintiffs’ response dooms this claim — Citi was not “collecting” the disputed YSP, it was
paying it. Moreover, to the extent Plaintiffs are arguing the contract incorporates the law, they

appear to be trying to duplicate their RESPA claims. Count VIII is dismissed.

13


Cornfield v. Consolidated High School District No. 230, 991 F.2d 1316, 1324 (7th Cir.1993).
However, the court need not accept as true conclusory legal allegations. Baxter v. Vigo County
School Corp., 26 F.3d 728, 730 (7th Cir.1994). “The issue is not whether a plaintiff will
ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.
Indeed it may appear on the face of the pleadings that a recovery is very remote and unlikely, but
that is not the test.” Pickrel v. City of Springfield, 45 F.3d 1115, 1118 (7" Cir. 1995) (quoting
Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)). All that F.R.C.P. Rule 8 requires to state a claim
in federal court “is a short statement, in plain (that is, ordinary, nonlegalistic) English, of the
legal claim.” Kirksey v, R.J. Reynolds Tobacco Company, 168 F.3d 1039, 1041 (7" Cir. 1999)
“Complaints need not plead law or match facts to every element of a legal theory....” Bennett v.
Schmidt, 153 F.3d 516, 518 (7" Cir. 1998). Moreover, more can be less under the Federal Rules
of Civil Procedure; a litigant that includes details in his complaint well-beyond the limited
requirements of Rule 8 may plead himself out of court. Holman v. State of Indiana, 211 F.3d

399, 406 (7"" Cir. 2000), cert. denied, 121 S. Ct. 191(2000).

Disputed Substantive Provisions

RESPA

§2607. Prohibition against kickbacks and unearned fees

(a) Business referrals

No person shall give and no person shall accept any fee, kickback, or thing of
value pursuant to any agreement or understanding, oral or otherwise, that business
incident to or part of a realestate settlement service involving a federally related
mortgage loan shall be referred to any person.

(b) Splitting charges

No person shall give and no person shall accept any portion, split, or percentage of
any charge made or received for the rendering of a real estate settlement service in
connection with a transaction involving a federally related mortgage loan other
than for services actually performed.


interest payments, YSP’s should not be counted as part of the 1% origination fee limit. Jd. at
1191.

Lastly, HUD’s definition of total broker compensation explicitly includes both fees paid
by the borrower and any yield spread premium paid by the lender, see Policy Statement at 53055,
which presupposes that brokers can and will be compensated by both the borrower and the
lender. Mortgages with YSP are widely utilized and regularly accepted by HUD. See Bjustrom,
178 F.Supp.2d at 1192; Vargas, 2001 WL 1545874, at *3.

Thus, Plaintiffs contentions that total broker compensation is limited to the 1% ceiling
and that YSP counts against that ceiling are utterly refuted by the existing case law, the HUD
Policy Statement, and the plain language of the regulation. Count V must be dismissed. *

The result is far different for Count I, the gravamen of which is that the YSP’s constitute
forbidden referral fees. That YSP’s are not per se illegal gets the Defendants little here, as that
general truism says nothing about the legality of the YSP’s paid in these particular loans.
“HUD’s position that lender payments to mortgage brokers are not illegal per se does not imply,
however, that yield spread premiums are legal in individual cases or classes of transactions.”
Policy Statement at 53052. That the Plaintiffs failed to allege facts showing that the YSP’s were
improper in their particular loans is a nonstarter. Under the notice standard of Rule 8, the
Plaintiff need not plead extensive facts. As to Defendants claim that Plaintiffs failed to allege
that the YSP’s were not for services actually performed, the amended complaint belies this

assertion. Plaintiffs repeatedly state, or fairly imply, that the YSP’s were not for services

‘In their response, Plaintiff appear to be making new claims regarding other fees that were
not discussed in the complaint. This is for naught, as the complaint cannot be amended in a
response brief.


or illegal...” 66 Fed. Reg. 53052 (“Policy Statement”). Fortunately, some recent district court
cases persuasively address issues relevant to resolving the Defendants’ motions.
1_RESPA Claims

There are two RESPA claims. Count I, an individual claim, alleges that: (1) Plaintiffs
were entitled to have their mortgages closed without paying charges that solely represented
referral fees; (2) Citi paid and AHL received YSP’s that were simply referral fees; (3) the YSP’s
were in excess of reasonable compensation for any services provided by AHL; and (4) as a
consequence of the YSP’s, Plaintiffs were significantly overcharged. Count V, the class claim,
alleges that: (1) Plaintiffs were entitled to have their loans closed without unreasonable fees that
did not represent compensation for services provided; and (2) that Citi’s payment of YSP’s to
AHL exceeded the 1% limit, Defendants argue that Count I cannot stand because YSP’s are not
per se illegal, the Plaintiffs failed to allege facts showing that the payment was improper for their
particular loans, and Plaintiffs failed to allege that the broker did not receive the payment for
services actually performed. Defendants also maintain that Count V, the class claim, cannot
stand because the FHA 1% cap does not apply to YSP’s, which are paid by the lender, and that
Plaintiffs were never charged more than 1% in origination fees. Plaintiffs counter that it is
illegal for a broker to receive a fee in excess of 1% and that the court must consider all the
broker’s compensation in determining whether the 1% cap has been exceeded. Plaintiffs further
argue that the YSP’s are, in any event, illegal as referral fees.

HUD’s determination, noted above, that YSP’s are not per se illegal has been accepted by
the courts. See Michalowski v. Flagstar Bank, No. 01 cv 6095, 2002 WL 113905, at *3 (N.D. Ill.

Jan. 25, 2002)( “general consensus...is that YSP’s are not per se illegal”); Vargas v. Universal


(c) Fees, salaries, compensation, or other payments

Nothing in this section shall be construed as prohibiting...(2) 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....

12 U.S.C. §2607.

HUD Regulations

§ 203.27 Charges, fees or discounts.
(a) The mortgagee may collect from the mortgagor the following charges, fees or

discounts:...
(2) A charge to compensate the mortgagee for expenses incurred in
originating and closing the loan, the charge not to exceed:
(i) $20 dollars or one percent of the original principal
amount of the mortgage..., whichever is greater...
(3) Reasonable and customary amounts, but not more than the
amount actually paid by the mortgagee, for any of the following
items:
(i) Recording fees and recording taxes...;
(ii) Credit Report;
(iii) Survey,...;
(iv) Title examination; title insurance,...,
(v) Fees paid to an appraiser or inspector...,
(vi) Such other reasonable and customary charges as may
be authorized by the Commissioner...
(4) Reasonable and customary charges in the nature of discounts.
(5) Interest from the date of closing....
(e) Nothing in this section will be construed as prohibiting the mortgagor from
dealing through a broker who does not represent the mortgagee, if he prefers to do
so, and paying such compensation as is satisfactory to the mortgagor in order to
obtain mortgage financing.’
24 CFR § 203.27.

DISCUSSION
The focus of this action is on the payment of YSP’s, a practice that has not been
definitively addressed by our appellate court or, for that matter, by HUD. In its 2001 Statement

of Policy, HUD colored the subject gray, noting that “yield spread premiums are not per se legal


but the lender cannot pay a broker a referral fee for sending business the lender’s way. See
Vargas, 2001 WL 1545874 at *1; Schauf, 2001 WL 1654711 at * 2.

The gravamen of Count V is that broker compensation is limited to a 1% origination fee
and the YSP must be aggregated with any origination fee to determine whether the cap has been
exceeded. At least two courts have considered this issue, and both courts concluded that such an
aggregation was improper and that broker compensation is not limited to a 1% origination fee.
See Vargas, 2001 WL 1545874, at *3 ; Bjustrom v. Trust One Mortgage, 178 F. Supp.2d 1183
(W.D. Wash. 2001). The bases for these decisions are ultimately persuasive.

The plain language of the relevant provisions is directly counter to Plaintiffs’ theory. An
examination of Section 203.27 shows that an origination fee is but one fee that brokers are
entitled to receive; there are a host of others, including charges for recording fees, surveys, title
searches, appraisers, etc. See 24 CFR § 203.27. “The 1% ‘origination fee’ is merely one of a
number of charges that may be collected from a borrower.” Bjustrom, 178 F.Supp.2d at 1189. In
addition, Section 203.27 regulates what the “mortgagee may collect from the borrower.” See 24
CFR § 203.27. By its plain language, it does not apply to YSP’s that are paid by the lender, not
the borrower. Bjustrom, 178 F.Supp.2d at 1189-90; Vargas, 2001 WL 1545874, at *3.

Further, the Bjustrom court explicitly rejected the contention that the borrower really does
pay the YSP in the form of higher interest rates, concluding that the provision relates only to
direct payments. 178 F. Supp.2d at 1190. The court noted that §203.27 does not restrict all
payments from the borrower; interest payments, undoubtedly a large charge and significant
source of profit for the lender, are not covered in the provision. Jd. at 1190-1. The court

concluded that because interest payments are not included, and YSP’s are paid in expectation of


Minute Order Form (06/97)

United States District Court, Northern District of Illinois

Name of Assigned Judge Sitting Judge if Other
or Magistrate Judge John A. Nordberg than Assigned Judge

CASE NUMBER 01 C 4043 DATE 4/17/2002

CASE Watson, et al vs. CBSK Financial Group
TITLE

[In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and a state tebrielly the nature

f tk
MOTION: of the motion being presented.}

DOCKET ENTRY:
(1)
(2)
3)
@)
(5)
(6)
7)
(8)
(9)

0

Filed motion of [ use listing in “Motion” box above.]
Brief in support of motion due
Answer brief to motion due . Reply to answer briefdue__.

Ruling/Hearing on set for at

Status hearing[held/continued to] [set for/re-set for] on set for at

Pretrial conference[held/continued to] [set for/re-set for] on set for at

Trial[set for/re-set for] on at

[Bench/Jury trial] [Hearing] held/continued to at

ooo0agoao0ag 00

This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OFRCP4(m) O General Rule21 [FRCP41(a)(1) 1 FRCP41(a)(2).

(10) = [Other docket entry] _ Enter amended memorandum opinion and order. For the foregoing reasons,
Defendants’ Motions to Dismiss and for Judgment on the Pleadings are GRANTED as to Counts V, VI, VIL
and VII, and Denied as to all remaining counts. Defendant’s Motion for Partial Reconsideration is
GRANTED.

al @ [For further detail see order attached to the original minute order.]

No notices required, advised in open court.

No notices required. number of notices

Notices mailed by judge’s staff. APR ] 8 2002

Notified counsel by telephone.

date docketed
oY | Docketing to mail notices. CD v YW on
docketing deputy ihitials 7

Mail AO 450 form. Lupe) LaINisia sg
Copy to judge/magistrate judge. yours
courtroom date msled notice
1? deputy's
initials

UT “Dateltime reedived in
central Clerk’s Office sailing deputy ntils



As to Count II, we conclude that the claim is adequately pled. That the required HUD
disclosures were made does not immunize Defendants entirely. Significantly, HUD has opined
“that disclosure alone does not make illegal fees legal under RESPA.” Policy Statement at
53056. Further, “omission or concealment of a material fact can violate the IFCA as well as a
misrepresentation.” Vargas, 2001 WL 558045, at *3. We note that Plaintiffs’ claim appears not
so much based on the YSP not being disclosed as the impact of the YSP on the interest rate and
overall cost to the borrower not being disclosed, and such claims have passed muster in this
district. See generally Id.; Michalowski, 2002 WL 113905, at *6.

Count VI is based entirely on the premises that broker compensation is limited to 1% and
that the YSP is to be aggregated with the origination fee paid by the borrower to determine if the
1% cap is exceeded. As the court has rejected both these premises, this claim must be dismissed.
See generally, Vargas, 2001 WL 1545874 at *4.

3. Breach of Fiduciary Duty

Count III, against AHL, alleges that :(1) AHL had fiduciary obligations to Plaintiffs; (2)
AHL had a duty to fully disclose material facts to Plaintiffs, including AHL’s sources of
compensation and its impact on the loan transaction; (3) AHL had a duty to treat Plaintiffs fairly
by refraining from self dealing and obtaining a low rate; and (4) AHL violated its duties. AHL
argues that the claim must be dismissed because all the required RESPA disclosures were made
and the contract provided that AHL was an independent contractor who could not guarantee the
lowest rates and who could be compensated by other parties. Plaintiffs argue that there was a

fiduciary relationship and there was a total failure to disclose the impact of the YSP’s.

11


provided by the broker. (See, ¢.g., Amended Complaint at {] 28, 30, 32, 33, 42, 56.) Moreover,
assessing whether a particular YSP passes muster in a given transaction is a very fact intensive
exercise, and therefore unlikely to be resolved in a motion to dismiss. See Michalowski, 2002
WL 113905 at *4, This RESPA claim survives.’

2. Consumer Fraud Claims

There are two consumer fraud claims raised against the Defendants. Count II, an
individual claim, alleges that: (1) Citi paid and AHL received YSP’s as referral fees or
commercial bribes; (2) Defendants failed to disclose the impact of the YSP’s; (3) the payments
led to Plaintiffs being substantially overcharged; and (4) the payments, which were unrelated to
services provided, deprived Plaintiffs of the loyalty of their broker. Count VI, a class claim,
makes the following allegations: (1) that Plaintiffs were entitled to pay no more than a 1%
origination fee; (2) that Plaintiffs were entitled to fair and honest treatment from AHL; (3) that
the YSP resulted in broker compensation exceeding the 1% limit, and (4) that Defendants did not
disclose that the 1% limit was being evaded. Defendants argue that the consumer fraud claims
must be dismissed because the Defendants made all the disclosures required by RESPA, which
bars Plaintiffs claims under Illinois law. In addition, Defendants claim that YSP’s are not subject
to the 1% ceiling. Defendants also‘argue that the relevant agreements make it clear that AHL was
an independent contractor, would receive compensation from other sources, and could not
guarantee the lowest interest rate. Lastly, Defendants maintain the claims are inadequately pled.

Plaintiffs argue the claims are adequate, citing Vargas.

SCaveat: to the extent Plaintiffs intended to raise claims in Count I that were foreclosed in
our discussion of Count V, such as YSP’s being subject to the 1% ceiling, they are foreclosed for
purposes of Count I as well.

10


Mortgage Corp., No. 01 cv 0087, 2001 WL 1545874, at *1 (N.D. Ill. Nov. 29, 2001) (same). In
1999, HUD formulated a two part'test to determine whether a payment (typically a YSP) from a
lender to a mortgage broker is legitimate under RESPA or whether it is a forbidden referral fee:
(1) “whether goods or facilities were actually furnished or services were actually performed for
the compensation paid” and (2) “whether the payments are reasonably related to the value of
goods or facilities that were actually furnished or services that were actually performed.” Policy
Statement at 53054. All the fees paid to the broker are to be scrutinized in determining whether
the broker’s total compensation is reasonably related to the goods/services that the broker
provides. Jd. Thus, “total compensation” includes both fees paid by the borrower and any yield
spread premium paid by the lender. Id. at 53055. Significantly, the compensation paid “must be
commensurate with the amount normally charged for similar services, goods or facilities.” Jd.
“Simply delivering a loan with a higher interest rate is not a compensable service.” Jd. The
courts have widely acknowledged and followed the HUD test. See, e.g., Empalmado v. First
Franklin Financial Corp., No. 01 cv 1117, 2002 WL 193411 (N.D. Ill. Feb. 7, 2002); Schauf v.
Mortgage Bankers Service Corp., No. 01 ev 4442, 2001 WL 1654711 (N.D. Ill. Dec. 20, 2001);
Vargas v. Universal Mortgage Corp., No. 01 cv 0087, 2001 WL 558045 (N.D. Ill. May 21,
2001); Golon v. Ohio Savings Bank, No. 98 cv 7430, 1999 WL 965593 (N.D. Ill. Oct. 15, 1999).
Applying the HUD test to make this determination, which requires a very detailed factual
analysis of the individual transaction. Sims v. First Franklin Financial Corp., No. 01 cv 1116,
2001 WL 1155271, at * 3 (N.D. Ill. Sept. 28, 2001). The basic principle to be gleaned from all

this is that lenders can pay brokers reasonable compensation for the services the brokers perform,


5. Count V is a class RESPA claim against both Defendants, alleging that borrowers are entitled
to close mortgage transactions without unreasonable fees, and that Defendants structured the
transaction so that fees in excess of the 1% FHA? maximum were paid;

6. Count VI is a class consumer fraud claim against both Defendants alleging that Citi paid and
AHL received fees (YSP’s) in excess of the 1% maximum and that Defendants failed to disclose
the evasion of the 1% maximum;

7. Count VII is a restitution claim against AHL seeking the return of fees received in excess of
the 1% maximum;

8. Count VIII is a breach of contract claim against Citi, alleging that Citi violated the mortgage

contract by paying fees in excess of the 1% maximum.

LEGAL STANDARDS

Motion to Dismiss

Evaluating the legal sufficiency of a plaintiff's factual allegations requires the courts to
adhere to a strict standard. A court may grant a motion to dismiss only if “it is clear that no relief
could be granted under any set of facts that could be proved consistent with the allegations.”
Cushing v. City of Chicago, 3 F.3d 1156, 1159 (7th Cir.1993)(quoting Hishon v. King &
Spalding, 467 U.S. 69, 73 (1984)). When considering a Rule 12(b)(6) motion, the court must
accept as true all well-pleaded factual allegations in the complaint and view them, along with the

reasonable inferences to be drawn from them, in the light most favorable to the plaintiff.

3“FHA” is the common acronym for the Federal Housing Authority; this agency is
overseen by the Department of Housing and Urban Development (“HUD”).

3


CONCLUSION
For the foregoing reasons, Defendants’ Motions to Dismiss and for Judgment on the
Pleadings are GRANTED as to Counts V, VI, VII, and VII, and DENIED as to all remaining counts.

Defendant’s Motion for Partial Reconsideration is GRANTED.

ENTER:

lor United States Distric)

DATED: “/7 Z Od

14


by the lender; the higher the interest rate is above the par (or market rate), the higher the yield
spread premium that the broker receives. The Plaintiffs maintain that the payment of a yield
spread premium (“YSP”) jacks up the interest rate that the borrower pays, results in significantly
greater costs to the borrower, and provides excessive compensation to the broker that is unrelated
to the value of the services that the broker provides. As to the latter, Plaintiffs maintain the
payments amount to illegal referral fees under Section 2607 of the Real Estate Settlement
Procedure Act, 12 U.S.C. §2601, et seq.(“RESPA”).

The Plaintiffs filed an eighth count complaint which raises both individual? and class
claims:
1. Count I is against both Defendants, and claims that Defendants violated RESPA by
paying/receiving a YSP for the referral of business, which resulted in an overcharge to the
borrowers and excess compensation to the broker;
2. Count II is against both Defendants, and claims that Defendants violated the Illinois
Consumer Fraud Act (“IFCA”) (815 ILCS §505/2) by paying a YSP in violation of RESPA,
failing to provide meaningful disclosure, and unnecessarily increasing mortgage costs to
borrowers;
3. Count III is against AHL, alleging a breach of fiduciary duty based upon AHL’s acceptance of
a YSP, failure to obtain the best interest rate, failure to treat borrowers fairly, and failure to make
necessary disclosures;
4. Count IV is against Citi, and claims that Citi induced a breach of fiduciary duty on the part of

AHL by paying AHL excess compensation in the form of a YSP;

? The class claims in Counts I-IV were stricken/dismissed on December 6, 2001.

2


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
WATSON) DOCKETED
Prana } No. 01 C 4043 APR 1 8 200d
* } HONORABLE JOHN A. NORDBERG
CBSK FINANCIAL GROUP, INC., etal, _)
Defendants. )

AMENDED MEMORANDUM OPINION AND ORDER

Plaintiffs Berlin Lamar Watson, Latara Watson, James Willard and Mary Willard
(“Plaintiffs”) have brought this action against CBSK Financial Group, Inc. (which does business
as American Home Loans) (“AHL”) and Citimortgage, Inc.(“Citi”). Before the court is Citi’s
motion to dismiss and AHL’s motion for judgment on the pleadings. ' This memorandum
opinion supersedes the original memorandum opinion issued on March 26, 2002, and addresses
matters raised in Defendant AHL’s Motion for Partial Reconsideration regarding a possible

clerical error.

BACKGROUND
Plaintiffs all acquired home mortgages from Citi through mortgage broker AHL. Both
loans provided for the payment of a “yield spread premium” from Citi to AHL. The yield spread
premium is a payment from the lender to the broker for delivering a loan with an interest rate

above a preset “par” rate. The amount of the premium is determined from a rate sheet provided

'AHL’s motion for judgment on the pleadings is essentially a reiteration of AHL’s
previous motion to dismiss.

au
YD


We conclude the claim survives. “The existence of an agent/principal relationship rests
on factual underpinnings, and cannot be determined on a motion to dismiss.” Michalowski, 2002
WL 113905, at *7. See also Vargas, 2001 WL 558045 at *3 (same).

4. Inducement to Breach Fiduciary Duty_

Count LV, against Citi, alleges that: (1) Plaintiffs were owed a fiduciary duty by broker
AHL; (2) Plaintiffs were entitled to full disclosure regarding their broker’s compensation and its
effect on the transaction; (3) Citi paid AHL YSP’s that were nothing but referral fees; and (4) this
excess compensation induced AHL to breach its duties to Plaintiffs. Citi argues that the claim
must be dismissed because it is inadequately pled, notably by failing to allege that Citi knew of
the fiduciary relationship. Plaintiffs argue the claim is adequately presented.

As Rule 8 does not require a Plaintiff to plead facts matching every element of a legal
theory, and the complaint puts Citi on fair notice as to the nature of this claim, we conclude this
claim is adequately pled. In addition, in this district, nearly identical claims have been found
adequate to survive a motion to dismiss. See generally Hastings v. Fidelity Mortgage Decisions
Corp., 984 F.Supp. 600, 614-5 (N.D. Ill. 1997). See also Michalowski, 2002 WL 113905, at *7.
5. Restitution

In Count VII, Plaintiffs allege that AHL was unjustly enriched to the extent that it
received fees in excess of the 1% limit permitted by HUD and should be required to make
restitution. In its memorandum opinion of March 26, 2002, this court concluded that AHL did
not address this claim in its motion and let it stand. Shortly thereafter, AHL moved to
reconsider, arguing that the court misread AHL’s presentation, and that AHL did challenge Count

VII.

12