This distinction is that there are two kinds of righteousness portrayed in the Bible, and along with them two kinds of justification. This word, justification, can be used as a technical term for the forgiveness of a sinner by God as a gift, but it also has a more general meaning of validating or confirming the truthfulness of our position or actions in the eyes of other people.
The first type of righteousness acts in a vertical direction--that is between God and man. This vertical righteousness is what we normally think of as Lutherans when we hear the word, justification. This is the type of righteousness that comes from God as a gift to us, apart from any worthiness on our part.
The second type of righteousness occurs in a horizontal direction--that is between man and his fellow man. While the vertical sort of righteousness or justification is where our salvation occurs, we continue to live in relationship with other people in our everyday lives. It is within these relationships that the horizontal sort of righteousness or justification occurs, where the actions of the Christian are intended to validate or confirm the truthfulness of the claims of Christianity in the eyes of those who observe our lives
So, when James says, “You see that a person is justified by works, and not faith alone,” he is speaking of the way that our actions serve to validate or invalidate the Christian faith we claim to believe, when our actions are viewed by other people, particularly those outside of the Church. If we act in a way that reflects what we believe, it confirms the Christian faith in their eyes. If we act hypocritically or in habitual sin, it invalidates the Christian faith in their eyes. If we read James' words in context, we can see that this is the sort of thing he is speaking of with the word "justification" and that he is not discussing how we relate to God.
Just as there are two directions in which righteousness and justification occur, there are also two directions in which sin occurs. We can sin against God alone by breaking any of the first three commandments. However, when we sin against the remaining commandments, we sin not only against God, but also against our fellow man. When Peter says, “Above all, keep loving one another, since love covers over a multitude of sins,” he is speaking to those who are already Christians. So, when he talks about love covering a multitude of sins, this is what he speaks of--not that our love reduces the burden of our sins in God's eyes (because Jesus has already completely fulfilled that need), but that love covers over or abates the division and discord that are the result of our sins and separate or embitter the relationship between the sinner and the one against whom he has sinned.