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From Banking and Finance Law Daily, December 2, 2013

Federal policy statement on sham business arrangements irrelevant to whether companies received illegal payments

By Richard A. Roth, J.D.

Real estate settlement service providers whose relationships satisfied the Real Estate Settlement Procedures Act criteria for affiliated business arrangements were not required also to satisfy a separate test imposed by a 1996 Department of Housing and Urban Development policy statement, the U.S. Court of Appeals for the Sixth Circuit has decided. Rejecting the consumers’ claims that the service providers had violated the RESPA prohibition on kickbacks and unearned fees, the court determined that the rules on qualified for the affiliated business arrangement safe harbor were set by the statute and could not be supplemented by a federal agency policy statement (Carter v. Welles-Bowen Realty, Inc., Nov. 27, 2013, Sutton, Circuit Judge).

There was no dispute about the facts of the case as outlined by the court. The consumers bought homes using the services of real estate agencies, which referred the consumers to title companies to perform title searches and provide title insurance. The title companies were jointly owned by the real estate agencies and Chicago Title Insurance Company, which performed much of the actual title search work in exchange for fees paid by the title companies. There were no payments to the real estate agencies.

Affiliated business arrangements. RESPA generally prohibits paying or accepting any fee for the referral of real estate settlement service business, the court said (12 U.S.C. §2607). However, the law also provides a safe harbor for an affiliated business arrangement, which it defines as a situation in which the person making the referral has at least a 1-percent direct or indirect interest in the person to whom the business is referred. Under the safe harbor, there is no violation of the anti-kickback provision if:

  • the business relationship is disclosed to the consumer;

  • the consumer is free to decline the referral and secure the services of another service provider; and

  • the person making the referral receives nothing of value other than a return from its ownership in the person to whom the business was referred.

There was no dispute that the companies had satisfied these requirements, the court said.

However, the consumers pointed out that in 1996 HUD adopted a policy statement that purports to add a fourth criterion—the person to whom the business is referred must be a bona fide provider of settlement services, not a sham used to protect kickbacks that otherwise would be illegal (Statement of Policy 1996-2 Regarding Sham Controlled Business Arrangements). HUD laid out 10 specific factors it intended to consider in making that decision that were intended to examine whether the company that received actually performed services. The consumers alleged that the companies failed this test, making their business relationships illegal.

Results in trial court. The trial court rejected the consumers’ argument, concluding that the HUD policy statement—now being defended by the Consumer Financial Protection Bureau—was not a binding interpretation of RESPA. The act set the requirements for how to qualify for the safe harbor, and the companies satisfied those requirements, the court said.

When the consumers appealed the trial court’s summary judgment in favor of the companies, the appellate court rejected their appeal.

Effect of policy statement. Since it was accepted that the companies satisfied RESPA’s requirements, there would have been an illegal kickback only if the HUD policy statement had a binding effect, the court said. While the consumers, and the government in support, offered two reasons why the policy statement should be considered, neither of those reasons were found to be convincing.

One argument relied on Chevron v. Natural Resources Defense Council (467 U.S. 837, 1984), which says that a binding interpretation of a federal law by an agency empowered by Congress to enforce that law is entitled to deference by the courts. The government told the court that part of the policy statement, asserting that only bona fide service providers could rely on the safe harbor, was entitled to deference. The court disagreed.

First, RESPA already imposed conditions on the safe harbor, and the bona fide service provider requirement added nothing unless it required courts to inquire into whether the service provider was genuine, the court said. Second, if such an inquiry were to be made by a court, the only standards offered were the 10 factors laid out elsewhere in the policy statement, and the government conceded those were merely non-binding guidelines.

Finally, a policy statement is generally not perceived as carrying the same weight as a more formal agency interpretation, the court said. The availability of criminal penalties added to this concern, the court noted. It would be unfair to expect a person to decide whether a business arrangement was criminal based on a 10-factor test that was never mentioned in the statute.

The court went on to reject the second argument, based on Skidmore v. Swift & Co. (323 U.S. 134, 1944), which says that an agency’s interpretation of a law is entitled “to weight in proportion to its persuasiveness.” Since the government said that the 10 specific factors were only guidelines the CFPB would consider, rather than an official interpretation, it was not entitled to any weight, the court said.

Argument based on statute. The consumers also argued that RESPA itself implied a bona fide servicer provider requirement, pointing out that the definition of affiliated business arrangement referred to an ownership interest in “a provider of settlement services.” A “provider” meant a “bona fide provider,” they asserted.

The court disagreed. The natural meaning of “provider of settlement servicers” was a person that provided settlement services, and the consumers did not dispute that the title companies did provide settlement services. Moreover, the safe harbor made three requirements explicit, and that argued against implying a fourth requirement drawn from another part of the law.

Concurring opinion. A separate opinion by Judge Sutton emphasized concerns over the potential criminal liability if the 10-factor guidelines were to be considered. Ambiguities in criminal laws are to be interpreted in favor of defendants, the court pointed out, and the interpretations of the executive branch of government are not entitled to any deference. Adhering to the policy statement in this case would conflict with that principal, the concurring opinion said.

The case is No. 10-3922.

Attorneys: John T. Murray (Murray & Murray Co., L.P.A.) for Erick C. Carter, Whitney A. Hayes-Carter, and Joshua J. Grzecki. Richard H. Carr for Welles-Bowen Realty, Inc., Welles Bowen Title Agency, LLC, Welles Bowen Investors, LLC, and Welles Bowen Mortgage, Inc. Robert J. Fogarty (Hahn Loeser & Parks) for Chicago Title Insurance Company. Jay N. Varon (Foley & Lardner LLP) and Gregory N. Happ (National Consumer Law Center) for amici curiae. Christine N. Kohl, United States Department of Justice.

Companies: Chicago Title Insurance Company; Danberry Title, LLC; The Danberry Co.; Integrity Title Agency of Ohio & Michigan, LTD; Welles-Bowen Realty, Inc.; Welles Bowen Title Agency, LLC; Welles Bowen Investors, LLC; Welles Bowen Mortgage, Inc.

MainStory: TopStory ConsumerCredit Mortgages RESPA

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