A U.S. District Court judge concluded that Policy Statement 1996-2, in which HUD set forth factors to aid in determining whether an affiliated business arrangement is a bona fide provider of settlement services under the Real Estate Settlement Procedures Act (RESPA), is "unconstitutionally vague."
We have been tracking this litigation for some time, due to its importance. In our February 4, 2009 Advisory Letter, "Section 8 and AfBAs-Private Right of Action w/o Concrete Injury," we provided a brief outline of the Federal Appeals Court ruling of January 23, 2009, which held that a plaintiff has standing to bring a RESPA claim, even if there is no concrete injury.
- The Plaintiffs-Appellants, Edward and Whitney Carter (Carter), brought a RESPA claim alleging that Chicago Title Insurance Company (Chicago Title) was improperly splitting fees with other service providers in exchange for referrals. Settlement service provider Welles-Bowen Realty (WB Realty), a realty agent, was owned by Chicago Title and Welles-Bowen Investors, LLC (WB Investors). Chicago Title owned 51.1% and WB Realty owned 49.9% of Welles-Bowen Title Agency, LLC (WB Title).
The heart of the case pertained to this issue: whether a plaintiff must allege a concrete injury, such as an overcharge, in order to have standing for a RESPA violation.
- In the January 23, 2009 decision, the Sixth Circuit ruled that a plaintiff has a statutorily-authorized private right of action under the Real Estate Settlement Procedures Act (RESPA) and constitutional standing to sue, despite failing to allege that there was an overcharge for any settlement service.
- The Carter's allegation that they were injured by the deprivation of a right conferred by RESPA was upheld, because the Court determined that the statute creates an individual right to receive referral services untainted by kickbacks or fee-splitting.
By alleging that the sole purpose for the creation of WB Title was to enable Chicago Title to provide kickbacks to WB Realty in exchange for referrals (i.e., violating sections 8 (a) and 8 (b) of RESPA [12 USC §2607 (a)-(b)] - and that the Carters themselves received a referral from WB Realty - the Court ruled that the Carters had adequately demonstrated that their own RESPA rights were violated.
On June 30, 2010, in a ruling on a consolidated case, the U.S. District Court held that U.S. Department of Housing and Urban Development's (HUD) Policy Statement 1996-2, "Policy Statement on Sham Controlled Business Arrangements," in which HUD set forth ten factors to aid in determining whether an affiliated business arrangement is a bona fide provider of settlement services under RESPA, is "unconstitutionally vague."
- Plaintiffs again contended that the real estate firms' partial ownership of the affiliated business arrangements from which plaintiffs purchased their title insurance violated RESPA's anti-kickback provision. Defendants asserted in a summary judgment motion that the statutory exception for affiliated business arrangements barred plaintiffs' claims.
- In response, plaintiffs argued that an affiliated business arrangement must be a bona fide provider of settlement services in order to take advantage of this exception, an inquiry typically determined by apply a ten-factor test set forth in the Policy Statement.
The court, however, has declined to apply that test, concluding that it raised serious constitutional concerns. By employing broad terms such as "sufficient," "substantial," and "reasonable" without providing guidance as to how to determine the meaning of such terms in the context of the title insurance business, the court noted that the Policy Statement 1996-2 invited a highly subjective evaluation.
Furthermore, according to the court, HUD's Policy Statement 1996-2 providing that the ten factors be considered together required further subjective judgments, because the directive provided no guidance as to how many factors would be determinative, or how much weight was to be given to the individual factors. As a result, the court concluded that the regulation did not contain sufficient detail to prevent arbitrary enforcement and to give notice of what an individual must do to comply with the Policy Statement, and instead applied the terms of the statute itself.
After concluding that no violation of the anti-kickback provision had occurred, the court entered summary judgment for the defendants.
The Affiliated Business Arrangement (AfBA), when properly structured, is a RESPA-compatible means to developing strategic alliances between certain settlement service providers.
Comprehensive planning and implementation are necessary to satisfy current RESPA requirements and HUD's specified guidelines in order to satisfy a "safe harbor" test.
If you have any questions about this matter or would like assistance with mortgage compliance, please contact Jonathan Foxx, Managing Director or call 516-442-3456 x 100.
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Carter v. Wells-Bowen Realty, Inc.
No. 3:05 CV 7427 (N.D. Ohio June 30, 2010)
