09 December 2013
Practice Group(s):
Consumer Financial
Services
Financial Institutions
and Services
Litigation
Safe Harbor Means Safe Harbor: Sixth Circuit
Rejects Any Judicial Deference to HUD’s Sham
Affiliated Business Guidelines
By Phillip L. Schulman, Irene C. Freidel, and David D. Christensen
Providing clarity in an area of law that had become increasingly muddled over the last two
decades, the U.S. Court of Appeals for the Sixth Circuit has issued a decision that clarifies
the scope of RESPA’s safe harbor for affiliated business arrangements (“ABA”). In Carter v.
Welles-Bowen Realty, Inc.,1 the court held that ABAs need only satisfy the three
requirements set forth in the statute to fall within the statutory safe harbor; they do not need
to also satisfy the so-called 10-factor “sham ABA” test addressed in HUD’s 1996 policy
statement (“1996 Policy Statement”).2 HUD issued the 1996 Policy Statement for
enforcement purposes and to inform the public of the factors it applies when considering
whether an ABA is a bona fide settlement service provider. A number of federal district
courts have held that ABAs must satisfy the 1996 Policy Statement for their profits to qualify
for the safe harbor exemption. In Carter, the Sixth Circuit rejected this line of cases as well
as arguments presented by the United States, as intervenor, and held that the Policy
Statement was not entitled to judicial deference. The Carter decision is consistent with recent
U.S. Supreme Court jurisprudence on RESPA, which has rejected broad interpretations of
the statute, and instead, adhered to its plain language. 3 Nonetheless, it remains to be seen
how, if at all, the Sixth Circuit’s decision will affect the Consumer Financial Protection
Bureau’s (“CFPB”) enforcement approach to ABAs or influence other courts’ views regarding
the use of the Policy Statement in civil lawsuits attacking ABAs as sham entities.
RESPA Section 8 and the ABA Safe Harbor
12 U.S.C. § 2607(a) (also known as RESPA Section 8), prohibits any person from giving or
accepting “any fee, kickback, or thing of value pursuant to any agreement or understanding,
oral or otherwise, that business incident to or a part of a real estate settlement service
involving a federally related mortgage loan shall be referred to any person.” Similarly, 12
U.S.C. § 2607(b) prohibits any person from giving or accepting “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.”4 Violators of RESPA Section 8 are subject to civil
liability of three times the settlement service fees involved in the violation, as well as criminal
1
Carter v. Welles-Bowen Realty, Inc., --- F.3d ----, 2013 WL 6183851 (6th Cir. Nov. 27, 2013).
HUD, Statement of Policy 1996-2 Regarding Sham Controlled Business Arrangements, 61 Fed. Reg. 29,258 (June 7,
1996). ABAs were previously referred to as “controlled business arrangements.”
3
In Freeman v. Quicken Loans, Inc., the Supreme Court addressed whether, to establish a violation of RESPA Section
8(b), a plaintiff must demonstrate that a charge was divided between two or more persons, rather than the collection of an
unearned charge by a single provider. 132 S. Ct. 2034, 2037 (2012). Following the plain language of Section 8(b), the
Supreme Court unanimously held that “[i]n order to establish a violation of [Section 8(b)], a plaintiff must demonstrate that
a charge for settlement services was divided between two or more persons.” Id. at 2044.
4
12 U.S.C. § 2607(a) and (b).
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Safe Harbor Means Safe Harbor: Sixth Circuit Rejects Any Judicial Deference
to HUD’s Sham Affiliated Business Guidelines
liability, including up to one year in prison.5 The CFPB can also bring a civil enforcement
action for violations of Section 8.6
RESPA contains a statutory “safe harbor” or exemption from Section 8 liability for profits
generated by ABAs7 where (1) the affiliated relationship is properly disclosed to the person
being referred, including a written estimate of the charges made by the provider to which a
person is preferred; (2) the person being referred is not required to use any particular
provider of settlement services; and (3) the only thing of value that is received from the
arrangement is a return on the ownership interest.8
HUD issued the 1996 Policy Statement to provide public guidance on how HUD, in
enforcement actions,9 evaluates whether an ABA is bona fide, rather than a “sham,”
settlement service provider. In its 1996 Policy Statement, HUD stated that satisfying the
three elements set forth in 12 U.S.C. § 2607(c)(4) was not sufficient for an ABA to fall within
the safe harbor from Section 8 liability. In effect, HUD’s 1996 Policy Statement added a
fourth element to the safe harbor analysis—whether the ABA is a “bona fide provider of
settlement services.”10 To determine whether an ABA is bona fide, HUD set forth ten
general factors, each of which contains a number of subfactors, including whether the ABA is
staffed with its own employees, manages its own business affairs, and provides the essential
services for which it receives a fee.11 HUD states that no one factor is determinative of a
sham ABA, but rather the factors, taken together, will be considered and balanced “in light of
the specific facts.”12
Carter: The Claims and District Court Decision
In Carter, the plaintiffs purchased a home in 2005 and used Welles-Bowen Realty (“WellesBowen”) as their real estate agent. Welles-Bowen referred plaintiffs to Welles-Bowen Title
Agency (“WB Title”) for title work, which in turn referred some of the title work to Chicago
Title Insurance Co. (“Chicago Title”). Welles-Bowen and half of WB Title are owned by a
common parent. Chicago Title owns the other half of WB Title.13 The plaintiffs alleged that
WB Title performed few substantive services and contracted most of the title work to Chicago
Title. According to the plaintiffs, WB Title was simply a shell company designed to funnel
referral fees between Chicago Title and Welles-Bowen.14 The plaintiffs filed a class action
complaint, asserting that the profits generated by WB Title, as an affiliated business
arrangement, which were distributed to the owners of Welles-Bowen and WB, violated the
5
12 U.S.C. § 2607(d)(1) and (2).
12 U.S.C. § 2607(d)(4).
7
An “affiliated business arrangement” “means an arrangement in which (A) a person who is in a position to refer business
incident to or a part of a real estate settlement service involving a federally related mortgage loan, or an associate of suc h
person, has either an affiliate relationship with or a direct or beneficial ownership interest of more than 1 percent in a
provider of settlement services; and (B) either of such persons directly or indirectly refers such business to that provider or
affirmatively influences the selection of that provider.” 12 U.S.C. § 2602(7).
8
12 U.S.C. § 2607(c)(4).
9
With the passage of the Dodd-Frank Act, the CFPB is now the primary agency authorized to bring civil enforcement
actions for violations of RESPA Section 8. 12 U.S.C. § 2607(d)(4).
10
61 Fed. Reg. 29,258, 29,262 (June 7, 1996).
11
Id.
12
Id.
13
Carter, 2013 WL 6183851, at *1; Carter v. Welles-Bowen Realty, Inc., 719 F. Supp. 2d 846, 848-49 (N.D. Ohio 2010).
14
Carter, 2013 WL 6183851, at *1; Carter, 719 F. Supp. 2d at 848-49.
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Safe Harbor Means Safe Harbor: Sixth Circuit Rejects Any Judicial Deference
to HUD’s Sham Affiliated Business Guidelines
anti-kickback and unearned fees provisions as set forth in Section 8 of RESPA, 12 U.S.C. §
2607(a) and (b).
There was no dispute in Carter that WB Title satisfied each of the safe harbor requirements
set forth in the express language of Section 8(c)(4) of RESPA: (1) the plaintiffs were
provided with proper disclosures on HUD-approved forms, which informed them of the
defendants’ affiliated relationship; (2) the plaintiffs were not required to use any particular title
insurance agency; and (3) the only thing of value that the owners of WB Title received from
the relationship was a return on their ownership interest.15 Regardless, the plaintiffs claimed
that WB Title was a “sham” entity under the HUD 10-factor test, and therefore, the
defendants could not benefit from RESPA’s safe harbor. The plaintiffs further asserted that
whether WB Title was a “sham” was an issue that could be resolved on a class basis. 16
In June 2010, soon after denying the plaintiffs’ motion for class certification, 17 the District
Court granted defendants’ motion for summary judgment. In so doing, the District Court held
that HUD’s 10-factor test was unconstitutionally vague because “[i]t provides insufficient
guidance to the regulated public, and it lacks identifiable standards under which authorities
(or private parties) can enforce its provisions in a criminal or civil context.” 18 Because it was
undisputed that the defendants satisfied the three elements actually set forth in the statutory
safe harbor, the District Court determined that there was no issue for trial.19 The plaintiffs
appealed.
Sixth Circuit’s Decision
On appeal, the United States intervened to defend the validity of the 1996 Policy Statement.
While the United States conceded that the Policy Statement was not a binding interpretation
of RESPA, it argued that the Policy Statement contained two distinct parts: the first, which
sets forth the binding interpretation that an ABA be a bona fide provider of settlement
services, and the second, which presents the nonbinding guidance on how to evaluate
whether an ABA is bona fide.20
In affirming the District Court, the Sixth Circuit rejected the arguments of the United States
and held that HUD’s 1996 Policy Statement was not entitled to judicial deference. Because
Congress had already set out the three unambiguous requirements in 12 U.S.C. § 2607(c)(4)
that would exempt profits generated by ABAs from Section 8 scrutiny, the Policy Statement
could not be imposed as a fourth safe harbor requirement.21 In Chevron U.S.A. Inc. v.
Natural Resources Defense Council, Inc., the U.S. Supreme Court held that, where a statute
15
Carter, 2013 WL 6183851, at *1; Carter, 719 F. Supp. 2d at 849.
A number of federal district courts have addressed whether claims arising out of sham ABA allegations can be certified.
See, e.g., Minter v. Wells Fargo Bank, N.A., 274 F.R.D. 525, 550 (D. Md. 2011) (certifying sham ABA claims); Carter v.
Welles-Bowen Realty, Inc., 3:05 CV 7427, 2010 WL 908464, at *3 (N.D. Ohio Mar. 11, 2010) (denying class certification);
Robinson v. Fountainhead Title Grp. Corp., 252 F.R.D. 275, 291 (D. Md. 2008) (granting plaintiff’s motion for class
certification only as to the limited issue of whether defendant was a “sham” ABA or a “bona fide provider of settlement
services”); Pettrey v. Enter. Title Agency, Inc., 241 F.R.D. 268, 284 (N.D. Ohio 2006) (denying motion for class
certification because individual issues regarding plaintiff’s sham ABA claims would predominate over common ones);
Benway v. Res. Real Estate Servs., LLC, 239 F.R.D. 419, 427 (D. Md. 2006) (certifying class).
17
On March 11, 2010, the District Court denied the plaintiffs’ motion for class certification finding that a class action was
not the superior method to resolve the plaintiffs’ claims and that individual issues would predominate. Carter v. WellesBowen Realty, Inc., 3:05 CV 7427, 2010 WL 908464, at *2-*3 (N.D. Ohio Mar. 11, 2010).
18
Carter, 719 F. Supp. 2d at 854.
19
Id. at 855.
20
Carter, 2013 WL 6183851, at *3.
21
Id. at *5.
16
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Safe Harbor Means Safe Harbor: Sixth Circuit Rejects Any Judicial Deference
to HUD’s Sham Affiliated Business Guidelines
expressly or implicitly delegates authority to an agency to implement a provision or fill a
statutory gap, courts must defer to the agency’s interpretation of statutory ambiguity when
Congress has not clearly spoken to the point at issue and the agency’s interpretation is
reasonable and not arbitrary or capricious (“Chevron deference”).22 The Sixth Circuit
rejected Chevron deference for the 1996 Policy Statement, because it is “not a binding
interpretation of [RESPA].” Rather, the Policy Statement merely sets forth factors that HUD
(and now the CFPB) will “consider” when evaluating ABAs and thus is more akin to “nonbinding advice about the agency’s enforcement agenda.”23
The Sixth Circuit further rejected the government’s arguments that the bona fide settlement
service provider requirement could be separated from the actual evaluative factors set forth
in the 1996 Policy Statement. In doing so, the Sixth Circuit stated that the government’s
proposed approach would lead to even more ambiguity, as there would then be no guidance
on what constituted a bona fide provider, a result directly at odds with Chevron. The Sixth
Circuit held that Chevron “encouraged agencies to resolve statutory ambiguities, not to
create new uncertainties.”24 Further, the Court noted that a policy statement “does not speak
with the force of law” and does not warrant Chevron deference.25 In addition, because a
violation of Section 8 of RESPA carries criminal, as well as civil, penalties, the court
functionally applied the “rule of lenity” and concluded that the policy statement does not give
the public “fair warning” of the conduct that violates the statute. 26
Agency interpretations that do not receive Chevron deference may still be “entitled to
respect” under the standards set forth in Skidmore v. Swift & Co., 323 U.S. 134 (1944), “but
only to the extent that those interpretations have the ‘power to persuade.’” 27 For the same
reasons that the Sixth Circuit rejected Chevron deference, it rejected the lesser Skidmore
deference, finding that the “policy statement does not present its multifactor test as the
agency’s interpretation of [RESPA] but only as guidelines that the agency intends to
consider.”28
In short, the Court concluded that Congress created the ABA safe harbor to eliminate
uncertainty regarding whether profits generated by referrals to affiliated companies violate
the statute. The safe harbor “reflects this objective.” RESPA’s statutory safe harbor for
ABAs “is not very safe if a federal agency may add a new requirement to it through a policy
statement,” and that the 1996 Policy Statement’s “multi-factor inquiry … would reintroduce
much of the uncertainty the safe harbor was meant to eliminate.”29
Carter’s Impact
The Sixth Circuit’s decision is significant because it represents a marked change in how
courts have treated the use of the 1996 Policy Statement in construing sham ABA claims.
Until the District Court in Carter issued its decision, district courts had unanimously held that
22
467 U.S. 837, 842-44 (1984); see also United States v. Mead Corp., 533 U.S. 218, 229 (2001).
Carter, 2013 WL 6183851, at *3.
24
Id. at *4.
25
Id. (citing Christensen v. Harris County, 529 U.S. 576, 587 (2000)).
26
Id. (“The government’s duty of fair notice precludes us from supplementing the safeguards expressed on the face of the
statute with a multi-factor blend that the statute nowhere mentions.”). Judge Sutton in his concurrence provides an indepth analysis of the rule of lenity and its interaction with Chevron and Skidmore deference. See id. at *6-*13.
27
Christensen v. Harris County, 529 U.S. 576, 587 (2000).
28
Carter, 2013 WL 6183851, at *4.
29
Id. at *3, *6.
23
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Safe Harbor Means Safe Harbor: Sixth Circuit Rejects Any Judicial Deference
to HUD’s Sham Affiliated Business Guidelines
the Policy Statement created a fourth safe harbor requirement. 30 While the Sixth Circuit’s
decision is only binding on federal district courts in Ohio, Michigan, Kentucky, and
Tennessee, courts in other circuits are likely to take a closer look at the 1996 Policy
Statement and whether it should play any role in the ABA safe harbor analysis. Moreover,
the Carter decision may deter plaintiffs’ attorneys from filing new sham ABA class action
lawsuits when those claims require reliance on the HUD Policy Statement.
Carter is also significant in that it adheres to a narrow reading of RESPA that follows the
plain language of the statute, an approach consistent with the U.S. Supreme Court’s recent
Section 8(b) decision in Freeman v. Quicken Loans, Inc.31 Like the U.S. Supreme Court, the
Sixth Circuit rejected attempts to add requirements (and potential liability) not set forth on the
face of the statutory language.
Perhaps the most interesting impact from the Carter decision will be the CFPB’s response.
To date, the CFPB has clearly demonstrated its intent to continue HUD’s reliance on the
1996 Policy Statement in its enforcement strategy. As set forth in a prior client alert,
between 2003 and July 2011, HUD announced 13 settlement agreements with providers who
were alleged to have operated or invested in “sham” ABAs. 32 Each of these agreements
resulted from HUD’s application of its sham ABA guidelines to the entities involved. On May
17, 2013, the CFPB announced a consent order with Paul Taylor Homes Limited; Paul
Taylor Corp.; the general partner of the home builder; and Paul Taylor, the president of Paul
Taylor Corp., for allegedly accepting fees in return for the referral of settlement service
business to two affiliated mortgage companies partially owned by Paul Taylor.33 In Taylor,
the CFPB concluded that the ABA at issue was a sham, rather than a bona fide settlement
service provider.34
The CFPB also recently filed a new complaint in the Western District of Kentucky against
Borders & Borders, PLC, a law firm, and several of its principals, alleging that the defendants
set up numerous title joint ventures that did not qualify for Section 8’s safe harbor. 35 As
Kentucky is within the Sixth Circuit, the case may be impacted by Carter.
Whether the Carter decision will have lasting impact will depend on how it affects the CFPB’s
RESPA Section 8 enforcement initiatives, the outcome of any petitions for further review
before the Sixth Circuit or to the U.S. Supreme Court, and whether it influences other judicial
decisions around the country—all of which remains to be seen.36
30
See, e.g., Edwards v. First Am. Corp., CV 07-03796 SJO FFMX, 2012 WL 6963359, at *7 n.4 (C.D. Cal. Nov. 30, 2012);
Minter v. Wells Fargo Bank, N.A., 274 F.R.D. 525, 542 (D. Md. 2011); Toldy v. Fifth Third Mortgage Co., 721 F. Supp. 2d
696, 702 (N.D. Ohio 2010); Wyman v. Park View Fed. Sav. Bank, 1:09 CV 1851, 2010 WL 420032, at *4 (N.D. Ohio Jan.
29, 2010); Robinson v. Fountainhead Title Grp. Corp., 252 F.R.D. 275, 285 (D. Md. 2008); Pettrey v. Enter. Title Agency,
Inc., 241 F.R.D. 268, 274 (N.D. Ohio 2006); Gardner v. First Am. Title Ins. Co., 296 F. Supp. 2d 1011, 1017 (D. Minn.
2003). In Minter, sham ABA class action claims were tried to a jury in 2013. The jury returned a verdict in the defendants’
favor on all counts. We believe this is the only trial that has addressed claims arising from HUD’s 1996 Policy Statement.
31
See note 3 above.
32
Holly Spencer Bunting, CFPB’s RESPA Radar Pointed at Affiliated Business Arrangements (June 17, 2013), available
at http://www.klgates.com/files/Publication/cb517346-d1c8-44a5-85e24cdf800e31c3/Presentation/PublicationAttachment/a288b48f-a911-4ca0-b208-50ba9cea5a57/Client_Alert_6172013.pdf.
33
In re Paul Taylor, No. 2013-CFPB-0001, Consent Order (May 17, 2013).
34
Id. at para. 26.
35
CFPB v. Borders & Borders, PLC, No. 3:13-mc-99999, Doc. No. 1251 (W.D. Ky. Oct. 24, 2013).
36
The deadline to seek additional review before the Sixth Circuit is December 11, 2013.
5
Safe Harbor Means Safe Harbor: Sixth Circuit Rejects Any Judicial Deference
to HUD’s Sham Affiliated Business Guidelines
Authors:
Phillip L. Schulman
phillip.schulman@klgates.com
+1.202.778.9027
Irene C. Freidel
irene.freidel@klgates.com
+1.617.951.9154
David D. Christensen
david.christensen@klgates.com
+1.617.951.9077
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