Court Refuses to Defer to RESPA Statement of Policy Regarding Affiliated Businesses – 6th Circuit Says a Safe Harbor is a Safe Harbor

By: Irene C. Freidel

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 held on November 27, 2013 that HUD’s 1996 policy statement setting forth a so-called “10-factor test” to determine whether an affiliated business arrangement (“ABA”) is bona fide or a sham is not entitled to deference (“1996 Policy Statement”).  See Carter v. Welles-Bowen Realty, Inc., No. 10-3922 (6th Cir. Nov. 27, 2013). The Real Estate Settlement Procedures Act (“RESPA”) prohibits the payment of a fee in exchange for a referral of settlement service business. Profits generated by ABAs are exempt from this prohibition if the ABA meets the three prerequisites in RESPA’s safe harbor. Even though the plaintiff did not dispute that the ABA in Carter satisfied the three safe harbor requirements, they urged the district court to hold that the ABA nonetheless fell outside the safe harbor because, they claimed, the ABA did not satisfy a fourth requirement, namely HUD’s 1996 Policy Statement. While several district courts have otherwise concluded that an ABA must satisfy HUD’s policy statement in order to fall within the safe harbor, the theory was rejected by district judge Jack Zouhary in the Carter case.

In affirming Judge Zouhary, the Sixth Circuit rejected arguments presented by the United States, as intervenor, and held that the policy statement was not entitled to the deference due an agency rulemaking. The Sixth Circuit held that although the policy statement sets forth agency guidelines for consideration when enforcing the act, it does not purport to be a controlling interpretation of RESPA. As such, the policy statement’s 10-factor test consists of only “non-binding advice about the agency’s enforcement agenda.” Further, the Court noted that a policy statement “does not speak with the force of law” and thus not warrant Chevron-style deference. In addition, because a violation of Section 8(a) of RESPA carries criminal, as well as civil, penalties, the court applied the “rule of lenity” and held that the policy statement does not give the public “fair warning” of the conduct that violates the statute. In the end, 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.” The policy statement, which set forth a new approach to considering whether an entity is bona fide or a sham, “would reintroduce much of the uncertainty the safe harbor was meant to eliminate.”

It remains to be seen how, if at all, the Sixth Circuit’s decision will affect the CFPB’s enforcement approach to affiliated business arrangements or influence other courts’ views, outside of the Sixth Circuit, regarding the impact of the policy statement in civil lawsuits attacking ABAs as sham entities.

The K&L Gates Consumer Financial Services Group is preparing a client alert to address this decision in greater detail. See the group’s Publications here.


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