The U.S. Court of Appeals for the Sixth Circuit, which covers Michigan, Ohio, Kentucky and Tennessee, held late last month that real estate settlement service providers whose relationships satisfied the Real Estate Settlement Procedures Act‘s (“RESPA’s”) statutory three-part test for affiliated business arrangements (“AfBAs”) were not also required to satisfy any tests set forth in HUD’s Statement of Policy 1996-2 Regarding Sham Controlled Business Arrangements (the “Policy Statement”).  That three-part test provides a safe harbor from violation by the AfBA of the anti-kickback prohibition set forth in Section 8 of RESPA if (i) the party referring the AfBA to a consumer provides the consumer with an Affiliated Business Arrangement Disclosure Statement at the time of the referral, (ii) the person making the referral does not require the consumer to use any particular provider of settlement services or business incident thereto, and (iii) the only thing of value that is received from the arrangement (with certain exceptions) is a return on ownership interest or franchise arrangement.

In the case of Carter v. Welles-Bowen Realty, Inc., the Circuit Court considered the Policy Statement, and held that its interpretation of RESPA was not entitled to deference because it was not binding and was too indefinite in its application. In addition, in a thorough and well-reasoned concurring opinion, one of the judges explained that the Rule of Lenity—which requires ambiguities in statutes, such as RESPA, that can bear criminal penalties, to be interpreted in favor of the defendant—prevents HUD from adding substantive requirements to RESPA, even if HUD were to use notice-and-comment rulemaking and issue a more precise rule.

In Carter, a married couple sued their real estate brokerage and title insurance company, and those companies’ affiliated title agency. They had been referred by their real estate brokers to the affiliated title agencies, which in turn had given business to the title insurer (Another consumer’s claims were also joined, against a similar set of affiliated businesses). Notably, the plaintiffs admitted that the defendants, in fact, satisfied the three statutory safe harbor requirements, but they still asserted that the defendant AfBAs did not satisfy the ten factors set forth in the Policy Statement and, accordingly, were not “bona fide” settlement service providers. The district court held that the Policy Statement was invalid, and plaintiffs appealed. The Justice Department intervened in the appeal to argue for the validity of the Policy Statement.

On appeal, the Sixth Circuit rejected plaintiffs’ theory, explaining that the Policy Statement was not entitled to the high degree of deference called for under the United States Supreme Court’s ruling in Chevron v. Natural Resources Defense Council because the Policy Statement’s ten factor test was admittedly not “a binding interpretation of” RESPA.  HUD was further not entitled to a lesser degree of deference owed to an agency position, “in proportion to its persuasiveness” as set forth in the United States Supreme Court’s opinion in Skidmore v. Swift & Co. because the Policy Statement was framed as guidelines for HUD to consider, rather than an interpretation of RESPA, and because HUD did not explain its position persuasively. Since the Policy Statement was admittedly not a binding regulation, and was not entitled to deference, its ten-factor test for bona fides was not part of the safe harbor for AfBAs from Section 8 violations, and the defendants’ putative failure to satisfy those factors were not relevant to whether they satisfied the safe harbor..

While the Sixth Circuit’s opinion remains subject to further appeal, and is not binding in other federal Circuits, the panel’s unanimous opinion (and Judge Sutton’s concurring opinion) are well-written and well-reasoned, and will likely have a significant impact on RESPA enforcement going forward.  Nevertheless, we believe that companies with AfBAs (particularly those that are doing business outside of the Sixth Circuit’s jurisdiction, which covers Michigan, Ohio, Kentucky and Tennessee) should attempt to comply with the Policy Statement’s ten-factor balancing test.  It remains to be seen how the Bureau of Consumer Financial Protection (the “CFPB”)—which now enforces RESPA—and other state and federal regulators may respond to this decision in a supervisory context. In court, however, whether in response to a private civil suit or to an action brought by the CFPB, the Carter opinion is likely to provide a powerful argument in a defendant’s favor.