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Recent Decisions Construe Section 8 of RESPA
The Real Estate Settlement Procedures Act [RESPA],12 U.S.C. §§2601 et seq., governs one-to-four family residential real estate closing procedures where the property is sold or refinanced, or where a mortgage is secured by a subordinate lien, and financing is provided by an institutional lender. Section 8 of RESPA, 12 U.S.C. §2607, regulates certain abuses (or perceived abuses) by prohibiting kickbacks, unearned fees and certain arrangements tied to the referral of business.

            RESPA Section 8 prohibits (in general) any person, in a residential real estate transaction which involves mortgage financing, from giving or receiving anything of value pursuant to an agreement or understanding for the referral of any settlement service. It further prohibits related activities such as fee-splitting, overcharges, etc. The phrase settlement service (as used above) is not limited to closing-related services (as is customary in South Jersey, for example), but includes most residential real estate-related activities, such title insurance, mortgages, credit reports, document preparation, hazard, flood and homeowners’ insurance, and any other services which a provider requires a borrower or seller to pay for in connection with a real estate transaction.Section 8 has been a frequent source of RESPA-related litigation.

            RESPA was formerly enforced by HUD, but is now enforced by the CFPB. (See preceding article.) In addition, consumers who have been aggrieved by alleged RESPA violations sometimes file suits (often as part of a class action) against settlement service providers seeking monetary damages and other relief. One such suit, decided by the United States Supreme Court, is Freeman v. Quicken Loans, 566 U.S. ___, 132 S. Ct. 2034 (2012) wherein several borrowers filed suit against their lender. They alleged that they were charged loan origination and processing fees for which no services were provided in return, and that this constituted a violation of. RESPA §8.
            In response, the defendant lender argued that because the fees were not split with another party, no violation of RESPA §8 could have occurred. The United States Supreme Court, in a unanimous opinion by Justice Scalia, agreed with the lender. In sum, the court held that  since a settlement service provider cannot share or split an unearned fee with itself, such fees do not contravene §8 of RESPASee Title Talk No. 81 (Summer 2012) for more information.
            In Edwards v. First American, 610 F 3d 514 (9th Cir 2010), the plaintiffs alleged that an unlawful referral arrangement (in violation of Section 8) occurs where a title insurer holds an
ownership interest in a title agency, and the agent has an exclusive issuing-agency contract with the insurer. The Ninth Circuit Court of Appeals held that plaintiffs had standing to bring     
suit under RESPA, even though they did not claim to have been overcharged. The United States Supreme Court originally granted the title insurer’s petition for certiorari (i.e., it agreed to hear the appeal), but later decided against doing so. First American v. Edwards, __ U.S.__, 132 S. Ct. 2536 (2012) (cert. dism’d as improvidently granted).  
           More recently, a federal Sixth Circuit decision discussed the guidelines for  affiliated business arrangements [AfBAs] originally
created by HUD. A typical AfBA may be a title agency which is a joint venture between a real estate broker and an existing title agency. The broker may lawfully refer its customers to the AfBA entity, but only if certain rules are followed. The statute itself contains three criteria which a joint venture or AfBA must meet in order to be considered RESPA-compliant (often collectively referred to as the safe harbor): (a) the AfBA relationship must be disclosed to consumers; (b) consumers may not be required to use the AfBA; and (c) the AfBA owners may be compensated only in proportion with their respective ownership interests.
In an effort to address concerns about so-called sham AfBAs, which superficially meet the safe harbor requirements, but are in reality vehicles created to skirt the law, HUD had published a “Policy Statement” in 2001 containing 10 additional criteria with which AfBAs were expected to comply. These are commonly known as the joint venture (or AfBA) guidelines, and include the following. Does the entity (a) have sufficient capital and net worth? (b) manage its own affairs? (c) have its own office space and employees? (d) provide substantial services and assume risk? etc.
Consistent with the last criterion, the HUD Policy Statement included the concept of core services: (a) evaluation of title search to determine insurability; (b) preparation and issuance of the title commitment; (c) clearance of title objections; (d) preparation and issuance of the title insurance policy; and (e) conducting the closing or settlement (where it is customary to do so). Thus, in the view of HUD (and now presumably the CFPB), an AfBA must not only meet the 3-part statutory safe harbor test, but must also adhere to its regulatory guidelines.  

             In Carter v. Welles-Bowen Realty, 736 F 3d 722 (6th Cir. 2013), the AfBA consisted of a joint venture between a real estate agency and a title company. Plaintiffs alleged that even though the AfBA met the 3 statutory safe harbor requirements, it failed to comply with HUD’s additional guidelines.

         The court held that the Policy Statement went beyond the scope of the statute by, in effect, adding a fourth safe harbor requirement; i.e., that the HUD AfBA guidelines be followed. Administrative agencies may of course create regulations which are within the scope of authority granted to them by statute. But actions which go beyond the limits of an agency’s statutory authority are ultra vires, and are hence invalid. Thus, the suit was dismissed.

        Does the Sixth Circuit’s decision in Carter v. Welles-Bowen mean that the joint venture guidelines may now be ignored? Prudence suggests otherwise. First, it is possible that the case will be appealed by plaintiffs to the United States Supreme Court. Second, other federal circuits (such as the Third Circuit, which includes New Jersey) may decline to follow the holding. Third, The CFPB may choose to initiate proceedings against so-called sham AfBAs, arguing that the decision applies only to suits brought by consumers, and not to governmental enforcement actions. In sum, settlement service providers should continue to proceed with caution in the creation and operation of joint ventures and AfBAs.

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