The policy statement that interprets when an affiliated business arrangement (AfBA) qualifies for a safe harbor from the referral fee prohibition of the Real Estate Settlement Procedure Act (RESPA) is not entitled to deference, the U.S. Court of Appeals for the Sixth Circuit has ruled.

In Carter v. Welles-Bowen Realty, Inc., the Sixth Circuit affirmed the district court’s refusal to follow the policy statement issued by the U.S. Department of Housing and Urban Development (HUD). The plaintiffs claimed that the defendants fell outside the safe harbor’s coverage despite fulfilling the RESPA conditions because they failed to satisfy a separate condition contained in the policy statement. The plaintiffs were home buyers whose real estate agent had referred them to a title company jointly owned by the real estate agent’s owners and a second title company. The title company receiving the referral had contracted out some of the plaintiffs’ title work to the second title company.

RESPA Section 8 establishes three conditions that an AfBA must satisfy to qualify for the safe harbor. In 1992, HUD (whose RESPA rulemaking authority was transferred to the Consumer Financial Protection Bureau) issued an AfBA policy statement (then referred to as “controlled business arrangements”). The policy statement provided that to qualify for the safe harbor, in addition to satisfying the three statutory conditions, an AfBA had to be a “bona fide provider of settlement services.” In addition, the policy statement included 10 factors that HUD would consider in determining whether an entity was such a “bona fide provider.”

In Carter, it was undisputed that the relationship satisfied the three statutory conditions for the AfBA safe harbor: the real estate agent had provided the requisite AfBA disclosure to the plaintiffs, the plaintiffs were free to reject the referral, and the real estate agent and its owners had not received anything of value apart from a return on their ownership interests. The plaintiffs nevertheless argued that because the title company to which they had been referred did not satisfy the policy statement’s 10-factor test and therefore was not a “bona fide settlement service provider,” the profits earned by that title company’s owners were prohibited referral fees.

The Sixth Circuit rejected the argument made by the federal government, which had intervened in the appeal, that the policy statement was entitled to Chevron deference. According to the Sixth Circuit, the policy statement did not carry the “force of law” necessary for such deference and, as referral fee violations carry criminal penalties, did not provide “fair notice” of what conduct would constitute a crime. The court held that because the defendants had satisfied the three statutory conditions, the AfBA at issue qualified for the safe harbor regardless of whether the title company receiving the referrals satisfied the policy statement’s added requirement for it to be a “bona fide provider of settlement services.”

Last year, in Freeman, et al. v. Quicken Loans, Inc., the U.S. Supreme Court refused to follow a HUD policy statement interpreting the prohibition on unearned fees in RESPA Section 8(b). The court labeled HUD’s interpretation a “palpable overreach” that went “‘beyond the meaning that the statute can bear.’”

Ballard Spahr's Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. It is part of the firm's Consumer Financial Services Group, which is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

For more information, please contact Mortgage Banking Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or, or Mortgage Banking Practice Leader John D. Socknat at 202.661.2253 or

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