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Court Disregards HUD Policy Statement

Read the full decision: Carter v. Welles-Bowen Realty

In Carter v. Welles-Bowen, a federal appellate court affirmed the district court’s opinion that a HUD policy statement was not entitled to consideration in determining whether the defendant real estate companies (“Companies”) had violated the Real Estate Settlement Procedures Act (“RESPA”).

The defendant Companies in this case were a real estate brokerage (“Brokerage”) and two title companies (“Title Companies”).  Both Title Companies were affiliated with the Brokerage through mutual ownership.  Plaintiff homebuyers (“Homebuyers”) engaged Brokerage when purchasing their homes in 2005, and Brokerage referred Homebuyers to the Title Companies to complete the associated title work.

Homebuyers objected to this referral as a violation of RESPA, which generally prohibits settlement companies from paying referral fees to brokers and punishes violators with up to a year in prison and monetary damages.  However, RESPA sets forth a notable “safe harbor” exception to this law.  Referral fees between affiliated businesses are permissible when the following three factors are met:  (1) the person making the referral discloses the arrangement to the client; (2) the client remains free to reject the referral; and (3) the person making the referral does not receive any “thing of value” from the arrangement other than a return on the ownership interest or franchise arrangement.

Homebuyers conceded that Companies met all three factors of the RESPA safe harbor exception.  Nonetheless, they sued Companies based on a 1996 HUD policy statement that purported to set forth a fourth factor to the RESPA exemption:  that the entity receiving the referral “must be a … bona fide provider of settlement services.”  The HUD statement listed ten factors to consider when separating “bona fide” providers from “shams,” including whether the provider had “its own employees” and “sufficient initial capital and net worth,” and whether the affiliated businesses shared offices.

In affirming the lower court’s grant of summary judgment in favor of Companies, the appellate court roundly rejected application of HUD’s “fourth factor” test, holding that the policy statement amounted to “non-binding advice about the agency’s enforcement agenda.”  “A statutory safe harbor,” concluded the court, “is not very safe if a federal agency may add a new requirement to it through a policy statement.”

Carter v. Welles-Bowen Realty, Inc.  No. 10-3922, 2013 WL 6183851 (6th Cir. Nov. 27, 2013). [This is a citation to a Westlaw document. Westlaw is a subscription, online legal research service. If an official reporter citation should become available for this case, the citation will be updated to reflect this information].

Editor’s Note: The National Association of REALTORS® participated in an Amici Curiae brief in support of defendant Companies in this appeal.  The full text of the brief can be found at:   http://www.a-e-a.org/userfiles/file/Carter_v_Welles-Bowen.pdf

Second Editor’s Note:  For additional reading on the courts’ rejection of HUD policies interpreting RESPA, see Freeman v. Quicken Loans.