On the day before Thanksgiving, the Sixth Circuit handed down an important RESPA decision in Carter v. Welles-Bowen, Inc.¹—one that may not have left the Consumer Financial Protection Bureau in a particularly thankful mood. The case is important not only for RESPA and the mortgage finance industry, but also for its impact on administrative law generally, as it offers new reasons to question the deference generally accorded to agency policy statements.

Section 8(a) of the Real Estate Settlement Procedures Act, enacted in 1974 and amended in 1983, prohibits unlawful referral fees, condemning them as “kickbacks.” Among the 1983 amendments is Section 8(c)(4), which creates a safe harbor that allows “affiliated business arrangements” (ABAs), provided that they meet three requirements: (1) the ABA is disclosed to the consumer; (2) the consumer is free to reject the referral to an affiliated business; and (3) there is no referral fee or other “thing of value” paid, other than a return on the ownership interest.

In 1996, the Department of Housing and Urban Development promulgated a Policy Statement to provide “guidance” as to its interpretation of the application of the anti-kickback rules to affiliated business arrangements.² HUD found that Congress intended for RESPA to prohibit “sham” affiliated business arrangements. The Policy Statement set forth 10 factors, such as adequate capitalization, separate office space and employees, advertising for business, and others, that HUD would use to determine whether a particular ABA was a “sham” or “bona fide.” Since issuance of the policy statement, HUD has consistently employed the 10 factor test in its enforcement actions, and in resulting consent orders. In addition, a number of federal district courts have applied the 10 factor test, and, implicitly or explicitly, accorded it deference under Chevron.³ However, no federal appellate court had applied this policy statement or addressed a challenge to the 10 factor test.

In Carter, a putative class of consumers challenged the affiliated business arrangement among a realty company, a title insurance underwriter, and their jointly owned title company, arguing that it failed to meet the 10 factor test. The plaintiffs conceded that the ABA met the three statutory factors of Section 8(c)(4), but argued that it must meet the 10 factor test to avoid condemnation as “sham.” The district court ruled for the defendants, holding the Policy Statement to be “unconstitutionally vague,” since it did not state how many factors must be met or how they should be weighted, and that many factors used undefined or subjective qualifiers such as “substantial” and “reasonable.” The plaintiff consumers appealed, and the Department of Justice intervened on behalf of the government to defend the Policy Statement. The Dodd-Frank Act has since transferred RESPA enforcement authority to the Consumer Financial Protection Bureau, and former HUD attorneys now with the CFPB appeared on the brief with the DOJ.

The Sixth Circuit rejected the government’s argument that HUD’s policy statement was entitled to deference under the Chevron test. The Court observed that Chevron was used as a gap-filler. Here, the Court found no gap to fill: Congress had already created a three factor safe harbor. As the Sixth Circuit explained, a “statutory safe harbor is not very safe if a federal agency may add a new requirement to it through a policy statement.” Using a statutory interpretative approach similar to that recently employed by the Supreme Court,⁴ the Sixth Circuit concluded that Chevron and Skidmore⁵ could not be employed to change the clear statutory mandate.

The Court rejected the DOJ’s argument that congressional intent implicitly required the creation of an additional requirement that a provider of settlement services be “bona fide,” and such status should be determined by a 10 factor test created by HUD. Moreover, the Court questioned how the government could assert that the10 factor test was binding on the courts on one hand, but admit it was not binding on HUD on the other. At argument, the government even admitted that the interpretation of the test could change with successive administrations. In light of this, the Court affirmed the lower court’s determination that the 10 factor test was not legally binding on the courts. Since the consumers and government conceded that the ABAs met the three factor test of RESPA Section 8(c)(4), the defendants were entitled to summary judgment.

Last summer, the CFPB applied the 10 factor test to extract a consent order from a Texas homebuilder it accused of operating a sham ABA. Just last month, CFPB cited each of the now-discredited 10 factors to support its RESPA complaint against a law firm in Kentucky—a state within the Sixth Circuit, where Carter is binding. Although the CFPB cherishes its “new cop on the beat” persona, the Sixth Circuit decision must surely affect its future enforcement strategy. Undoubtedly, financial institutions defending actions founded on agency policy statements will want to consider whether the agency charges can survive Carter.

Finally, in an unusual move, Judge Sutton, who authored the opinion of the Court, submitted his own concurring opinion to offer his thoughts on the interaction of the rule of lenity with Chevron deference. The rule of lenity is generally a rule of statutory construction applied in the criminal law. It holds that where a criminal statute is ambiguous, and capable of two interpretations, preference will be given to the one more lenient to the defendant. Of course, under the Chevron rule, preference is given to the interpretation of the administrative agency, supposedly expert in the field. The judge observed that although the two rules generally operate “comfortably in their own spheres,” when they do come into conflict, the rule of lenity must prevail, as Congress, not agencies, has the ultimate authority to define crimes. This concurring opinion is likely be utilized in future cases where agencies attempt to augment clear statutes that have both civil and criminal dimensions, such as RESPA, with their own enforcement gloss.

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¹Carter v. Welles-Bowen, Inc., __ F.3d __, No. 10-3922 (6th Cir. 2013).
²Statement of Policy 1996-2 Regarding Sham Controlled Business Arrangements, 61 Fed. Reg. 29,258 (1996).
³Chevron U.S.A. v. Natural Resources Defense Council, 462 U.S. 837 (1984).
⁴Freeman v. Quicken Loans, Inc., 132 S.Ct. 2034 (2012) (involving RESPA Section 8(b)).
⁵Skidmore v. Swift & Co., 323 U.S. 134 (1944).