6th_circuitU.S. Court of Appeals Issues Ruling in Carter:

Shortly before everyone left for their Thanksgiving holiday, the United States Sixth Circuit Court of Appeals in Cincinnati, Ohio issued a decision in the closely-watched Carter v. Welles Bowen Title, et al., case.

The Carter case centered on the issue of whether the 1996-2 HUD Policy Statement, otherwise known as the Ten Part Test, was unconstitutional because it was too vague to be enforced.

The Ten Part Test was created as a policy statement by HUD to help its enforcement of RESPA’s prohibition against sham affiliated business arrangements. In other words, under RESPA, any controlled business arrangement must satisfy the basic requiremetns of disclosure, non-restricted consumer choice and investment tied to ownership interests in order to qualify as a valid entity. Anything else would not be considered a bona fide provider of settlement services.

Carter sued an Ohio controlled business arrangement consisting of a real estate firm and title company which was co-owned through a holding company also co-owned by Chicago Title Insurance Company, a well-known title insurance underwriter. The main allegation for the Plaintiff in the case was that the title agency and its ownership structure was nothing more than a sham conduit for illegal referral payments in violation of RESPA Section 8 and the 1996-2 HUD Policy Statement.

The case has had a long procedural history winding its way through to the Court of Appeals on two separate occasions. The most recent of which focused on a lower court ruling that the Ten Part Test was unconstitutional as it was void for vagueness and thereby unenforceable.

This prior ruling was important because in states like Ohio, the Ohio Department of Insurance (ODI) has created administrative rules such as OAC 3901-7-04 that incorporates the 1996-2 HUD Policy Statement as its impetus for governing controlled business arrangements. If that impetus is now unconstitutional, what then becomes of Ohio’s administrative code provision?  In OAITA’s lawsuit against the ODI, just such an argument has been raised and that action has been delayed by the wait for clarity from the Carter decision. Other states who have adopted the same stance may be hesitant to proceed in that direction now.

As the Court of Appeals concludes in the attached decision, the Sixth Circuit held that the Ten Part Test is, in fact, unconstitutional, but for different reasons than the lower court held. The lower court said the test was unconstitutional because it was “void for vagueness.” The Sixth Circuit has now concluded that the policy statement is unconstitutional because a it is not entitled to consideration when a statute (i.e. RESPA) does not provide the present authority to permit an agency such as HUD to add additional requirements to the stated law. In other words, an administrative agency is only permitted to interpret the written law, not create new law or new requirements.

What Next?

The Carter decision may be appealed to the United States Supreme Court. If so, you should expect a significant time delay as that issue is settled. If it is not, the question remains as to what the newly empaneled Consumer Financial Protection Bureau (CFPB) will do with enforcement of sham affiliated business arrangements. Without the policy statement to help guide the construction of CBAs, how will a CBA know whether their arrangement passes muster under the new CFPB regime? While proponents of CBAs such as RESPRO and the national title underwriters will likely herald the death of the Ten Part Test, their collective joy may be tempered by the reality that CBA compliance may be even tougher than ever as attorneys and business prospects haggle over what is a legitimate settlement service versus one that it is not.

NAILTA will continue to update you on this case and other important RESPA-related litigation.

A copy of the Carter decision can be found here.