RESPA-Impermissible Charges, Kickbacks, Up-Charges, Etc.

RESPA-Impermissible Charges, Kickbacks, Up-Charges, Etc.

By

Ashley Cook
Ashley L. Cook, P.C.
5950 Berkshire Lane, Suite 200
Dallas, Texas 75225

(214) 760-1533
[email protected]

Presented to
24th Annual Robert C. Sneed Texas Land Title Institute

San Antonio
December 4, 2014

1

Ashley Cook

Principal, Cook Law Firm CEO/President, ZOCCAM
5950 Berkshire Lane, Suite 200 www.zoccam.com
Dallas, Texas 75225
Ph. 214.760.1533
[email protected]

Ashley Cook started in the title business at the age of 15. During high school, she worked as a
receptionist, runner, and marketing assistant for an independent agent. This experience in the title
industry sparked her love for the business. Ashley began her legal career at the firm of Hunter &
Kramer, P.C. where she built her law practice by focusing on the needs of title insurance
companies and real estate brokers. Her legal experience includes commercial litigation, real
estate law, corporate counsel and title insurance underwriting. After four years at Hunter &
Kramer, Ashley began her own law firm. She currently serves as of counsel to several companies
including brokers, underwriters and independent title agents.

Born and raised in Dallas, Ashley attended Southern Methodist University where she received
both her BA and Juris Doctorate degrees. While at SMU law school she was a Zeigler Fellow
Award Recipient and President of the Intellectual Property Club. One of Ashley’s greatest
characteristics is her entrepreneurial spirit, which was revealed during law school when she
started a company designing stemware that was distributed throughout the country in retail
stores, including Neiman Marcus. That spirit continues with her law firm and her newest venture,
Zoccam. Ashley’s entrepreneurial spirit, along with her real estate experience gave her the
insight to recognize a need for technology in the real estate vertical. This led her to invent and
patent the first third party use of remote deposit capture for earnest money and the option fee.

She frequently teaches mandatory continuing education classes and serves on the TLTA
legislative committee. Ashley and her husband, JR, who is also an attorney, reside in Dallas.
They have two children, Taylor and Jack. Ashley enjoys golf, tennis and traveling with her
family.

Connect with her on LinkedIn.

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RESPA-IMPERMISSIBLE CHARGES, KICKBACKS, UP-CHARGES, ETC.
I. Introduction

Originally, The Real Estate Settlement Procedures Act clearly articulated that certain
behaviors were in violation of the act. At the heart of this was the elimination of kickbacks and
referral fees.1 Despite the clarity in the statute, settlement service providers are faced with
uncertainty because of the ever changing interpretation of RESPA.

II. The History of RESPA: From Gecko to Godzilla.
The Real Estate Settlement Procedures Act or RESPA was enacted in 1974 in order to

provide consumers with greater and more timely information on the nature and costs of the
settlement process and to protect them from unnecessarily high settlement charges.2 Congress
sought to eliminate kickbacks or referral fees that increased the cost of settlement services.3

As originally drafted, RESPA was slight and contained two prohibitions regarding settlement
services.

(a) Business referrals

No person shall give and no person shall accept any fee, kickback or other thing
of value pursuant to any agreement or understanding, oral or otherwise, that
business incident to or part of a settlement service involving a federally related
mortgage loan shall be referred to any person.4

(b) Splitting charges

No person shall give and no person shall accept any portion, split, or percentage
of any charge made or received for the rendering of a settlement service in

1 12 U.S.C. 2601(b).
2 Pub. L. 93-533, Dec. 22, 1974, 88 Stat. 1724, as amended, known as the Real Estate Settlement Procedures Act of
1974, codified at 12 U.S.C. 2601.
3 12 U.S.C. 2601(b).
4 12 U.S.C. 2607(a).

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connection with a transaction involving a federally related mortgage loan other
than for services actually performed.5

In its original implementation, it was permissible (1) to pay attorneys for services
actually rendered; (2) for title companies to pay its duly appointed agent for services
actually performed in the issuance of a title policy; (3) for a lender to pay its duly
appointed agent for services performed in making a loan, and (4) it was permissible to
pay to any person a bona fide salary or compensation or other payment for goods of
facilities actually furnished or for services actually performed.6

The Penalties for violating RESPA’s anti-kickback provisions included both civil and
criminal liability.7 This is still true today.

As written, it was not clear if referrals between affiliated settlement service providers
violated RESPA. After much consideration, Congress answered this question through the
Housing Urban/Rural Recovery Act (HURRA). Specifically, RESPA was amended to include
the definition of “controlled business arrangement” and expressly allowed for referrals to be
made between the parties in these controlled business arrangements.8

Controlled business arrangements were exempt from the prohibition against kickbacks
for referrals of such business so long as “(A) at or prior to the time of the referral a disclosure is
made of the existence of such an arrangement to the person being referred and, in connection
with the referral, such person is provided a written estimate of the charge or range of charges
generally made by the provider to which the person is referred, …(B) such person is not required
to use any particular provider of settlement services, and (C) the only thing of value that is
received from the arrangement, other than the payments permitted under this subsection, is a
return on the ownership interest or franchise relationship.”9

On July 21, 2011, the Dodd-Frank Act granted rule-making authority under RESPA to
the Consumer Financial Protection Bureau (CFPB) which is an independent agency of the United

5 12 U.S.C. 2607(b).
6 12 USC 2601 §2(a).
7 Id.; See Also 12 U.S.C. § 2607(d)(1) and 12 U.S.C. § 2607(d)(2), (4).
8 H.R. 1 (98th): Housing and Urban-Rural Recovery Act of 1983; 12 U.S.C. 2602(7)
9 Id. (In 1996, Congress amended RESPA the change “controlled business arrangement to “affiliated business
arrangement.” Pub. L. 104-208, Div. A., Title II § 2103 (c), Sept. 30, 1996).

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States Government.10 All consumer protection functions originally granted to the Secretary of
the Department of Housing and Urban Development (“HUD”) relating to the enforcement of
RESPA transferred to the Bureau.11 The Bureau immediately issued a notice stating that it
would enforce HUD’s RESPA regulations and that, pending further Bureau action, it would
apply HUD’s previously issued official policy statements regarding RESPA.12 Approximately
six months later, CFPB restated HUD’s implementing regulation at 12 CFR Part 1024 (76 Fed.
Reg. 78978)(December 20, 2011) and subsequently issued a final rule to amend Regulation X.
This final rule included substantive and technical changes to the existing regulations.13 Currently,
the two regulatory prohibitions concerning referral fees and charges read as follows:

(b) No referral fees. No person shall give and no person shall accept any fee,
kickback or other thing of value pursuant to any agreement or understanding, oral
or otherwise, that business incident to or part of a settlement service involving a
federally related mortgage loan shall be referred to any person. Any referral of a
settlement service is not a compensable service, except as set forth in §
3500.14(g)(1). A company may not pay any other company or the employees of
any other company for the referral of settlement service business.14

(c) No split of charges except for actual services performed. No person shall give
and no person shall accept any portion, split, or percentage of any charge made or
received for the rendering of a settlement service in connection with a transaction
involving a federally related mortgage loan other than for services actually
performed. A charge by a person for which no or nominal services are performed
or for which duplicative fees are charged is an unearned fee and violates this
section. The source of the payment does not determine whether or not a service is
compensable. Nor may the prohibitions of this part be avoided by creating an
arrangement wherein the purchaser of services splits the fee.15

10 Dodd-Frank Act Secs. 1002(12)(M), 1024(b)-(c), and 1025(b)-(c); 1053; 12 U.S.C. 5481(12)(M).
11 Section 1061(b)(7) of the CFPA, 12 U.S.C. §5581(b)(7).
12 76 Fed. Reg. 43570-43571.
13 78 Fed. REg. 44686, July 24, 2013
14 24 CFR 2500.14
15 24 CFR 2500.14

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Section 8 of RESPA permits:
(i) A payment to an attorney at law for services actually rendered;
(ii) A payment by a title company to its duly appointed agent for services actually
performed in the issuance of a policy of title insurance;
(iii) A payment by a lender to its duly appointed agent or contractor for services
actually performed in the origination, processing, or funding of a loan;
(iv) A payment to any person of a bona fide salary or compensation or other
payment for goods or facilities actually furnished or for services actually
performed;
(v) A payment pursuant to cooperative brokerage and referral arrangements or
agreements between real estate agents and real estate brokers. (The statutory
exemption restated in this paragraph refers only to fee divisions within real estate
brokerage arrangements when all parties are acting in a real estate brokerage
capacity, and has no applicability to any fee arrangements between real estate
brokers and mortgage brokers or between mortgage brokers.);
(vi) Normal promotional and educational activities that are not conditioned on the
referral of business and that do not involve the defraying of expenses that
otherwise would be incurred by persons in a position to refer settlement services
or business incident thereto; or
(vii) An employer's payment to its own employees for any referral activities.16

In light of the new regulations and CFPB’s enforcement thereof, many questions exist
about the scope of RESPA and what is and is not permissible. As evidenced by the enforcement
of RESPA, the scope appears to be much larger than originally drafted. In recent years, CFPB
has attempted to expand this scope, despite several rulings swinging the pendulum back to the
strict construction approach.

16 24 CFR 2500.14

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III. Does the Safe Harbor for ABAs include a Fourth Factor?

Kickbacks for referrals are not permissible under RESPA, but with the express inclusion
of affiliated business arrangements (ABA), it was thought to be clear that such arrangements
would be shielded from Section 8 scrutiny if three requirements were met: (1) disclosure of the
affiliation is made to the consumer; (2) the consumer is not required to use the referred ABA;
and (3) payments to the ABA owners are not based on the number of referrals, but instead based
on a return on ownership.17

In 1996, the United States Department of Housing and Urban Development (HUD)
issued a policy statement concerning affiliated business arrangements as they relate to RESPA’s
safe harbor.18 According to HUD, even if an ABA met the three prong requirement for the
statutory safe harbor, the arrangement would still constitute a violation of RESPA’s anti-
kickback prohibition if HUD determined (on a case-by-case basis) that the entity receiving
referrals was not a “bona fide” provider of settlement services.19 A 10-Factor Test was set forth
so that HUD could determine “whether a controlled business arrangement is a sham under the
Real Estate Settlement Procedures Act (RESPA) or whether it constitutes a bona fide provider of
settlement services.”20

The ten factors are as follows:

1. Does the new entity have sufficient initial capital and net
worth, typical in the industry, to conduct the settlement service
business for which it was created? Or is it undercapitalized to
do the work it purports to provide?

2. Is the new entity staffed with its own employees to perform the
services it provides? Or does the new entity have “loaned”
employees of one of the parent providers?

17 12 U.S.C. § 2607(c)(4).
18 Statement of Policy 1996-2 Regarding Sham Controlled Business Arrangements, 61 Fed. Reg. 29,258 (1996).
19 Id.
20 Id.

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3. Does the new entity manage its own business affairs? Or is an
entity that helped create the new entity running the new entity
for the parent provider making the referrals?

4. Does the new entity have an office for business which is
separate from one of the parent providers? If the new entity is
located at the same business address as one of the parent
providers, does the new entity pay a general market value rent
for the facilities actually furnished?

5. Is the new entity providing substantial services, i.e., the
essential functions of the real estate settlement service, for
which the entity receives a fee? Does it incur the risks and
receive the rewards of any comparable enterprise operating in
the new market place?

6. Does the new entity perform all of the substantial services
itself? Or does it contract out part of the work? If so, how much
of the work is contracted out?

7. If the new entity contracts out some of its essential functions,
does it contract services from an independent third party? Or
are the services contracted from a parent, affiliated provider or
an entity that helped create the controlled entity? If the new
entity contracts out work to a parent, affiliated provider or an
entity that helped create it, does the new entity provide any
functions that are of value to the settlement process?

8. If the new entity contracts out work to another party, is the
party performing any contracted services receiving a payment
for services or facilities provided that bears a reasonable
relationship to the value of the services or goods received? Or
is the contractor providing services or goods at a charge that
the new entity is receiving a “thing of value” for referring
settlement service business to the party performing the service?

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9. Is the new entity actively competing in the market place for
business? Does the new entity receive or attempt to obtain
business from settlement service providers other than one of
the settlement service providers that created the new entity?

10. Is the new entity sending business exclusively to one of the
settlement service providers that created it (such as the title
application for a title policy to a title insurance underwriter or a
loan package to a lender)? Or does the new entity send
business to a number of different entities, which may include
one of the providers that created it?21

HUD took the position that a party could violate RESPA regardless of their compliance
with the three requirements of the statutory safe harbor. CFPB, consistent with its announcement
to follow HUD’s policies, has been using the 10-Factor Test to pursue enforcement actions
against settlement service providers. Recently, several courts and defendants have successfully
challenged the 10-Factor Test. The United States Court of Appeals for the Sixth Circuit aptly
stated, “A statutory safe harbor is not very safe if a federal agency may add a new requirement to
it through a policy statement.”22

The most notable case to date was decided thirteen years after the addition by HUD of the
fourth requirement (Bona Fides Test). The Sixth Circuit in Carter v. Welles-Bowen Realty, held
that this test was unconstitutional.23 The plaintiffs’ alleged that the Title Agency in which they
closed performed few substantive services and was a shell company designed to funnel referral
fees between two companies.24 The plaintiffs filed a class action asserting that the profits
generated by the Title Agent, as an affiliated business arrangement, violated the anti-kickback
and unearned fees provisions in Section 8 of RESPA, 12 U.S.C. §2607(a) and (b).25 There was
no dispute that the Title Agent satisfied each of the safe harbor requirements set forth in Section

21 61 Fed. Reg. 29258 at 29262.

22 Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722 (6th Cir. Ohio 2013).
23 Id.
24 Carter v. Welles-Bowen Realty, Inc., 719 F. Supp. 2d 846, 848-49 (N.D. Ohio 2010).
25 Id.

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8(c)(4) of RESPA.26 The plaintiffs claimed that the Title Agent was a “sham” entity under the
HUD 10-Factor test, and therefore, could not benefit from RESPA’s safe harbor.27

The Defendant filed a motion for summary judgment which was granted by the District
Court on the basis that the test was unconstitutionally vague. The Plaintiff appealed and the
United States government intervened to defend their Policy Statement and 10-Factor Test.28
Specifically, they argued that the policy was not unconstitutionally vague and that the policy
statement is entitled to deference.29 The Sixth Circuit in the first sentence of its opinion stated,
“Under the Real Estate Settlement Procedures Act, a title services company may not pay a real
estate agent a fee in exchange for a referral. Exempted from this prohibition are “affiliated
business arrangements.”30 The Court held that the policy statement is not binding and is not
entitled to Chevron deference.31

Chevron, a unanimous opinion written by Justice Stevens, articulates the predominant
judicial paradigm for review of agency interpretations of statutes and regulations.32 The Chevron
approach to review an agency’s statutory interpretation is a two part test. First, the Court inquires
into whether Congress has directly spoken to the precise question at issue. If it is determined that
Congress has done so clearly, then the Court “must give effect to the unambiguously expressed
intent of Congress.33 If the statute is silent or ambiguous with respect to the specific question, a
court is to move onto step two. At step two, Chevron endorses judicial deference to the agency’s
statutory interpretation. The role of a court in such instances is to defer to the agency’s statutory
interpretation, giving the agency’s “controlling weight unless they are arbitrary, capricious, or
manifestly contrary to the statute.”34

26 Id.
27 Id.
28 Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722 (6th Cir. Ohio 2013).
29 Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722 (6th Cir. Ohio 2013).
30 Id.
31 Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842.
32 In Chevron, the Supreme Court upheld the Environmental Protection Agency’s reasonable interpretation of the
term “stationary sources” in the Clean Air Act Amendments of 1977. (Chevron U.S.A. Inc. v. Natural Resources
Defense Council, Inc., 467 U.S. 837, 842).
33 Id. At 843.
34 Id. At 844.

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In Carter, the Court found the statute to be clear and not deserving of Chevron deference
or Skidmore consideration.35 “An arrangement qualifies for the safe harbor if it meets three
conditions: (1) The person making the referral must disclose the arrangement to the client; (2)
the client must remain free to reject the referral; and (3) the person making the referral cannot
receive any “thing of value from the arrangement” other than “a return on ownership interest or
franchise relationship.”36 Chevron deference is only contemplated when an agency offers a
binding interpretation of a statute that it administers. Here, the Court reasoned that the statement
was not binding because the statement informs the public that the Department plans to
“consider” these factors when separating bona fide providers from shams.

The Government attempted to overcome this argument by clarifying that the policy
contains two parts. The first half announces the Department’s binding view that only bona fide
providers of settlement service providers qualify for the safe harbor and the second half presents
the non-binding advice about how to separate genuine providers from shams. It is the first half
that the Government claims is entitled to deference.

The Court was unmoved by this argument. First, the Court contended that the statute
already contains the three conditions that protects buyers against ABAs with sham providers.
Chevron deference, the Court states, is to encourage agencies to resolve statutory ambiguities,
not to create new uncertainties.37

Second, a single statute with civil and criminal applications receives a single
interpretation.38 Fair notice, the Court states, is the government’s duty and precludes
supplementation to the safeguards expressed on the face of the statute with a multi-factor blend
that the statute nowhere mentions.39

The Court recognized that the most far reaching argument was made by the buyer’s based
on a textual hook found hidden in a dependent relative clause in the Act’s definition section.40

35 Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722 (6th Cir. Ohio 2013);.
36 Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722 (6th Cir. Ohio 2013) citing 2607(c)(4).
37 Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722 (6th Cir. Ohio 2013)
38 Carter v. Welles-Bowen citing Leocal v. Ashcroft, 543 U.S. 1, 11n.8 (2004); United States v. Thompson/Center
Arms Co., 504 U.S. 505, 518 n. 10 (1992)
39 Id.
40 Id.

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According to the buyers, the phrase “provider of settlement services” found in the definition of
“affiliated business arrangement” means “bona fide provider of settlement services”, and
whether a provider qualifies as a bona fide turns on the factors identified in the policy
statement.41

To this the Court pointed to the fact that the Act uses the word “bona fide” in other
provisions and not in this one. In their final plea, the buyer’s argued that the Court’s
interpretation frustrates the Act’s purpose of prohibiting referral fees. The Court responded by
stating that safe harbor’s purpose was to create a safe harbor and that the “statute’s precision in
defining the boundaries of this exception reflects this objective.”42 Carter’s impact will be
exhibited in outcome of Consumer Financial Protection Bureau v. Borders & Borders, et. al.,
which was filed one month before the Sixth Circuit’s ruling.43

On October 24, 2013, CFPB filed suit for violations of Section 8 against Border &
Borders, et. al. in the United States District Court, Western District of Kentucky.44 Specifically,
the Government alleged that Defendants “violated RESPA by arranging for the giving of, and
giving kickbacks in exchange for referrals of customers for real estate settlement services
involving federally related mortgage loans.45 The kickbacks –paid to owners and managers of
local real estate and mortgage brokerage companies who referred business to Borders & Borders,
PLC – were disguised as profit distributions made by title insurance companies created and
operated by the Defendants and jointly owned by the referring entities.”46

The Bureau’s Complaint uses the Bona Fides test to allege that the title joint venturers
were shams. Additionally, CFPB alleged that the Disclosure for Affiliated Businesses failed to
disclose the ownership percentages, failed to include a customer acknowledgement section, used

41 Id.
42 Id.
43 Consumer Financial Protection Bureau v. Borders & Borders, et al. United States District Court Western District of
Kentucky, Louisville Division; Case No. 3:13 CV-1047-H
44 HUD investigated Borders before February 23, 2011. Borders complied with HUD’s investigation and provided
the agency with full explanations concerning the Title LLCs as well as documents and correspondence spanning
back as far as 2006. When Borders learned that HUD had questions concerning the affiliated business
arrangements, they ceased operation of the Title LLCs until compliance could be confirmed. This was in early 2011.
After submitting their full explanation to HUD in April 2011, with the assistance of former HUD enforcement
counsel, the Borders heard nothing from the government for over one year.
45 Id.
46 Id. Paragraph 2.

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“modified language and typography” from the model form set forth in Appendix D and the
Disclosure was provided at closing and not at the time of the referral.47

“The distributions …are not subject to the “safe harbor” for affiliated business
arrangements in 12 U.S.C. § 2607(c)(4) –which authorizes certain referrals to
providers of settlement services – because the Title LLCs did not constitute bona
fide “providers of settlement services” within the meaning of RESPA. The
payments they made to the Individual Defendants and the Joint Venture Partners
did not constitute bona fide returns on ownership interest. The “safe harbor” in 12
U.S.C. §2607(c)(4) is also inapplicable because the AfBA Disclosures provided to
referred customers did not conform to 12 C.F.R. part 1024, Appendix D, represent
a threat to the basic purpose of the disclosure, and were not provided at the time
of referral.”48

One month after this Complaint was filed, the Carter decision was rendered. Because of
this, the Defendants filed a Motion for Judgment on the Pleadings asking the court to follow the
Carter decision and dismiss the case because the Complaint on its face asserted a violation of the
invalid “bona fides test.”49 The Motion to Dismiss makes four arguments: (1) The Complaint
asserts a violation of an agency-created policy that conflicts with the statutory safe harbor and
was invalidated by Carter; (2) CFPB pleads sufficient facts to dismiss based on the statutory safe
harbor; (3) CFPB’s vague and conflicting allegations fail to give notice of how defendants
allegedly violated RESPA or what should have been done differently; (4) the scope of the
complaint is barred by the Statute of Limitations; and (5) the demand for disgorgement exceeds
CFPB’s statutory authority.50

47 Id.
48 See Consumer Financial Protection Bureau v. Borders & Borders, et al. United States District Court Western
District of Kentucky, Louisville Division; Case No. 3:13 CV-1047-H, Complaint for Permanent Injunction and Other
Relief. Paragraph 30
49 See Consumer Financial Protection Bureau v. Borders & Borders, et al. United States District Court Western
District of Kentucky, Louisville Division; Case No. 3:13 CV-1047-H, Defendants Motion for Judgment on the
Pleadings.
50 Id.

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The Bureau filed its response on May 27, 2014.51 The twenty three page Opposition to
Defendant’s Motion for Judgment on the Pleadings is one of the most comprehensive filings
made by the Bureau. First, it argued that the complaint sufficiently asserts that defendants gave
or accepted things of value for referrals of settlement services pursuant to an agreement or
understanding in violation of RESPA Section 8(a), 12 U.S.C §2607(a).52 Furthermore, the
Bureau argued, that the defendants are not entitled to protection of the affiliated business safe
harbor of RESPA Section 8(c)(4) because, at a minimum, the defendants failed to provide timely
and proper disclosures.53

The Bureau stated, “In sum, the allegations contained in the complaint sufficiently put
the defendants on notice that, after an opportunity to take reasonable discovery in this litigation,
the Bureau intends to prove that the defendants created and operated a well-oiled payment-for-
referral machine easily understood and frequently utilized by numerous real estate and mortgage
brokerage companies.”54

CFPB further states, “To qualify for the affiliated business safe harbor from Section 8(a)
liability, the law requires that a payment claimed to be a return on ownership interest in an
affiliated business must be bona fide.”55 Regulation X provides in relevant part:

Neither the mere labeling of a thing of value, nor the fact that it may be calculated
pursuant to a corporate or partnership organizational document or a franchise
agreement, will determine whether it is a bona fide return on an ownership
interest or franchise relationship. Whether a thing of value is such a return will be
determined by analyzing facts and circumstances on a case by case basis. 12
C.F.R. § 1024.15(b)(3)(iii).”

Here, they argue, the distributions made in the name of the Title LLCs did not constitute
bona fide returns on ownership and instead were nothing more than illegal kickbacks couched as

51 See Plaintiff Consumer Financial Protection Bureau’s Opposition to Defendant’s Motion for Judgment on the
Pleadings.
52 Id.
53 Id.
54 Id.
55 Id.

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returns on ownership.56 The Bureau then uses the factors from the Bona-Fides test as evidence
that the returns were not bona-fide.57 “[T]he complaint sufficiently asserts that the purported
profit distributions attributed to the Title LLCs were not sufficient to satisfy the safe harbor in
RESPA Section 8(c)(4) because they “had a basis of calculation with no apparent business
motive other than distinguishing among recipients of payments on the basis of the amount of
their actual, estimated or anticipated referrals.” (Citing 12 C.F.R. § 1024.15(b)(3)(ii)(A).

The Defendants, according to the Bureau, misinterpreted Carter. The Bureau
distinguished Carter from this case by stating that in Carter it was uncontested that the
defendants satisfied the prerequisites for the affiliated business safe harbor.58 Another
distinguishing factor, according to the Bureau, is that here, the Bureau has not cited the statement
of policy in its complaint nor does its claim against the Defendants rely on the statements
validity.59 Instead, the Bureau insists that its cause of action relies on the authority of RESPA
and Regulation X, which provides “that the return on an ownership interest must be bona fide,
that “neither the mere labeling of a thing of value, nor the fact that it may be calculated pursuant
to a corporate or partnership organizational document” will control, and that whether a thing of
value is a bona fide return on ownership interest “will be determined by analyzing the facts and
circumstances on a case by case basis.”60

The most chilling characterization made by the Bureau was that “the defendants created
and operated a well-oiled payment-for-referral machine easily understood and frequently utilized
by numerous real estate and mortgage brokerage companies.”61

On June 13, 2014, Defendants filed a Reply Memorandum reaffirming its position that
the CFPB is using the ten-factor test and that “the certainty of the safe harbor would be
undermined by superimposing a case-by-case “bona fides” inquiry under which the CFPB can
arbitrarily determine civil and criminal liability in enforcement actions using subjective

56 Id.
57 Id.
58 Id.
59 Id.
60 Id citing 12 C.F.R. § 1024.15(b)(3)(previously codified at 24 C.F.R. §3500.15(b)(3)).
61 Plaintiff Consumer Financial Protection Bureau’s Opposition to Defendant’s Motion for Judgment on the
Pleadings

15

criteria.”62 Borders argued that, “Congress, not agencies or courts, must legislate the bounds of
illegal conduct, and the rule of lenity requires that any ambiguity be construed in favor of the
defendant. CFPB cannot legislate through enforcement.”63

Addressing CFPB’s assertion that it is permitted to conduct a “bona-fides” inquiry under
the preexisting Regulation X, Defendants state, “[T]he phrase “bona fide return on an ownership
interest” does not appear in the statutory safe harbor in 12 U.S.C. § 2607 (c)(4). CFPB, the
Defendants assert, is again attempting to superimpose an open-ended “bona fides” inquiry that
does not appear in the statute—exactly the issue addressed in Carter.64

“The fact that Carter invalidated the ten-factor test does not permit CFPB to revert back
to a completely undefined and amorphous “bona fides” standard under the auspices of applying
Regulation X… Under CFPB’s position, every single ABA in the country would be subject to
potential litigation (civil and criminal) that would turn on a subjective evaluation of the “bona
fides” or the arrangement.”65

In light of CFPB calling ABAs a “well-oiled machine” it is not a distant
hypothetical that CFPB’s position is that every single ABA in the country is subject to
potential litigation. The Court has not yet made a ruling in the Borders case. That ruling
will have a significant impact on settlement service providers. If the Court in Borders &
Borders follows Carter and dismisses the complaint on its face, it will serve as yet
another judicial blow to the administrative expansion of RESPA.

IV. The Administrative Advantage

Even if the Courts continue to follow Carter, there is still a problem for settlement
service providers who are faced with Administrative Proceedings. The Director is the deciding
factor from start to finish. Prior to filing an action in court or as an administrative proceeding,

62 Defendants Reply Memorandum in Further Support of Their Motion citing Carter, 736 F.3d at 729.
63 Defendants Reply Memorandum in Further Support of Their Motion, page 2.
64 Id. Regulation X(24 C.F.R.§2500.15) was enacted in 1992; “Neither the mere labelling of a thing of value, nor the
fact that it may be calculated pursuant to a corporate or partnership organizational document or a franchise
agreement, will determine whether it is a bona fide return on an ownership interest or franchise relationship.
Whether a thing of value is such a return will be determined by analyzing the facts and circumstances on a case by
case basis. 25 C.F.R. §3500.15(b)(3)(iii).
65 Id.

16

the Bureau uses an investigative demand to determine what violations, if any, have occurred and
to what degree. After an exhaustive review of the potential defendant’s records the Bureau can
allow a settlement to be presented or file an enforcement action.

The Bureau amended the Uniform Rules to include “a procedural mechanism to
commence an adjudication proceeding to effectuate a settlement agreed to before the filing of a
notice of charges.”66 Where the parties agree to settlement before the filing of a notice of
charges, a proceeding may be commenced by filing a stipulation and a consent order concluding
the proceeding.67 Any settlement offer must be presented to the Director and must contain a
waiver of any provisions that may be construed to prohibit ex parte communications between the
Director and the Bureau employee and must further waive any right to claim bias or prejudgment
by the Director arising from the Director’s consideration or discussions concerning settlement. If
there is no settlement and the proceeding continues, the Administrative Law Judges make a
recommendation to the Director. A notice of appeal may be filed within 10 days after the service
of the recommended decision. If a party does not file a timely appeal, the Director may adopt the
recommended decision as the final decision and order of the Bureau. If an appeal is timely filed,
the Director will issue a final decision and order within 90 days on the appeal.

While CFPB’s website states, “Administrative Law Judges in the OAA hold hearings and
decide on formal charges and actions initiated by the Bureau”68 it is clear that the Director is the
one who decides who to file against, whether or not to accept a settlement, what the outcome of
the initial action is, as well as the appeal. It is no wonder why there are so many settlements.69

V. IS CFPB TRYING TO TAKE AWAY ONE OF THE ORIGINAL
EXCEPTIONS?

Section 8(c) of RESPA provides that nothing in Section 8 shall be construed as
prohibiting the payment to any person of a bona fide salary or compensation or other payment

66 CFPB Website, http://www.consumerfinance.gov/
67 See In the Matter of Paul Taylor, In the Matter of Fidelity Mortgage and Mark Figert, In the Matter of JRHBW
Realty, In the Matter of Stonebridge, In the Matter of Lighthouse.
68 CFPB Website, http://www.consumerfinance.gov/
69 See in the Matter of Paul Taylor –settlement of $118,194.20 for violation of 12 U.S.C. Section 2607(a); See also In
the Matter of Fidelity Mortgage Corporation and Mark Figert- settlement of$54,000; See also In the Matter of
JRHBW Realty

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for goods or facilities actually furnished or services actually performed.70 This provision has
been a part of RESPA since its inception and consistent with Congresses’ statement that
“reasonable payments in return for services actually performed or goods actually furnished were
not intended to be prohibited.”71 However, there now appears to be two different interpretations
of the relationship between the exception found at §3500.14(g)(1)(iv) and §2607(a).

The first interpretation is that regardless of anything to the contrary, there is an exception
that allows for a Settlement Service Provider to pay a compensation for services actually
performed. This comes from reading the statute.

“No person shall accept any fee, kickback or other thing of value pursuant to any
agreement or understanding, oral or otherwise, that business incident to or part of
a settlement service involving a federally related mortgage loan shall be referred
to any person. Any referral of a settlement service is not a compensable service,
except as set forth in §3500.14(g)(1).”
Section 3500.14(g)(1) states that “Section 8 of RESPA permits (iv) a payment to
any person of a bona fide salary or compensation or other payment for goods or
facilities actually furnished or for services actually performed.”

Therefore, a Settlement Service Provider can pay a person a compensation for
services actually performed and this is a compensable referral of a settlement service.

The second interpretation adds a caveat to the exception allowing for payments for services
actually rendered.

“RESPA Section 8(c)(2) provides an exemption for “payment[s] to any person of
a bona fide salary or compensation or other payment for goods or facilities
actually furnished or for services actually performed. 12 U.S.C. §2607(c)(2); see
also 12 C.F.R. §1024.14(g)(1)(iv).”72
“Payments to non-employees for referrals are prohibited by Section 8(a) and
cannot be bona fide payments for goods actually furnished or services actually
performed. 12 U.S.C. §2607(a); 12 C.F.R. §1024.14(b)(“A company may not pay

70 2400 C.F.R. 3500.14(g)(1).
71 S. Rep. No. 93-866 (1974) reprinted in 1974 U.S.C.C.A.N. 6548 at 6551.
72 12 U.S.C. §2607(c)(2); see also 12 C.F.R. §1024.14(g)(1)(iv)

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any other company or the employees of any other company for the referral of
settlement service business.”).”73

The latter argument was used by the CFPB in its enforcement action against Lighthouse
Title Inc.74 Lighthouse Title entered into Marketing Service Agreements (“MSAs”) with people
in order to market and advertise the title company.75 The Bureau set forth contradicting
allegations concerning the fees paid under the MSAs.76 After stating that Lighthouse failed to
determine a fair market value for the services rendered, CFPB stated that Lighthouse set fees by
considering how much competing title insurance companies would be willing to pay the same
marketing people for their services.77 One of the most amusing findings made by the Bureau
was that “the counterparties referred significantly more transactions to Respondent when they
had MSAs with Respondent than when they did not.”78

The Bureau stated that the entering into the contract was a “thing of value” and that the
violation of Section 8(a) was the entering into the MSA in exchange for referrals.

The Bureau did not set forth any additional facts as to the content of the MSAs beyond
the fact that the MSAs were entered into for the payment of marketing and advertising. The
Bureau did, however, define “Marketing Service Agreements” to “mean an agreement pursuant
to which Respondent is to provide any Thing of Value to a person in a position to refer business
incident to or a part of a real estate settlement service involving a federally related mortgage loan
in exchange for marketing or advertising services. This includes agreements that allow
Respondent to market or promote Respondent’s services to such a person or its employees or
agents to endorse Respondent or Respondent’s services, agreement pursuant to which such a
person is to market Respondent’s services to others, and agreements to include references to
Respondent in any advertising placed by such person.”79

By making the MSAs the “thing of value” and then creating its definition, it appears that
the Bureau is using enforcement actions to legislate and expand the statute. Further evidence of

73 12 U.S.C. §2607(a); 12 C.F.R. §1024.14(b)
74 In the Matter of Lighthouse Title, Inc., Administrative Proceeding File No. 2014-CFPB-0015.
75Id.
76 Id.
77 Id.
78 Id.
79 Id.

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their legislation through enforcement is the express exclusion of “an agreement for mass
advertising for consumer consumption pursuant to which Respondent is to pay a person who
does not provide real estate settlement services to place an advertisement to the public (e.g., an
agreement to place an advertisement in a newspaper or magazine or on a television or radio
station)” from their definition of MSAs.80

The Bureau did not name the counterparties or specify whether they were a “person who
is in a position to refer settlement service business.”81

One has to wonder if this case was litigated in District Court would the Defendant prevail
by arguing the statute on its face permits payment to a person for services actually performed.
Would not the common sense canon of noscitur a sociis ---that a word is given more precise
content by the neighboring words with which it is associated be appropriate here as it was used
by the Supreme Court in Freeman to dismiss the Plaintiff’s attempt to expand the scope of
§2607(b) beyond its natural meaning?82

The statute clearly states, “No person shall accept any fee, kickback or other thing of
value pursuant to any agreement or understanding, oral or otherwise, that business incident to or
part of a settlement service involving a federally related mortgage loan shall be referred to any
person. Any referral of a settlement service is not a compensable service, except as set forth in
§3500.14(g)(1).”83

Section 3500.14(g)(1) states that Section 8 of RESPA permits (iv) a payment to any
person of a bona fide salary or compensation or other payment for goods or facilities actually
furnished or for services actually performed.84 Just as Congress added a safe harbor for
“affiliated business arrangements”, hasn’t Congress made it clear that a referral of a settlement
service is a compensable service and does not violate RESPA when it is a payment for services
actually performed?

Lighthouse hired marketing people for the purpose of marketing the title company. The
fees paid to the marketing people were based on the amount that other people in the market place

80 Id.
81 3500.15(c)(9) Person who is in a position to refer settlement service business means any real estate broker or
agent, lender, mortgage broker, builder or developer, attorney, title company, title agent, or other person deriving
a significant portion of his or her gross income from providing settlement services.”
82 Freeman v. Quicken Loans, Inc., 132 S. Ct. 2034-2012.
83 12 U.S.C. § 2607(a).
84 3500.14(g)(1)(iv)

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would pay, i.e. “market value.” There were several factors listed by the CFPB which one has to
assume were intended to bolster their claim of RESPA violations. Contrary to Fair Notice, most
are not found anywhere in the statute. Has CFPB created a new test? There is no statutory
requirement that documentation is required to prove how someone proved fair market value.
There is no statutory requirement that a settlement service provider must monitor its employees
or independent contractors to ensure it received the services for which it contracted. The proof
that the people hired by Lighthouse were being paid for services actually rendered is apparent by
the increase of business. Companies hire marketing people to increase business. That is the
service rendered.

Prior to filing against Lighthouse, CFPB filed an Administrative Proceeding against
Stonebridge Title Services, Inc.85 In its findings, the Bureau cited violations of Sections 8(a) and
8(b) of RESPA, 12 U.S.C. §§2607(a), (b). Paragraph 16 and 17 of the Consent Order read as
follows: “The commission payments made by Stonebridge to the Independent Salespeople for
referrals violate RESPA’s referral-fee prohibition and RESPA’s fee-splitting prohibition.
Although the Independent Salespeople received Form W-2s during this period of time, they were
not “employees” covered by 12 C.F.R. §1024.14(g)(1)(vii).86 Rather, they acted as independent
contractors, and Stonebridge did not have the right or power to control the manner and means by
which the Independent Salespeople performed their duties.”87

There was no mention of the exclusion cited in 12 C.F.R. §1024.14(g)(1)(iv) which
allows for “payment to any person of …compensation ….for goods or services actually
performed.” The Bureau stated that “Stonebridge paid referral commissions of up to 40% of the
title insurance premiums they received from consumers to Independent Salespeople for the
referral of title insurance work” but did not specify if the payments made to the Independent
Salespeople were tied to an agreement stating that they would be paid a percentage of the
premium.88 In fact, from the Consent Order the payments were not tied to the premium, but that
the Independent Salesperson was paid a commission for the amount of business he/she brought

85 In the Matter of Stonebridge Title Services, Inc., Administrative Proceeding, File No. 2014-CFPB-0006
(06/12/2014).
86 12 C.F.R. §1024.14(g)(1)(vii) states “
87In the Matter of Stonebridge Title Services, Inc., Administrative Proceeding, File No. 2014-CFPB-0006
(06/12/2014).
88 Id.

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in. The exception allows for payment to people for work that is actually performed. The Bureau
complained that “Stonebridge sought Independent Salespeople who could solicit title insurance
business for Stonebridge. These Independent Salespeople had or developed relationships with
entities, typically law firms, and referred these entities to Stonebridge for title insurance and
related services on behalf of consumers.”89

It would be shocking if any company in any industry hired sales people who did not have
or establish relationships with people or companies that could give them business. CFPB’s
interpretation that this common business practice is against RESPA bypasses common business
principles and extends into the realm of ridiculous. Settlement Service Providers are businesses
that should be able to market themselves to the public and establish business relationships in
order to profit from an increase in sales/closings. Marketing and business development, at its
core, is to bringing business to a company in order to increase its profits in exchange for a fee,
whether it be a salary to an employee or money to an independent contractor. As drafted, RESPA
appears to allow for this type of relationship, i.e., paying a fee to a person for services actually
performed. The Enforcement Action against Stonebridge and Lighthouse contradicts this
exception and deteriorates the clarity of the Act as written and further diminishes the ability for
Settlement Service Providers to market freely.

VI. STAND-ALONE MARK-UPS ARE NOT A VIOLATION OF 8(B) UNLESS
THERE IS PAYMENT TO A THIRD PARTY?

The Supreme Court, in Freeman v. Quicken Loans clearly answered this question.90 Prior
to this ruling, there was a split among the U.S. Circuit Courts of Appeals. The Second, Third and
Eleventh Circuits held that markups, standing alone, are impermissible.91 The Fourth, Seventh
and Eighth Circuits held that these were acceptable and were not a violation of RESPA.92

The Supreme Court of the United States in Freeman et al v. Quicken Loans, Inc., defined
the scope of 2607(b), which provides “no person shall give and no person shall accept any

89 Id.
90 Freeman et. al. v. Quicken Loans, Inc.,
91 Kruse v. Wells Fargo Home Mortgage Inc., 383 F.3d 49 (2nd Cir. 2004); Santiago v. GMAC Mortgage Group, Inc..,
417 F.3d 384 (3rd Cir. 2005); Sosa v. Chase Manhattan Mortgage Corp., 348 F.3d 979 (11th Cir. 2003).
92 Boulware v. Grassland Mortgage Corp., 291 F.3d 261 (4th Cir. 2002); Echevarria v. Chicago Title & Trust Co., 256
F.3d 623 (7th Cir. 2001); Haug v. Bank of America, 317 F.3d 832 (8th Cir. 2003).

22

portion, split, or percentage of any charge made or received for the rendering of a real estate
settlement service…other than for services actually performed.93 The question presented was
whether, to establish a violation of §2607(b), a plaintiff must demonstrate that a charge was
divided between two or more persons. To that, the Supreme Court answered that Section 2607(b)
unambiguously covers only a settlement-service provider’s splitting of a fee with one or more
other persons; it cannot be understood to reach a single provider’s retention of an unearned fee.94
Justice Scalia delivered the opinion for a unanimous Court. The Petitioner’s argued that the
scope of 2607(b) covers the collection of an unearned charge by a single settlement service
provider, which is referred to an undivided unearned fee. Petitioner’s argument relies on the
2001 policy statement issued by HUD which says that 2607(b) “prohibits any person from giving
or accepting any unearned fees and that a provider may also be liable under 2607(b) when it
charges a fee that exceeds the reasonable value of goods, facilities, or services provided.95 The
Court refused to extend deference under the framework of Chevron U.S.A. Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837 (1984) stating that this consideration “eliminated
by the policy statement’s palpable overreach with regard to price controls.”96

The Court found the plain language of the Real Estate Settlement Procedures Act to be
controlling and rejected pleas to legislative interpretation, enforcement discretion and the HUD
Policy. The Supreme Court’s refusal to give weight to the Agency’s interpretation should send a
message that the statute is clear on its face and subjective and expansive interpretations will not
be tolerated. Quite simply, the court stated, “In our view, §2607(b) unambiguously covers only a
settlement-service provider’s splitting of a fee with one or more other persons; it cannot be
understood to reach a single provider’s retention of an unearned fee.”

CONCLUSION

The topic of this paper as given was Impermissible Charges, Kickbacks and up-charges.
Research of the cases and Enforcement Actions made it clear that there is no concrete answer or
rules to follow. It appears that the judicial system is speaking out for a strict construction

93 Freeman v. Quicken Loans, Inc…
94 Freeman et. al. v. Quicken Loans, Inc.,
95 Citing 66 Fed. Reg. 52057 (2001).
96 See Freeman v. Quicken Loans

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approach of RESPA, while the Bureau continues to push a less concrete more subjective
approach.

In part, The Real Estate Settlement Procedures Act was created to protect the consumer
from unnecessarily high settlement charges caused by certain abusive practices.97 At the heart of
this was the elimination of kickbacks and referral fees.98 It was made clear by Congress through
the original act and subsequent amendments, that certain practices were acceptable and not
subject to Section 8 scrutiny. Specifically, Congress provided for a safe harbor for affiliated
businesses and further allowed for compensation to be paid for services actually performed.
Despite the clarity in the statute, settlement service providers are faced with uncertainty because
of the ever changing interpretation of RESPA. Obviously, the conservative approach when
dealing with an ABA is to operate under the premise that the HUD 10-Factor Test exists. But it
is not so obvious how the title industry is to operate in an environment where marketing and
business development are perceived as RESPA violations. Kickbacks and referral fees should be
impermissible, but marketing and developing business should not. The intention of RESPA was
to protect the consumer. It was not to limit settlement service providers ability to operate in a
free market.

97 12 U.S.C. 2601 Public Law 93-533-December 22, 1974
98 12 U.S.C. 2601(b).

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