The 6th Circuit recently ruled on an important case that will make it much easier to sue sham Affiliated Business Arrangements ("AfBA") for RESPA violations.  This may clear the way for private actions that will clean up the title industry - something the HUD and state regulators have been unable, or unwilling to do.  The court directly addressed the issue of whether a plaintiff must allege a concrete injury, such as an overcharge, in order to have standing to sue over a RESPA violation.  The answer - NO, an overcharge is not necessary for the plaintiff to have standing to bring the suit. 

In Carter v. Welles-Bowen Realty, 493 F. Supp. 2d 921 (6th Cir. 2009), the Carters were the purchasers of real estate, represented by Welles-Bowen Realty.  The title company that closed the transaction was WB Title, an AfBA owned by Welles-Bowen Investors and Chicago Title.  The Carters were given a proper AfBA Disclosure Statement.  The suit alleged that WB Title is a sham title company.

The Carters alleged that WB Title violates RESPA's anti-kickback and anti-fee-splitting provisions because the entity itself does not and can not (sic) provide settlement services.  WB Title is allegedly a sham title company which does not perform any settlement work but still receives unearned revenues while the real estate settlement work is actually performed by Chicago Title. Further, the Carters claim that the Appellees' arrangement allows Chicago Title to provide illegal kickbacks to WB Realty in exchange for the referral of settlement work; WB Realty would receive kickbacks to WB Realty in exchange for the referral of settlement work; WB Realty would receive kickbacks or splits in the form of their share of WB Title's profits, while Chicago Title would be paid for its work through its share of the ownership of WB Title.  Crucially, the Carters do not allege that they were overcharged for the title insurance or settlement services.

This pretty much describes the way most of the AfBA's operate around here.  The title company that actually performs the work sets up separate companies in which the referring partner (usually a lender or realty company) owns 49%.  In our county, the new company may have one dedicated employee that actually conducts the closing, but the majority of the work is done by the title company partner.  Most of the work is done out of the same office, or the office is partitioned to create the outward appearance of separate office space.  Under HUD's RESPA Statement of Policy on Sham Controlled Business Arrangements, these types of arrangements are clear violations.  However, there is very little active enforcement by HUD or the state (there are similar state laws). 

Section 8 of RESPA provides:

(a)Business referrals

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

(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 real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.

. . .

(d)(2) Any person or persons who violate the prohibitions or limitations of this section shall be jointly and severally liable to the person or persons charged for the settlement service involved in the violation in an amount equal to three times the  amount of any charge paid for such settlement service.

The interesting issue that this case presents is quite simply, can the plaintiff sue for a RESPA violation if they have not been overcharged?  If they have not been overcharged, have they really suffered any harm?  The circuit courts are split on this issue.  Welles-Bowen argued that "Congress did not grant a right of action to private plaintiffs to seek recovery of damages when private plaintiffs have not suffered any harm in the form of economic damages or in the form of inflated services without providing any benefits to home buyers."  Or, to paraphrase, "so what if we violated RESPA?  If the Carters didn't pay us any more for their services as a result of the violation, they have no standing to sue us."

In order to have standing to sue, plaintiffs must satisfy three elements:  Injury in fact, causation, and redressability.

[T]he irreducible constitutional minimum of standing is that (1) the plaintiff must have suffered an injury in fact--that is, an invasion of a legally protected interest which is (a) concrete and particularized, meaning that the injury must affect the plaintiff in a personal and individual way, and (b) actual or imminent, not conjectural or hypothetical, (2) there must be a causal connection between the injury and the conduct complained of--that is, the injury has to be fairly traceable to the challenged action of the defendant and not the result of the independent action of some third party not before the court, and (3) it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.

Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992).

HUD's official position is that whether an overcharge occurs "is irrelevant in determining whether the act is prohibited" by RESPA.  In an amicus curiae brief, HUD explained that the "language... of section 8(d)(2)... [indicates that] a person who violates section 8 is liable..., regardless of whether the consumer alleges that he was charged too much for the service."

The court found that RESPA was enacted to address Congress's concerns over the potential harm that can be caused by controlled business arrangements.  Specifically, "the advice of the person making the referral may lose its impartiality and may not be based on his professional evaluation of the quality of service provided if the referror or his associates have a financial interest in the company being recommended."

[T]he alleged section 8(a) violation presents the possibility for other harm, including a lack of impartiality in the referral and a reduction of competition between settlement service providers.  Therefore, RESPA allows individuals to police the marketplace in order to ensure impartiality of referrals and competition between settlement service providers, thereby creating a market-wide deterrent against unnecessarily high settlement costs.  Ultimately, the purpose of the statute is to prevent certain practices that are harmful to all consumers by establishing that consumers have a right not to be subject to those practices and providing both public and private remedies of that right. [citations omitted].

In summation, the court held that "Congress created a private right of action to impose damages where kickbacks and unearned fees have occurred - even where there is no overcharge."  This allows private parties to enforce RESPA; something that HUD and the various states have been unable to do effectively. 

Robert A. Franco
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