Wyatt,

I disagree.

The so-called "fourth requirement" was a not an additional requirement at all-- instead it was a requirement that the arrangement meet the definition of "affiliated business arrangement" in 12 USC § 2602(7)(a). The definition requires that the entity be a "provider of settlement services."  HUD interpreted the definition as to exclude shams.

The landmark Supreme Court case Chevron v. NRDC was a dispute over exactly the same situation-- there was a federal environmental statute that contained a term, and the relevant enforcement agency, the EPA, interpreted it.  The Supreme Court upheld the EPA's interpretation, saying the the courts were bound to uphold reasonable agency interpretations of statutes.  Here's the test, as articulated by the court in Chevron:

When a court reviews an agency's construction of the statute which it administers, it is confronted with two questions. First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute. "

...

If Congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute. Sometimes the legislative delegation to an agency on a particular question is implicit, rather than explicit. In such a case, a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency.

U.S. Supreme Court

Can a sham truly be a provider of settlement services?  I suppose an argument can be made either way, but HUD did not think so and articulated a reasonable set of criteria by which legitimate businesses can be distinguished from shams.  The appeals court was bound by Chevron to uphold the policy statement, but failed to do so.  A bad decision.