A U.S. District Court judge concluded that Policy Statement 1996-2, in which HUD set forth factors to aid in determining whether an affiliated business arrangement is a bona fide provider of settlement services under the Real Estate Settlement Procedures Act, is unconstitutionally vague. Plaintiffs contended that their real estate firms’ partial ownership of the affiliated business arrangements from which plaintiffs purchased their title insurance violated RESPA’s anti-kickback provision. Defendants asserted in a summary judgment motion that the statutory exception for affiliated business arrangements barred plaintiffs’ claims. In response, plaintiffs argued that an affiliated business arrangement must be a bona fide provider of settlement services in order to take advantage of this exception, an inquiry typically guided by a ten-factor test set forth in the Policy Statement.
The court declined to apply that test, concluding that it raised serious constitutional concerns. By employing broad terms such as “sufficient,” “substantial,” and “reasonable” without providing guidance as to how to determine the meaning of such terms in the context of the title insurance business, the court noted the Policy Statement invited a highly subjective evaluation. In addition, HUD’s directive that the ten factors be considered together required further subjective judgments, because the Policy Statement provided no guidance as to how many factors would be determinative, or how much weight was to be given to the individual factors. As a result, the court concluded that the regulation did not contain sufficient detail to prevent arbitrary enforcement and to give notice of what an individual must do to comply with the Policy Statement, and instead applied the terms of the statute itself. After concluding that no violation of the anti-kickback provision had occurred, the court entered summary judgment for the defendants. Click here for Carter v. Wells-Bowen Realty, Inc., No. 3:05 CV 7427 (N.D. Ohio June 30, 2010).