Professional Documents
Culture Documents
10-3922
_____________________________________________________________
Plaintiffs-Appellants,
v.
Defendants-Appellees.
_____________________________________________________________
On Appeal from the U.S. District Court for the Northern District of Ohio
Case No. 3:05 CV 07427
Judge Jack Zouhary
_____________________________________________________________
MEMBERSHIP
iii
Eugene Lolacono Denville, NJ
Regina Lowrie Blue Bell, PA
Michael J. Maloney Bala Cynwyd, PA
Joseph Maguire Ft. Washington, PA
Bill McNamara Pittsburg, PA
Donna Brady Miller Honesdale, PA
Clanci Moloney-Nelson Dublin, OH
Jennifer O‟Boyle Oakwood Village, OH
Mary O‟Donnell Winter Park, FL
Charlene M. Ostroski Norristown, PA
Arthur Parent Rumson, NJ
Harvey Pollack, Esq. Wauwatosa, WI
Chuck Proctor, Esq. Chadds Ford, PA
Maria Proctor Chadds Ford, PA
Elizabeth Ray Philadelphia, PA
Carmine Rego West Chester, PA
Christopher Ripley Waldorf, MD
Dennis Ryan Wayne, PA
Carl Samson, Esq. Parsippany, PA
Sandy Saunders Parsippany, PA
Greg Savad New Brunswick, NJ
Steve Squeo Dublin, OH
Howard Stipe Cranbury, NJ
Dorothy E. Tittermary Philadelphia, PA
Michael Tohn Cleveland, OH
Raphael Toledo Virginia Beach, VA
Anita Waterson Toms River, NJ
Mathew Waylett Hunt Valley, MD
Allison Waylett Hunt Valley, MD
Annmarie Weisenberger Chadds Ford, PA
Dave Wierzbicki West Lawn, PA
William J. Young Allentown, PA
iv
TABLE OF CONTENTS
III. ARGUMENT…………………………………………………….......4
IV. CONCLUSION….………………………………………….............26
CERTIFICATE OF COMPLIANCE……………………………..27
CERTIFICATE OF SERVICE……………………………............28
v
TABLE OF AUTHORITIES
CASES:
U. S. STATUTES:
12 U.S.C. § 2601.……………………………………………………..…......8
OHIO REGULATIONS:
vi
HUD POLICY STATEMENT:
OTHER AUTHORITIES:
vii
State of California Department of Insurance
Bulletin 80-12, December 24, 1980, Subject:
Insurance Code Section 12404 - Unlawful Rebates
Title Insurance Advisory Committee Final Report
to the State Board of Insurance, September 1986……………….………….7
INTERNET SOURCES:
viii
I. CONSENT TO FILE BRIEF OF AMICUS CURIAE
have consented to the filing by the National Association of Independent Land Title
Favor Of Reversal.
independent title insurance agents and state-licensed title insurance agencies, with
stakeholders, both independent and affiliated alike, who have been negatively
industry from its referral sources and the Association advocates for fair
1
competition in the industry and the removal of conflicts of interest from the real
estate process.
Amicus’ sole interest in this case is in the application of the Real Estate
District Court for the Northern District of Ohio, Western Division‟s Order which
urging reversal of the district court‟s holding that HUD‟s interpretation found in
Statement of Policy 1996-2, 61 Fed. Reg. 29,258, (June 7, 1996), 24 CFR Part
identifiable standards under which authorities (or private parties) can enforce
Amicus believes that this brief will assist the Court in understanding the title
insurance industry‟s acceptance of HUD Statement of Policy 1996-2 and its ten
1
“RE # _” is the district court record entry number in No. 3:05-cv-07427-JZ
2
factors HUD weights when determining whether an entity is a bona fide “provider
arrangement” requires, 12 U.S.C. § 2602(7), and why those factors help deter anti-
competitive practices in the title industry. Amicus also believes that this brief
will assist the Court in understanding the complexities of the title insurance
industry and why anti-competitive practices such as that alleged in this case are
to by the district court, that HUD Statement of Policy 1996-2 serves the interest of
the title insurance industry to guide title insurance agencies in the lawful creation
and operation of an “affiliated business arrangement,” Id., and to assist the title
agencies that are mere conduits for illegal kickbacks or payments for services not
3
III. ARGUMENT
Pennsylvania. This company was the first to issue guarantees of title with specific
indemnity clauses. From this early “Philadelphia System,” arose the modern title
insurance industry.
to protect purchasers or mortgage lenders from unforeseen loss due to title defects
such as: liens, encumbrances upon, defects in, or the unmarketability of the title to
real property for which the policy is issued. These contracts of indemnity have
evolved into two types of recognized title insurance policies: (i) those policies
issued to protect buyers of real estate (Owner‟s Policy of Title Insurance); and (ii)
those policies issued to lenders to protect the mortgage‟s title, which secures the
The fundamental difference between land title insurance versus other types
liability insurance) has always been the commitment of the title insurance industry
to seek “risk prevention” over “risk assumption.” The casualty insurance approach
4
losses arising out of an unforeseen future event such as death or accident. The title
insurance approach of “risk prevention” has as its goal the elimination of risks and
the prevention of losses caused by defects in title arising out of events that
Prior to World War II, the growth of the title insurance industry had been
limited to local and regional title insurance underwriters. After World War II the
Starting in the 1960‟s, the title insurance industry saw the emergence of
national title companies which caused a decline in the local and regional title
insurance underwriters in the national title insurance industry have left the industry
with only four underwriter groups controlling over 92 percent of all title insurance
2
American Land Title Association, “Preliminary Third Quarter 2008 Market Share
- Family-Company Summary” at: http://www.alta.org/industry/08-
03/Marketshare3rdQuarterfrncosummary.xls. (last visited January 9, 2011).
5
title insurance underwriters and has impacted the quality of the product and service
developed where the providers of title insurance marketed their products not to the
existing mortgage, but to third parties involved in the real estate transactions (i.e.,
Marketing to these third parties became the dominant source of business for
title insurance agents and their agencies because of the third party‟s access to the
real estate transaction and the third parties‟ general ability to refer or direct the
The issue of the high market consolidation in the title insurance industry
3
See The Pricing and Marketing of Insurance: A Report of the Department of
Justice to the Task Group on Antitrust Immunities, January 1977, Pages 250-274.
4
Title Insurance Cost and Competition: Before the House Committee on Financial
Services Subcommittee on Housing and Community Opportunity, 109 th Cong.,
(2006) (testimony of J. Robert Hunter, Director of Insurance, (continued)
6
of competition that exists in the title insurance industry and the negative impact
the title insurance consumers and the third-party attorneys and lending institutions
insurance industry, most title insurance underwriters and title insurance agencies
compete with other underwriters and agencies for the attention of these third-party
lenders and developers). This competition for “referral sources” unfortunately led
to widespread abuses and illegal referral activities in the title insurance industry.
This, in turn, led to the enactment of the Real Estate Settlement Procedures Act of
(continued)
Consumer Federation of America) see also, Jack Guttentag, “Real Estate
Settlement Services Take Bite Out of Borrowers,” Inman News, September 6,
2005; see also, The Pricing and Marketing of Insurance: A Report of the
Department of Justice to the Task Group on Antitrust Immunities, January 1977,
Pages 250-274; “Chapter XII The Title Assurance and Conveyance Industries” of
Real Estate Closing Costs, RESPA, Section 14a, Volume II Settlement Performance
Evaluation prepared by Peat, Marwick, Mitchell and Co. for the Department of
Housing and Urban Development, October 1980; State of California Department of
Insurance Bulletin 80-12, December 24, 1980, Subject: Insurance Code Section
12404 - Unlawful Rebates; Title Insurance Advisory Committee Final Report to the
(continued) (continued) State Board of Insurance, September 1986; Nelson
Lipshutz, The Regulatory Economics of Title Insurance, Praeger Press, Westport,
CT, 1994, page 5; Birnbaum, Birny, Report to the California Insurance
Commissioner, “An Analysis of Competition in the California Title Insurance and
Escrow Industry,” December 2005, at 57.
7
1974, Pub. L. No. 93-533, 88 Stat. 1724 (1974) ("RESPA"), 12 U.S.C. §§ 2601, et
seq.
there was a growth within the title insurance industry during the 1970‟s of a
with their third-party “referral sources” (i.e. real estate brokers, real estate agents,
8
known as “controlled business arrangements” and “affiliated business
arrangements.”
of a title insurance agency who participated directly in the profits of the agency.
Often the referral source had no active participation in the agency‟s business but
due to the “referral” of business to the title insurance agency, of which it was a
part, the referral source received a significant profit. The profit in some instances
was determined from the gross income and not net profits.
business arrangement” was to control the referral of title insurance business and by
9
kind of healthy competition generated by independent settlement
service providers.” 5
under certain conditions. Pub. L. No. 98-181, Title IV, § 461(a), 97 Stat.1153,1231
Div. A, Tit. II. § 2103(c)(1), 110 Stat. 3009-400 (1996), 12 U.S.C. § 2602(7).
§2602(7)(c)(4).
***
(4) affiliated business arrangements so long as (A) a
disclosure is made of the existence of the arrangement to the person
being referred and, in connection with such 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
5
Carter v. Welles-Bowen Realty, Inc., 553 F.3d 979, at 987, 2009 U.S. App. Lexis
1288 (6th Cir. 2009) (citing Robinson v. Fountainhead Title Group Corp., 447 F.
Supp. 2d 478, 488-89 (D. Md. 2006), and Kahrer v. Ameriquest Mortgage Co., 418
F. Supp. 2d 748, 756 (W.D. Pa. 2006)).
10
from the arrangement, other than the payments permitted under this
section, is a return on the ownership interest or franchise
relationship.” 12 U.S.C. § 2602(7) (c)(4)(A), (B), (C).
fees remains the same – to prohibit disguised referral fees, where the referring
empowered the Secretary of HUD to “prescribe such rules and regulations, to make
issued its interpretation in HUD Statement of Policy 1996-2. 24 CFR Part 3500.
The Secretary determined that “Congress did not intend to promote referral
fee payments through sham arrangements or shell entities. The “affiliated business
bona fide provider of settlement services, then the arrangement does not meet the
11
definition of an “affiliated business arrangement”. If an arrangement does not
meet the definition of an “affiliated business arrangement”, it cannot qualify for the
This broad and sweeping definition ensures that the RESPA‟s requirements
and prohibitions cover the entire real estate settlement industry. However, when
the same definitions are literally applied to the exception for “affiliated business
required disclosure is made, the consumer is not required to use any particular
provider of settlement services, and the only thing of value that is received from
12
the arrangement is a return on the ownership interest or franchise relationship. 12
settlement,” no matter how substantial or nominal, and share the profits. Consider
13
This “new company” would qualify as an “affiliated business arrangement”
because the real estate broker “is in a position to refer business” and it has an
it provides “any service… in connection with a real estate settlement,” despite the
fact that it contracts back a substantial part of the core work to the title company
that set it up. Thus, under this strict construction, the exception for affiliated
disclosure, no required use, and the only thing of value received is a return on
ownership interest.
The next question is whether the ABAs complied with the three
requirements of Section 2607(c)(4): (1) disclosure of the ownership
arrangement; (2) no requirement for the consumer to use a particular
provider; and (3) the only thing of value received by the ABA parents
was their ownership interest in the provider.
RE#190, Op.13.
14
The Secretary‟s interpretation, however, goes deeper into the analysis to
further the purpose of the statute. It recognizes that a “sham” “affiliated business
kickbacks and unearned fees, should not and does not qualify for the exception. A
allow any two companies which would otherwise be prohibited from sharing fees
not a bona fide provider of settlement services, than it is a “sham” and does not
qualify for the exception even if the other three conditions of Section 8(c) of
RESPA are otherwise met. HUD Statement of Policy 1996-2, 24 CFR Part 3500.
(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?
15
(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 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 such that the new entity is receiving a
``thing of value'' for referring settlement service business to the party
performing the service?
(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?
16
(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 entities, which may include one of the providers that
created it? Id.
settlement service business. These factors all represent things that any entity, other
settlement service business. Just like any business, it would require sufficient
capital, have employees to provide its services, manage its business, have an
office, actually provide the services it purports to provide, actively compete for
things; would likely fail. However, a sham affiliated business arrangement could
still survive because its partners would essentially supply any of these lacking
factors – it could rely on the capital of its partners, borrower the partners‟
employees, be managed by the partners, use the partners‟ office space, rely on the
partners‟ to provide some or all of its services, and because it has a built-in source
services in the marketplace must have some other primary purpose. In the case of
17
a sham affiliated business arrangement, that “primary purpose” is to capture
settlement service business by paying the referring partner a fee for its referrals.
But for the exception at issue in this case, this would be a clear violation of Section
8 of RESPA. What the Secretary has done, through its grant of authority “to make
12 U.S.C. § 2117(a), is declare that in order for this exception to apply, the
legal entity created to funnel illegal kickbacks and unearned fees to its partners.
The district court‟s holding that HUD Statement of Policy 1996-2 “lacks
a state regulation that encompass HUD‟s Policy Statement 1996‟s ten factors. On
***
(6) RESPA means the Real Estate Settlement Procedures Act, 12
U.S.C. 2601 et seq., as amended, and all rules, regulations and
interpretations issued under RESPA, as amended, including but not
limited to 24 C.F.R. Part 3500 and the Statement of Policy 1996-2
Regarding Sham Controlled Business Arrangements found at 61 Fed.
Reg. 29258 et seq.
(1) Does the new entity have sufficient initial capital and net worth,
typical of the industry, to conduct the title insurance 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 parents?
(3) Does the new entity manage its own business affairs or is the
new entity being run by one of the parents?
(4) Does the new entity have a office for business which is separate
from any of the parents? If the new entity is located at the same
19
business address as one of the parents, does the new entity pay fair
market value rent for the facilities actually furnished?
(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 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 from a
parent or affiliate of a parent? If the new entity contracts out work to a
parent or to an affiliate of a parent, 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 the
services or facilities that bears a reasonable relationship to the value
of the goods or services received?
24 CFR 3500, the title insurance industry has become familiar with HUD‟s “ten
20
factor test” for “affiliated business arrangements.” Yearly, the title insurance
industry and its title insurance agents receive RESPA updates through various
seminars, legal opinions, consultants, industry news sources, etc. Nearly every
REPSA and HUD‟s “ten factor test,” where attendees are brought up to date on the
HUD‟s “ten factor test” has come to provide the specific guidance necessary
violates Section 8 of RESPA. The importance of HUD‟s guidance via its “ten
factor test” to the title insurance industry cannot be underestimated in the context
of those within the title insurance industry who desire to establish and operate a
application of HUD‟s “ten factor test,” any “regulated” person within the title
insurance industry can easily verify whether the business entity to be established
provisions. Without HUD‟s guidance, the title insurance industry is left with no
21
Anne L. Anastasi, president of the American Land Title Association
The owners of the ABA are also required to invest capital based on
their ownership interest and in these tough economic times the owners
may be required to invest additional capital to keep the operation
viable. . . A compliant ABA has full time title employees performing
all of the same services (Core Title Services) that are performed by
non-ABA title agencies. A compliant ABA has brick and mortar, and
incurs all of the attended expenses of a non-ABA. . . In a compliant
ABA there is no payment for the referral of business. 6
non-profit trade association that openly advertises that they “represent their
6
Testimony of Anne L. Anastasi, then President-Elect of the American Land Title
Association, “Title Insurance Rates and Practices” May 28, 2009, before the
Pennsylvania Insurance Department, P 39. (Available online at:
www.alta.org). “ABA” is used by Ms. Anatasi to reference “affiliated business
arrangements.” Ms. Anastasi is also the president of Genesis Abstract, LLC in
Hatboro, Pennsylvania, which she opened in 1994 after spending 17 years with a
regional title insurance underwriter, and the president of Troon Management
Corporation, a consulting company dedicated to the creation and administration of
compliant “affiliated business arrangements.”
22
[members‟] affiliated businesses before federal and state policy makers, help them
manage their confusing and changing regulatory environment under the RESPA
and state laws, and enable them to develop and operate successful and legally-
7
compliant affiliated businesses, joint ventures, and marketing agreements.”
day program “focused on compliance, structure and the financial viability of the
entity, in which attendees will “hear the most often asked questions and… learn the
9
correct, compliant answers.”
provider of market intelligence, business news, and regulatory information for the
7
RESPRO Home Page at: http://www.respro.org/index.aspx (last visited January
9, 2011).
8
Troon Management Corp. Home Page at:
http/www.troonmanagement.comindex.html (last visited January 9, 2011.
9
Troon Management Corp. Services Page at:
http//www.troonmanagement.com/services.htm (last visited January 9, 2011).
23
Affiliated Business Arrangements Compliance Guide that “touches on all aspects
section on how to legally structure a joint venture, including the rules around in-
kind contributions, how much capital or employees are needed and how to legally
out employee payroll and benefits, what other services can be contracted out, and
how to keep office space for your joint venture separate; and answers to questions
regarding how much business a parent company can give its joint venture; HUD‟s
arrangement] disclosures.” 11
There are even companies offering compliance audits for affiliated business
10
October Research Store at:
http//www.octoberstore.com/AffiliatedBusinessArrangments_Complaince_Guide_
p/orc-sp-1002.htm. (last visited January 9, 2011).
11
Id.
24
confidential compliance audit of your existing affiliated business and provide you
Clearly the businesses that have sprung-up offering support services to title
Statement of Policy 1996-2 “ten factor test.” To those in the industry, HUD‟s ten
factor test” for determining whether an entity is a bona fide provider of settlement
services, or a mere sham, is not vague at all. On the contrary, it provides the
2 “ten factor test” is a viable analytical tool which, contrary to the District Court‟s
12
Alliance Solutions, LLC Compliance Audit at:
http//www.alliancesolutionsllc.com/compliance_audits.html (last visited January 9,
2011).
25
IV. CONCLUSION
For the foregoing reasons, the district court‟s judgment declaring HUD‟s
Statement of Policy 1996-2 and its “ten factors” “unconstitutionally vague” should
be reversed.
Respectfully submitted,
***
26
CERTIFICATE OF COMPLIANCE
32(a)(7)(B) because this brief contains 6,075 words, excluding the parts of
32(a)(5) and the type style requirements of Fed. R. App. P. 32 (a)(6) because
certificate of the FRAP 32(a)(7)(B)(C) And Sixth Circuit Rule 32(a) may
result in the Court‟s striking the brief and imposing sanctions against the
27
CERTIFICATE OF SERVICE
In compliance with FRAP Rule 25 and L.R. 25, I hereby certify that on this
FAVOROF REVERSAL with the Clerk of the Court for the United States Court of
Appeals for the Sixth Circuit and further certify that all counsels will be notified of
this filing through the Notice of Docket Activity generated by this electronic filing.
28