Appeal No.

10-3922
_____________________________________________________________

IN THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT
_____________________________________________________________

ERICK C. CARTER, ET AL.

Plaintiffs-Appellants,

v.

WELLES-BOWEN REALTY, INC., ET AL

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
_____________________________________________________________

BRIEF OF NATIONAL ASSOCIATION OF INDEPENDENT LAND TITLE

AGENTS AS AMICUS CURIAE IN SUPPORT OF PLAINTIFFS-
APPELLANTS AND IN FAVOR OF REVERSAL
_____________________________________________________________

Gregory W. Happ Robert A. Franco

Ohio Sup. Ct. Reg. No. 0008538
238 West Liberty Street
Medina, Ohio 44256
Telephone (330) 723-7000
Facsimile (330) 725-8804
E-mail gregoryhapp@msn.com
Ohio Sup, Ct. Reg. No 0085081
1007 Lexington Avenue
Mansfield, Ohio 44907
Telephone: (419) 524-5938
Facsimile (888) 764-3525
E-mail: rfranco@attorneyfranco.com

Attorneys for Amicus Curiae,

National Association of Independent Land Title Agents
ii
 NATIONAL ASSOCIATION OF LAND TITLE AGENTS

MEMBERSHIP

Anthony Affatati Freehold, NJ

Thomas F. Andres Carnegie, PA
Wyatt Bell Royal Palm Beach, FL
Anna Burns Chadds Ford, PA
Jennifer Carton Hamilton, NJ
Hillary Chris Parsippany, NJ
Nancy Cucuzza Staten Island, NY
Bruce Cweiber, Esq. Cleveland, OH
Donna D‟Agostino-Gal Philadelphia, PA
Tobias L. Biddle Philadelphia, PA
Nick Dideo Parsippany, NJ
Joseph Drum Santa Barbara, CA
Dave Dwyer Parsippany, NJ
Allen Exelby Parsippany, NJ
Rosemary Fedak Philadelphia, PA
Marc Foxx Philadelphia, PA
Adam Foxx Philadelphia, PA
Sandi Foxx-Jones Philadelphia, PA
Drew Friedman Southampton, PA
Scott Froggatt Southampton, PA
Donna Grasso Chadd Fords, PA
Bill Grossmiller Hunt Valley, MD
Gregory W. Happ, Esq. Medina, OH
Robert B. Holman, Esq. Cleveland, OH
Jacqui Hornberger North Wales, PA
Ian Katz Westminster, PA
Fran Kelly Reading, PA
Michael Kennerley Trento, NJ
Kimberly J. Klein Bethlehem, PA
Paula Knodel Oakwood Village, OH
Susan Kortman NJ
Clyde Kpochak Shrewsbury, NJ
Barbara Lecuona King of Prussia, NJ
Gregory H. Lindsay, Esq. Chadds Ford, PA

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

I. CONSENT TO FILE BRIEF OF AMICUS CURIAE…………..…1

II. INTERESTS OF AMICUS.……………….………………….. ……1

III. ARGUMENT…………………………………………………….......4

A. ESTABLISHMENT OF THE TITLE INDUSTRY

AND FORMS OF TITLE INSURANCE …………………………………4

B. THE GROWTH OF THE TITLE INSURANCE

INDUSTRY AND THE CONSOLIDATION OF
TITLE INSURANCE UNDERWRITERS ……………………………….5

C. THE DEVELOPMENT OF “REVERSE COMPETITION”…………….6

D. THE GROWTH OF AN ANTI-COMPETITIVE

TITLE INSURANCE INDUSTRY THROUGH
“BUSINESS ARRANGEMENTS” ……………………………………...8
E. HUD’S INTERPRETATION OF “AFFILIATED
BUSINESS ARRANGEMENTS” .…………………………………....11

F. OHIO DEPARTMENT OF INSURANCE’S ADOPTION OF

HUD’S “TEN FACTOR TEST”..……………………………………18

G. THE TITLE INSURANCE INDUSTRIES’ UNDERSTANDING

OF HUD’S “TEN FACTOR TEST” FOR ABAS ……….……...........20

IV. CONCLUSION….………………………………………….............26

CERTIFICATE OF COMPLIANCE……………………………..27

CERTIFICATE OF SERVICE……………………………............28

v
 TABLE OF AUTHORITIES

CASES:

Carter v. Welles-Bowen Realty, Inc.,

553 F.3d 979 (6th Cir. 2009) ……………………………………………….10

Kahrer v. Ameriquest Mortgage Co.,

418 F. Supp. 2d 748 (W.D. Pa. 2006)……………………………………...10

Robinson v. Fountainhead Title Group Corp.,

447 F. Supp. 2d 478 (D. Md. 2006) ……………………………….……....10

U. S. STATUTES:

12 U.S.C. § 2117(a) …………………………….…………………..….11, 18

12 U.S.C. § 2601.……………………………………………………..…......8

12 U.S.C. § 2602 ……………………………………………………..……12

12 U.S.C. § 2602(3) …………………………………………………...12, 14

12 U.S.C. § 2602(7) ……………………………….………....2, 3, 10, 11, 13

12 U.S.C. § 2602(7) (a), (b) …..…………………….................................3, 8

12 U.S.C. § 2602(7) (c) (4) ……………………………………….10, 13, 14

12 U.S.C. § 2602(7) (c) (4) (A) (B) (C) …………………………………...11

12 U.S.C. § 2607 ……………………………………………………………2

OHIO REGULATIONS:

Ohio Administrative Code 3901-7-04 ………………………................18-20

vi
HUD POLICY STATEMENT:

Statement of Policy 1996-2 Regarding Sham

Controlled Business Arrangements …..2, 3, 11, 13, 15-17, 18, 19, 20, 25, 26

OTHER AUTHORITIES:

Birnbaum, Birny, Report to the California

Insurance Commissioner, “An Analysis of
Competition in the California Title
Insurance and Escrow Industry,” December, 2005 …….………………. …7

Jack Guttentag, “Real Estate Settlement

Services Take Bite Out of Borrowers,”
Inman News, September 6, 2005 …………………………….……………...7

The Pricing and Marketing of Insurance:

A Report of the Department of Justice to
the Task Group on Antitrust Immunities, January 1977……………………. 6

Nelson Lipshutz, The Regulatory Economics

of Title Insurance, Praeger Press, Westport, CT, 1994 ……………………. 7

Title Insurance Cost and Competition: Before the

House Committee on Financial Services
Subcommittee on Housing and Community
Opportunity, 109th Cong., (2006) (testimony of
J. Robert Hunter, Director of Insurance, Consumer
Federation of America) ……………………………………………..…….. .6

“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 …………………………………….7

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:

Alliance Solutions, LLC Compliance Audit at:

http//www.alliancesolutionsllc.com/compliance_audits.html……………..25

American Land Title Association, “Preliminary

Third Quarter 2008 Market Share - Family-Company Summary” at:
http://www.alta.org/industry/08-03/Marketshare3rdQuarterfamcosummary.xls
………………………..5

October Research Store at:

http//www.octoberstore.com/Affiliated Business
Arrangments_Complaince_Guide_p/orc-sp-1002.html ………………..24

RESPRO Home Page at: http://www.respro.org/index.aspx .......................23

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
(Available online at: www.alta.org)............................................................. 22

Troon Management Corp. Home Page at:

http/www.troonmanagement.comindex.html ……………………………...23

Troon Management Corp. Services Page at:

http//www.troonmanagement.com/services.html …………………………23

viii
 I. CONSENT TO FILE BRIEF OF AMICUS CURIAE

Plaintiffs-Appellants, Defendants-Appellees and Intervenor United States

have consented to the filing by the National Association of Independent Land Title

Agents of its Brief of Amicus Curiae In Support of Plaintiffs-Appellants And In

Favor Of Reversal.

II. INTERESTS OF AMICUS

Amicus Curiae National Association of Independent Land Title Agents

(“NAILTA”) is a national trade association consisting of state-licensed

independent title insurance agents and state-licensed title insurance agencies, with

associate membership extended to title insurance underwriters and title insurance

industry stakeholders from across the United States. NAILTA is a non-profit,

member-supported national trade organization working to protect the transparency,

credibility and sanctity of the land title process.

As part of that mission, NAILTA represents the interest of those industry

stakeholders, both independent and affiliated alike, who have been negatively

impacted by the rise of anti-competitive business practices in the title insurance

industry. NAILTA works to protect the independence of the title insurance

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

Settlement Procedures Act (“RESPA”), 12 U.S.C. § 2607, et seq. in order to

promote and protect fair competition in the title insurance industry.

As amicus curiae, the NAILTA desires to support a reversal of U. S.

District Court for the Northern District of Ohio, Western Division‟s Order which

held the Department of Housing and Urban Development‟s (“HUD”)

interpretation of RESPA‟s definition of “affiliated business arrangement,” 12

U.S.C. § 2607 [sic: § 2602(7)] is unconstitutionally vague. NAILTA joins in

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

3500, “provides insufficient guidance to the regulated public, and it lacks

identifiable standards under which authorities (or private parties) can enforce

its provisions in a criminal or civil context is unconstitutionally vague.” RE

1
#190, Op. 12.

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

of settlement services” as the statutory definition of “affiliated business

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

harmful to our industry and the general public.

The issues presented by NAILTA are relevant to the current matter, as it is

clear to Amicus, as a representative of the members of the regulated public referred

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

insurance industry in self-regulation to thwart the operations of title insurance

agencies that are mere conduits for illegal kickbacks or payments for services not

actually performed. 12 § 2602(7)(a), (b).

3
 III. ARGUMENT

A. ESTABLISHMENT OF THE TITLE INSURANCE INDUSTRY AND FORMS OF

TITLE INSURANCE

In 1876 the first title insurance company was formed in Philadelphia,

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.

In simplest terms, title insurance is a contract of indemnity that is designed

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

loan (Loan Policy of Title Insurance).

The fundamental difference between land title insurance versus other types

of casualty insurance (i.e., homeowners, automobile and commercial general

liability insurance) has always been the commitment of the title insurance industry

to seek “risk prevention” over “risk assumption.” The casualty insurance approach

of “risk assumption” assures financial indemnity through a pooling of risks for

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

occurred in the past.

B. THE GROWTH OF THE TITLE INSURANCE INDUSTRY AND THE

CONSOLIDATION OF TITLE INSURANCE UNDERWRITERS

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

enormous demand and expansion of home ownership produced an equally

expanded mortgage market which in turn fostered a corresponding growth in the

demand for title insurance.

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. Combinations, consolidation, and mergers of 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

business nationwide.2 This consolidation has greatly impacted competition among

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

being provided by the title insurance underwriters.

C. THE DEVELOPMENT OF “REVERSE COMPETITION”

At least by the 1970‟s, a recognized marketing trend in the title industry

developed where the providers of title insurance marketed their products not to the

ultimate consumer, who either owned, was buying a home or re-financing an

existing mortgage, but to third parties involved in the real estate transactions (i.e.,

real estate agents, mortgage brokers, lenders and developers).

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

consumer to a particular title insurance provider. The term “reverse competition”

was applied to this title insurance industry marketing practice. 3

The issue of the high market consolidation in the title insurance industry

caused by “reverse competition” has been well documented by numerous studies

4
and articles. The common theme in each of these studies and articles is the lack

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

“reverse competition” has on title insurance underwriters, title insurance agencies,

the title insurance consumers and the third-party attorneys and lending institutions

involved in a real estate transaction.

Due to the development and dominance of “reverse competition” in the title

insurance industry, most title insurance underwriters and title insurance agencies

compete with other underwriters and agencies for the attention of these third-party

revenue-generating referral sources (i.e., real estate agents, mortgage brokers,

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.

Section § 8 of RESPA prohibits kickbacks and unearned fees. 12 §

2602(7)(a), (b). In relevant part, the statute states:

(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.
Id.

D. THE GROWTH OF AN ANTI-COMPETITIVE TITLE INSURANCE INDUSTRY

THROUGH “BUSINESS ARRANGEMENTS”

In response to RESPA‟s anti-kickback and unearned fees restrictions, Id.,

there was a growth within the title insurance industry during the 1970‟s of a

business marketing activity involving title insurance agency business arrangements

with their third-party “referral sources” (i.e. real estate brokers, real estate agents,

mortgage brokers, and mortgage lenders). These business arrangements became

8
known as “controlled business arrangements” and “affiliated business

arrangements.”

These “arrangements” involved the “referral source” becoming a part owner

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.

The primary purpose of a “controlled business arrangement” or “affiliated

business arrangement” was to control the referral of title insurance business and by

its very nature was anti-competitive.

“[T]o address Congress' concerns over "controlled business

arrangements," whereby real estate settlement business is referred
between two affiliated entities, which RESPA had not previously
addressed. Under such circumstances, one entity is able to provide a
benefit to its affiliate without the direct payment of a referral fee
which … could result in harm to consumers beyond an increase in
settlement charges . . . . 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. In addition, since the real estate industry is
structured so that settlement service providers do not compete for a
consumer's business directly, but almost exclusively rely on referrals
from real estate brokers, lenders or their associates for their business,
the growth of controlled business arrangements effectively reduce the

9
 kind of healthy competition generated by independent settlement
service providers.” 5

In response to the growth of these anti-competitive “business arrangements,”

Congress, in 1983, amended RESPA to permit “controlled business arrangements”

under certain conditions. Pub. L. No. 98-181, Title IV, § 461(a), 97 Stat.1153,1231

(1983), 12 U.S.C. § 2602(7). In 1996 Congress changed the term “controlled

business arrangement” to “affiliated business arrangement.” Pub. L. No. 104-208

Div. A, Tit. II. § 2103(c)(1), 110 Stat. 3009-400 (1996), 12 U.S.C. § 2602(7).

Congress, in its amendments to RESPA, provided an exemption from

RESPA‟s anti-kickback provisions for “affiliated business arrangements” so long

as they satisfied three statutory consumer protection provisions. 12 U.S.C.

§2602(7)(c)(4).

Nothing in this section shall be construed as prohibiting

***
(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).

E. HUD’S INTERPRETATION OF “AFFILIATED BUSINESS ARRANGEMENTS”

The main purpose of RESPA‟s prohibition against kickbacks and unearned

fees remains the same – to prohibit disguised referral fees, where the referring

entity receives unearned fees. To accomplish its objectives, Congress specifically

empowered the Secretary of HUD to “prescribe such rules and regulations, to make

such interpretations, and to grant such reasonable exemptions for classes of

transactions, as may be necessary to achieve the purposes of this chapter.” 12

U.S.C. § 2617(a). (Emphasis added). Relying on this grant of authority, the

Secretary of HUD (“Secretary”) thoroughly analyzed the purpose of RESPA‟s

anti-kickback provision and the affiliated business arrangement exception and

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

arrangement” definition, 12 U.S.C. § 2602(7), addresses associations between

providers of settlement services. In order to come within the “affiliated business

arrangement” exception, the entity receiving the referrals of settlement service

business must be a „provider‟ of settlement service business. If the entity is not a

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

“affiliated business arrangement” exception, even if the other three conditions of

Section 8(c) are otherwise met.” 24 CFR Part 3500.

The problem created by sham “affiliated business arrangements" stems from

the definitions contained in 12 U.S.C. § 2602. The term “settlement services” is

written broadly to include:

“any service provided in connection with a real estate settlement

including, but not limited to, the following: title searches, title
examinations, the provision of title certificates, title insurance,
services rendered by an attorney, the preparation of documents,
property surveys, the rendering of credit reports or appraisals, pest and
fungus inspections, services rendered by a real estate agent or broker,
the origination of a federally related mortgage loan (including, but not
limited to, the taking of loan applications, loan processing, and the
underwriting and funding of loans), and the handling of the
processing, and closing or settlement.”
12 U.S.C. § 2602(3). (Emphasis added).

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

arrangements,” it becomes the exception that swallows the rule.

The exception applies to “affiliated business arrangements” so long as the

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

U.S.C. § 2607(c)(4). The term “affiliated business arrangement” is defined as:

(A) a person who is in a position to refer business incident to or a part

of a real estate settlement service involving a federally related
mortgage loan, or an associate of such person, has either an affiliate
relationship with or a direct or beneficial ownership interest of more
than 1 percent in a provider of settlement services; and (B) either of
such persons directly or indirectly refers such business to that provider
or affirmatively influences the selection of that provider.”
[12 U.S.C. § 2602(7)]. (Emphasis added).

Essentially, a strict literal reading of the exception would allow a referrer of

settlement services and a settlement service provider to create an affiliated business

arrangement that provides “any service” in connection with “a real estate

settlement,” no matter how substantial or nominal, and share the profits. Consider

the following example from HUD‟s Policy Statement 1996-2:

A title insurance company solicits a real estate broker to create a

company wholly owned by the broker to act as its title agent. The title
insurance company sets up the new company for the real estate
broker. It also manages the new company, which is staffed by its
former employees that continue to do their former work. As in the
previous example, the new company also contracts back certain of the
core title agent services from the title insurance company that created
it, including the examination and determination of insurability of title,
and preparation of the title insurance commitment. The title insurance
company charges the new company less that its costs for these
services. The new company's employees conduct the closings and
issue only policies of title insurance on behalf of the title insurance
company that created it.

24 CFR Part 3500, Example 2.

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

“ownership interest of more than 1 percent in a provider of settlement services.”

The “new company” also qualifies as a “provider of settlement services,” because

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

business arrangements applies, so long as the other requirements are met –

disclosure, no required use, and the only thing of value received is a return on

ownership interest.

The trial court‟s analysis in this case was very similar:

There is no dispute that WB Title and Integrity Title did provide at

least some “settlement services” – namely, they evaluated the title
evidence to determine insurability, issued title commitments, and
issued final title insurance policies. See 12 U.S.C. § 2602(3) (defining
“settlement services” to include, among other things, “title searches,
title examinations, the provision of title certificates, [and] title
insurance”). Thus, under the plain terms of the ABA definition, WB
Title and Integrity Title are “providers of settlement services.”

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

arrangement,” which is only created to circumvent the prohibition against

kickbacks and unearned fees, should not and does not qualify for the exception. A

contrary interpretation would render the prohibition virtually meaningless and

allow any two companies which would otherwise be prohibited from sharing fees

to do just that by creating a new company solely for that purpose.

To prohibit this unintended result, the Secretary developed a balancing test

to determine if the “affiliated business arrangement,” regardless of its legal

structure, is a bona fide provider of settlement services. If it is determined that it is

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.

The factors used in the balancing test are:

(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.

These common sense questions serve to separate legitimate settlement

service providers from those created to funnel illegal kickbacks to referrers of

settlement service business. These factors all represent things that any entity, other

than a sham affiliated business arrangement, would have to have or do to create a

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

business, etc. A non-affiliated business arrangement that doesn‟t have or do these

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

of business it would not have to compete at all for business.

Clearly, a business that cannot stand on its own to provide settlement

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

such interpretations… as may be necessary to achieve the purpose of [RESPA],”

12 U.S.C. § 2117(a), is declare that in order for this exception to apply, the

affiliated business arrangement must be a bona fide provider of settlement services,

e.g. it must be a legitimate business providing settlement services – not merely a

legal entity created to funnel illegal kickbacks and unearned fees to its partners.

F. OHIO DEPARTMENT OF INSURANCE’S ADOPTION OF HUD’S “TEN FACTOR

TEST”

The district court‟s holding that HUD Statement of Policy 1996-2 “lacks

identifiable standards under which authorities” * * * “can enforce its

provisions,” RE #190, Op. 12, defies Ohio‟s Department of Insurance adoption of

a state regulation that encompass HUD‟s Policy Statement 1996‟s ten factors. On

January 1, 2007, the Ohio Department of Insurance adopted an administrative rule

known as, “Title insurance controlled business arrangements,” OAC 3901-7-04.

OAC 3901-704 provides in relevant part as follows:

3901-7-04 Title insurance controlled business arrangements.

(A) Purpose. The purpose of this rule is to establish ownership and
licensing standards for title insurance agents and agencies in
accordance with division (B) of section 3953.21 of the Revised Code,
18
which prohibits certain persons from acting as agents for a title
insurance company.
***
(C) Definitions. As used in this rule:

***
(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.

(D) No business entity may be licensed as a title insurance agency

where one or more prohibited persons control the business entity.

(E) A business entity may not become licensed or remain licensed

where the entity is merely a sham arrangement used as a conduit for
inducements or compensation for business payments in violation of
section 3953.26 and/or section 3933.01 of the Revised Code. In
determining whether an entity is a sham arrangement, the
superintendent may consider factors similar to those used to determine
whether a controlled business arrangement is a sham arrangement
under RESPA, including, but not limited to:

(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?

(5) Is the new entity providing substantial services, i.e., the

essential functions of the real estate settlement service, for which it
receives a fee?

(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?

(9) Is the new entity actively competing in the marketplace for

business or does it provide services solely for one or more of the
parents?

(F) Where a person has a direct or beneficial ownership interest in a

business entity title insurance agent, the only thing of value that can
flow from such an arrangement, other than permissible payments for
services rendered, is a return on ownership interest.

G. THE TITLE INDUSTRY’S UNDERSTANDING OF HUD’S “TEN FACTOR TEST”

Since Congress‟s 1993 amendments to RESPA and HUD‟s issuance of its

Statement of Policy 1996-2 Regarding Sham Controlled Business Arrangements,

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

title insurance continuing education seminar contains a segment dedicated to

REPSA and HUD‟s “ten factor test,” where attendees are brought up to date on the

latest court cases and enforcement actions.

HUD‟s “ten factor test” has come to provide the specific guidance necessary

to understand what is and what is not an “affiliated business arrangement” that

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

RESPA compliant “affiliated business arrangement.” From a common sense

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

will not be in violation of HUD‟s application of RESPA‟s anti-kickback

provisions. Without HUD‟s guidance, the title insurance industry is left with no

reasonable guidelines on how a RESPA compliant “affiliated business

arrangement” can be established.

21
 Anne L. Anastasi, president of the American Land Title Association

(“ALTA”), stated before the Pennsylvania Insurance Department, on behalf of

ALTA, in obvious reliance on HUD‟s “ten factor test,” that:

* * * a compliant ABA is simply a full service title agency. The only

difference between a compliant ABA and an independent full service
title agency is in the ownership makeup: ABA owners may be able to
direct business.

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

In addition, the title insurance industry is served by several organizations

dedicated to assisting those who wish to do so, establish “compliant affiliated

business arrangements.” RESPRO, the Real Estate Services Providers Council, a

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.”

Troon Management Corp., led by American Land Title Association

President Anne L. Anastasi, is “recognized as having created one of [the] country‟s

first controlled business arrangements in 1984 as well as having guided a broad

base of clients in opening successful RESPA compliant affiliated business

8
arrangements in thirty major cities, covering sixteen states.” Troon offers a 2-

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.”

October Research Corporation, which claims to be the nation‟s leading

provider of market intelligence, business news, and regulatory information for the

real estate, settlement services and mortgage origination industry, offers an

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

of building and maintaining legal affiliated business arrangements under RESPA

10
and the Department of Housing and Urban Development‟s guidelines.”

October Research Corporation‟s guide purports to include a “detailed educational

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

maintain part-time employees; a section explaining the rules around subcontracting

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

10-point sham AfBA [affiliated business arrangement] test; rules on marketing

arrangements; and the rules surrounding marketing arrangements, offering

discounts with bundled services and modifying AfBA [affiliated business

arrangement] disclosures.” 11

There are even companies offering compliance audits for affiliated business

arrangements, such as Alliance Solutions, LLC. Alliance “can provide a

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

with a complete and confidential report as to [their] findings that includes

suggestions and implementation plans.” 12

Clearly the businesses that have sprung-up offering support services to title

industry participants, all centered around creating RESPA compliant affiliated

business arrangements, could not have done so without an understanding of HUD‟s

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

necessary guidance for anyone wishing to create a legal affiliated business

arrangement, and those companies providing consulting services to them, to have

confidence in the manner in which they are created and managed.

As applied by the title insurance industry, HUD‟s Statement of Policy 1996-

2 “ten factor test” is a viable analytical tool which, contrary to the District Court‟s

finding of “unconstitutional vagueness,” serves the vital interests of the title

insurance industry desire to self-regulate “affiliated business arrangements.”

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,

/s/ Gregory W. Happ /s/ Robert A. Franco

Gregory W. Happ
Ohio Sup. Ct. Reg. No. 0008538
238 West Liberty Street
Medina, Ohio 44256
E-mail gregoryhapp@msn.com
Robert A. Franco
Ohio Sup. Ct. Reg. No. 0085081
1007 Lexington Avenue
Mansfield, Ohio 44907
E-mail: rfranco@attorneyfranco.com

Attorneys for Amicus Curiae,

National Association of Independent Land Title Agents

***

26
 CERTIFICATE OF COMPLIANCE

Pursuant to FRAP 32(a)(7)(B)(C) and Sixth Circuit Rule 32(a), the

undersigned certifies that:

1. This brief complies with the type-volume limitation of Fed. R. App. P.

32(a)(7)(B) because this brief contains 6,075 words, excluding the parts of

the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).

2. This brief complies with the typeface requirements of Fed. R. App. P.

32(a)(5) and the type style requirements of Fed. R. App. P. 32 (a)(6) because

this brief has been prepared in a proportionally spaced typeface using

Microsoft Word 2010 in Times New Roman, 14-point font.

3. The undersigned understands a material misrepresentation in completing this

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

person signing the brief.

/s/ Gregory W. Happ Dated: January 11, 2011

Gregory W. Happ
Attorney at Law

27
 CERTIFICATE OF SERVICE

In compliance with FRAP Rule 25 and L.R. 25, I hereby certify that on this

11th day of January, 2011, I electronically filed the foregoing BRIEF OF

NATIONAL ASSOCIATION OF INDEPENDENT LAND TITLE AGENTS AS

AMICUS CURIAE IN SUPPORT OF PLAINTIFFS-APPELLANTS AND IN

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.

/s/ Gregory W. Happ January 11, 2011

Gregory W. Happ
Attorney for Amicus Curiae
National Association of Independent
Land Title Agents (NAILTA)

28