Reed Smith Client Alerts

On November 10, 2014, the U.S. Supreme Court denied a petition for a writ of certiorari in a case entitled Douglas F. Whitman v. United States.1 Whitman was seeking to have the Supreme Court review (and, hopefully, overturn) his criminal conviction under section 10(b) of the Securities Exchange Act of 1934 (the “Securities Act”),2 which had been affirmed by the Second Circuit Court of Appeals. Section 10(b) makes it unlawful to “use or employ, in connection with the purchase or sale of any security …, any manipulative or deceptive device or contrivance in contravention of such rules or regulations as the [Securities and Exchange] Commission [the “SEC”] may prescribe as necessary or appropriate in the public interest or for the protection of investors.”3

One may well ask what this has to do with section 8 of the Real Estate Settlement Procedures Act (“RESPA”).4 The answer is, potentially a whole lot. Recall that section 8 prohibits, among other things, the payment or receipt of referral fees in connection with federally related mortgage loans, and attaches both civil and criminal penalties to violations of its provisions.

Justice Scalia’s Statement Respecting Denial of Certiorari In a statement respecting the denial of certiorari in Whitman, Justice Scalia, joined by Justice Thomas, raised the following question: “Does a court owe deference to an executive agency’s interpretation of a law that contemplates both criminal and administrative enforcement?” In affirming Whitman’s criminal conviction, the Second Circuit had deferred to the SEC’s interpretation of section 10(b).

Justice Scalia stated in no uncertain terms that this was error. His chief contention on this point is that “only the legislature may define crimes and fix punishments,” and that “Congress cannot, through ambiguity, effectively leave that function to the courts – much less to the administrative bureaucracy.” He reasoned that:

With deference to agency interpretations of statutory provisions to which criminal prohibitions are attached, federal administrators can in effect create (and uncreate) new crimes at will, so long as they do not roam beyond ambiguities that the laws contain. Undoubtedly Congress may make it a crime to violate a regulation, see United States v. Grimaud, 220 U.S. 506, 519 (1911) but it is quite a different matter for Congress to give agencies – let alone for us to presume that Congress gave agencies – power to resolve ambiguities in criminal legislation, see Carter v. Welles-Bowen Realty, Inc., F. 3d 722, 733 (CA6 2013) (Sutton, J., concurring).

Justice Scalia also indicated that for a court to defer to an administrative agency’s interpretation of a criminal law would “upend ordinary principles of [statutory] interpretation,” specifically, the rule of lenity, which “requires interpreters to resolve ambiguities in criminal law in favor of defendants.” In this regard, he stated:

Deferring to the prosecuting branch’s expansive views of these statutes “would turn [their] normal construction … upside-down, replacing the doctrine of lenity with a doctrine of severity.” Crandon v. United States, 494 U.S. 152, 178 (1990) (Scalia, J., concurring in judgment).

And, relative to how a court should treat administrative interpretations of such a statute in a civil context, he indicated that “if a law has both criminal and civil applications, the rule of lenity governs its interpretation in both settings,” citing Leocal v. Ashcroft5 and United States v. Thompson/Center Arms Co.6

However, despite his belief that the Sixth Circuit should not have afforded deference to the SEC’s interpretation of section 10(b), Justice Scalia nevertheless agreed with the decision of his fellow justices to deny the petition for certiorari. He did so primarily because Whitman did not seek Supreme Court review on the issue of deference and the procedural history of the case made it a poor setting in which to reach the question. In closing, however, he stated that “when a petition properly presenting the question comes before us, I will be receptive to granting it.”

Potential Impact on Agency Interpretations of RESPA § 8 Similar to section 10(b) of the Securities Act, section 8 of RESPA is a law that provides for both criminal and administrative enforcement.7 Also like section 10(b) of the Securities Act, it authorizes an administrative agency – initially, the U.S. Department of Housing and Urban Development (“HUD”), and since 2011, the Bureau of Consumer Financial Protection (“CFPB”) – to interpret it.8 Both HUD and the CFPB have over the years exercised this interpretative authority, through regulations, Statements of Policy, and informal agency guidance.

To say that RESPA section 8 contains ambiguities is merely to state the obvious. These ambiguities are illustrated by the numerous struggles of HUD (and now, the CFPB) and the courts, beginning with the enactment of RESPA and continuing to the present, to try to distinguish between conduct that is prohibited under section 8 and conduct that is permitted. In this regard, one need only recall the numerous and long-running controversies over the legality of computer loan origination system charges, yield spread premiums, settlement service provider mark-ups and overcharges, affiliated business arrangements (including captive reinsurance arrangements), “desk rentals,” work-share arrangements, and marketing services agreements, to name just a few.

Indeed, one of the decisions on which Justice Scalia relies in his Statement, Carter v. Welles-Bowen, was a civil action in which the plaintiffs claimed that the defendant violated RESPA section 8 by engaging in an affiliated business arrangement that did not meet the HUD 10-factor test for legitimacy.9 Ruling for the defendants, the Sixth Circuit invalidated the HUD test, holding that it was entitled neither (i) to Chevron deference, because, among other reasons, as a Statement of Policy and according to its own words, it was not a “binding interpretation” of the law, nor (ii) “to weight in proportion to its persuasiveness” under Skidmore, because it is presented only as “guidelines that [HUD] intends to consider” and not as its definitive interpretation of the Act, and is not “compatible with the imperative to provide fair warning in the criminal context.” The concurring opinion of Judge Sutton, cited by Justice Scalia, would have invalidated the HUD 10-factor test because it impermissibly resolves ambiguities in the law against the defendant in violation of the rule of lenity.

Similarly, in another RESPA civil case, the U.S. Supreme Court, in a decision written by Justice Scalia, unanimously rejected HUD’s interpretation, in a 2001 HUD Statement of Policy, that RESPA section 8(b) prohibits a settlement service provider’s “undivided unearned” charge to a borrower.10 The Court found that such interpretation “goes beyond the meaning that the statute can bear.” Section 8(b) outlaws the giving and accepting of “any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service ... other than for services actually performed.”11

Arguing in favor of HUD’s interpretation, plaintiffs maintained that a “portion, split or percentage” of a charge is broad enough to include the entirety (100 percent) of the charge, and, although 8(b) refers to both a “giver” and an “acceptor” of the charge, one could consider the borrower to be the giver and the lender the acceptor. Recognizing, however, that this would make the borrower equally liable with the lender, plaintiffs pointed to HUD’s statement in its Statement of Policy that “[it] is, of course, unlikely to direct any enforcement actions against consumers for the payment of unearned fees.”12 Justice Scalia, while not mentioning the rule of lenity, responded by noting that section 8(b) “is also enforceable through criminal prosecution” and that “prosecutorial discretion is not a reason for courts to give improbable breadth to criminal statutes.”13

Takeaway Particularly in light of Justice Scalia’s Statement in Whitman, defendants faced with a RESPA section 8 claim based on a HUD (or CFPB) administrative interpretation would seem well-advised to assert, in addition to other defenses they may have, an affirmative defense that such interpretation conflicts with the rule of lenity and is therefore not entitled to deference. 

  1. 574 U.S. __ (2014).
  2. 15 U.S.C. § 78j(b).
  3. 15 U.S.C. §§ 78a through 78pp.
  4. 12 U.S.C. § 2607.
  5. 543 U.S. 1, 11-12, n.8 (2004).
  6. 504 U.S. 505, 578, n.10 (1992) (plurality opinion), id. at 519 (Scalia, J., concurring in judgment).
  7. 12 U.S.C. § 2607(d) provides:
    (1) Any person or persons who violate the provisions of this section shall be fined not more than $10,000 or imprisoned for not more than one year, or both.
    (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.
    (4) The Bureau, the Secretary, or the attorney general or the insurance commissioner of any State may bring an action to enjoin violations of this section.
  8. 12 U.S.C. 2617(a).
  9. Statement of Policy 1996-2 regarding sham controlled business arrangements, 61 Fed. Reg. 29258 (June 7, 1996).
  10. Freeman v. Quicken Loans, 132 S.Ct. 2034 (2012).
  11. 12 U.S.C. 2607(b).
  12. Id. at 2041.
  13. Id.2


Client Alert 2015-003