86 [7 8 O p . A tt ’y

Th e se c tio n c onta ins c e rt a ine xcepti on s th at areno t r e le va nt t o 1 your inquiry

. C ONSTI TUTI ONAL L A W

) P REE M PT IO N

— P ROPE RT Y

— F E D E RA L L A W D OES N OT P REEMPT M ARYL AN D L A W P ROHI B I T I NG K I CKBACKS I N C ONN E CT I ON W I T H R EAL E STATE S ETT LEMENTS

J anuary27, 1993

T he Hon orab l e D on ald C

. Fry H ous e of D el egat es Y ou have r eques t ed our opi ni on conce r ni ng t he ef fec tof r ece nt fede r al reg u lat i ons on A r t i cl e 27, §465A of t he M ary l and C ode. Speci f i c a l l y , y o u a s k whe t h e rt h e M a r y l a n d s t a tu t e h a s b e en pr eempt ed bythe r evi s ed R egul at i on X of t he fe der al D epart m entof H o u sin g a n d U rb a n D e v e lo p m e n t. For t he r eas ons s t at ed bel ow , w e conc l ude thatA r t i cl e 27, § 4 6 5 A h a s n o t b e e n p re e m p te d

. I

M aryl and A nt i
- K i ckback L egi s l at i on A r t i cl e 27, §465A br oadl y pr ohi bi t s ki ckbac ks orot hert ypes o f r e f e r r a l p a y me n t s i n c o n n e c t i o n wi t h r e a l e s t a t e s e t t l e me n t s : “ No p e rso n , f irm , o r c o rp o ra tio n h a v in g a n y c o n n e c tio n w h a tso e v e r w ith t he s et t l ement of r eal es t at e tr ans act i ons i nvol vi ng l and s i tuat ed and l y i ng i n t hi s St at e, s hal l , fort he purpos e of s ol i ci t i ng, obt ai ni ng, re tain in g , o r a rra n g in g a n yre a l es tate se ttl e m e n t f o r re a l es tate s e t t l e me n tb u s i n e s s , p a y t o o r r e c e i v e f r o m, a n yo t h e rp e r s o n , f i r m, orcorp o rat i on anyfee , compensa t i on, gi ft( exce ptpr om ot i onal or advert i s i ng m at er i al s for gener al di s t r i but i on) , t hi ng of val ue, r ebat e, or o t h e r c o n s i d e r a t i o n , i n c l u d i n g l o a n s a n d a d v a n c e me n t s of com m i ssi on s or depo si t m on ey s. ” A viol at i on of t his provis i on i s a m isd e m e a n o r p u n ish a b le b yf in e o r im p riso n m e n t. 1
T hi s pr ohi bi t i on w as enac t ed as C hapt er 7 5 6 of t he Law s of M ary l and 1967 i n es s ent i al l yi t s pr es entfor m . A l t hough w e ar e notG en. 86] 87

One illustration, drawn from the e xplanatory material in the HUD 2 regulat i o n , co nveys the essenc e of what is now permitted under federal law: Suppose that A, a fra nchisor for fra

nchise real estate broker s, owns B , a pro vid e r of se ttl e me nt s e rv ic e s. C, a franc his e e of

A, re fers bu sin e ss to B. Unde r this controlled business ar rang ement, and a ssuming that cer tain disclosure a

nd other re quirements of theregulat i o n aresatisfied, B is per mitted to make pay

ments to A of dividends representinga re turn on A’ s o wn e rs hip int e re st. a war e o f a n y l e g i s l a t i v e h i s t o r y b e a r i n g o n t h e p u rp o s e of t he pr ovi s i on, i ti s evi dent l yi nt ended t o pr eventa r eal es t at e br oker , for exampl e, fr om hav ing a fi nanci al i ncent i ve t o s t eera pur chas erof real propert yt o a p art i cula r p rov i der of set t l em ent s ervi ces. Pr e s u ma b l y , t h e Gen e r a l As s e mbl yp e r c e i v e d t h a tt h e p u r c h a s er w oul d be bett ers er ved i f advi ce abouts et t l ement s er vi ces w as fr ee o f s u c h b ia s . II
R e gul at i on X O n N ovember 2, 1992, t he fe der al D epart m entof H ous i ng and U rban D evel opm ent( “H U D ”) adopt ed a f i nal rul e det ai l i ng t he r equi r ement s of t he R eal E s t at e Set t l ement Pr ocedur es A ctof 1974 (“ R E S P A ” ), t a k in g in to a c c o u n t c e rt a in a m e n d m e n t s i n 1 9 8 3

. See 2 4 C .F .R . P a rt 3 5 0 0

. R E SPA gener al l ypr ohi bi t s anyfee orki ckbac k fora r efe r r al o f “ b u s i n e s s i n c i d e n tt o o r p a r t o f a s e t t l e me n t s e r v i c e . . . . ” 1 2 U. S

. C. § 2 6 0 7 . A s a m e n d e d in 1 9 8 3 , h o w e v e r, R E S P A a llo w s c e rta in pay m ents a mong pa r t i ci pan t s i n a “co ntr oll ed b usi ness arr ang em ent. ” 12 U

. S

. C

. §2 60 7(c) (4)

. A “con t rol l ed b us iness ar r angem en t” i s one i n w hi ch a pe r s on i n a pos i t i on t o r efe r sett lem en t bu sine ss “h as e ith er an af fil iat e re lat ion sh ip w ith o r a di r ectorben ef

ici al ow ner s hi p i nt er es tof m or e than 1 per centi n a p rov ider o f se tt lem en t service s” an d ref ers bu sine ss t o that p rov ider. 1 2 U

. S

. C

. § 2 6 0 1 (7).
F o r p u r p o s e s o f

th is o p in io n , w e n e e d n o t ex p lo re th e d e tails underw hi ch paym ent s ot herw i s e pr ohi bi t ed by R E SPA m aybe m a d e a m o n g p a rt ic ip a n ts in a “ c o n tr o lle d b u s in e s s a rr a n g e m e n t.” 288 [7 8 O p . A tt ’y

Regulation X provides that: “U pon reque st by

any person, the 3 [HUD] Se c re tary is autho ri zed to de te rm ine if inc on sis te nc ie s w ithState law exist ....” 24 C.F.R. §3500.1(b). T h e k e yp o in t is th a t A rticle 2 7 , § 4 6 5 A p ro h ib its c e r ta in p a y m e n ts t hatfede r al l aw al l ow s i n contr ol l ed bus i nes s arr angement s . T he ques t i on, t hen, i s w hether fede r al l aw pr eempt s the M ary l and p ro h ib itio n . III

P r e e m p tio n A n a ly sis
R E SPA pr eempt s s t at e l aw s onl yt o the ex t entof any in c o n sis ten c yw ith R E S P A . T h e H U D S e c re tar yis g iv e n a u th o rity t o det erm ine w hethers uch i ncons i s t enci es exi s tbut“maynot det er m i ne t hatanySt at e l aw i s i ncons i s t entw i th anypr ovi s i on of [R E S P A ] if t he Secr et arydet er m i nes t hats uch l aw gi ves gr eat er p ro tecti o n to the co n su m er.” 1 2 U

. S

. C

. § 2 6 1 6

. M o reo v er, 3 R e g u latio n X sta tes a s f o llo w s: I n det er m i ni n g w hetherpr ovi s i ons of St at e l aw orr egul at i ons conce r ni ng contr ol l ed b u sin e ss a rra n g e m e n ts are in c o n sis ten t w ith R E SPA o rt hi s par t , t he Secr et arym aynot co n stru e tho se p rov isi o n s tha t i m p o se m o re stri ng ent li m i t at i on s on co ntr oll ed b usi ness arr ang em ents as i nco nsi st ent w i t h R E S P A so lo n g a s th e yg iv e m o re p r o tec tio n to cons um er s and/ orcompet i t i on. 2 4 C .F .R . § 3 5 0 0 .1 3 (b )( 2 ). C o n g re ss a n d H U D e n a c ted th e se p re e m p tio n p ro v isio n s w ith pr es u m ed know l edge of t he w el l

- es t abl i s hed “a s s um pt i on t hatt he hi s t or ic p o li ce pow er s of t he St at es w er e nott o be s uper s eded by [fe der al s t at ut e] unl es s t hatw as t he cl earand mani fes tpurpos e of C ongress.” R i ce v. Sa nta Fe E l evator C orp . , 331 U

. S. 218, 230 ( 1947)

. H ence , expr es s pr eempt i on pr ovi s i ons l i ke thes e ar e t o beG en. 86] 89

cons t rued narr ow l y“i n l i ghtof t he presu m p ti on agai ns tt he pr eempt i on of s t at e pol i ce pow err egul at i ons . ” C ip o llo n e v . L ig g e tt G r oup, I nc . , 1 1 2 S

. C t. 2 6 0 8 , 2 6 1 8 (19 9 2 ). A nar r ow appl i cat i on of R E SPA pr eempti on m eans t hatt he H U D S e c re tar yc o u ld f

in d A rticle 2 7 , § 4 6 5 A to b e p re e m p ted o n ly if th e M a ry lan d law m a n if e stlyf a iled to g iv e g re a ter p ro tec tio n to th e c o n su m e r th a n d o e s R E S P A

. B u t su re lyth e G e n e ra l A ss e m b ly coul d r eas onabl yconcl ude that , even i f a pr oper t ybuy eri s deal i ng w i t h a par t i ci pant i n a “contr ol l ed bus i nes s arr angement ” as defi ned byfede r al law , advi ce a bouts et t l ements er vi ces s houl d be off er ed wi t h o u tt h e p r o s p e c to f f i n a n c i a l i n d u c e me n t

. Un d e rt h i s v i e w, A r t i cl e 27, §4 6 5 A p r ovi des gr eat erpr ot ect i on t o cons um er s t han R ESP A bye l i mi n a t i n g s u c h i n d u c e me n t s , f o rwhi c h t h e c o n s um er w o u ld in d ire c tlyp a y . W h ile w e d o n o t d o u b t th a t ec o n o m ic ar gum ent s t he otherw aycoul d be mount ed, R E SPA pr eem p ti on, c o n stru e d n a rro w lya s it sh o u ld b e , le a v e s s u c h f a irlyd e b a tab le p o lic yju d g m e n ts to th e s ta te s . W e re c o g n ize th a t th e H U D S e c re tar y h a s u lti m a te a u th o rityto deci de w hether A r t i cl e 27, §465A i ndeed “ gi ves gr eat erpr ot ect i on t o the cons um er . ” See G r eenwal d v. F i rs tFed. Savi ngs & Loan A s s ’ n, 4 4 6 F . S u p p . 6 2 0 , 6 2 5 (D . M a s s . 1 9 7 8 ), af f ’ d 591 F. 2d 417 ( 1s t C i r . 1979)

. B ut , i n our opi ni on, i f t he Secr et aryappl i es t he l aw c o rr e c tly, h e w o u ld c o n c lu d e th a t § 4 6 5 A is n o t p re e m p te d

. IV C oncl usi on I n s um m ary , it is ouropi ni on t hatA r t i cl e 27, §465A of t he M a ryla n d C o d e is n o t p re e m p te d b yf e d e ra l la w .

J. Jo sep h C u rran , Jr. A t t or ney G ener al
Ja c k S c h w a rtz C hi ef C ouns el O pi ni ons & Advi ce