Does the federal real estate settlement law (RESPA) override Maryland's ban on real estate settlement kickbacks?

Plain-English summary

A member of the House of Delegates asked the Attorney General whether a Maryland law banning kickbacks in real estate settlements, Article 27, §465A, had been preempted by a 1992 federal regulation (Regulation X) implementing the Real Estate Settlement Procedures Act (RESPA). The federal rule allowed certain payments between businesses in a "controlled business arrangement," such as a franchisor receiving a return on its ownership stake in a settlement-services provider that its franchisees referred business to, while Maryland's law flatly banned any fee, gift, or other consideration paid or received in connection with soliciting or arranging a real estate settlement.

The Attorney General concluded that Maryland's law survived preemption. RESPA preempts a state law only where the state law is inconsistent with, and less protective than, federal law, and the federal HUD Secretary was barred from finding preemption where the state law gave consumers greater protection. Because Maryland's flat ban eliminated financial inducements that RESPA's controlled-business-arrangement exception still allowed, the opinion found Maryland's law more protective of consumers, not less, so it was not preempted.

Currency note

This opinion was issued in 1993. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule mentioned here, particularly since Maryland's kickback prohibition has since been recodified out of Article 27 into the Criminal Law Article, and federal RESPA regulations have also been amended since 1993.

Common questions

Did federal law override Maryland's ban on real estate settlement kickbacks?
No. The opinion concluded that the 1992 HUD regulation implementing RESPA did not preempt Article 27, §465A, because Maryland's law offered consumers more protection than federal law, and RESPA only preempts state laws that are less protective.

Why didn't the federal "controlled business arrangement" exception apply in Maryland?
The opinion explained that RESPA's controlled-business-arrangement exception allowed certain payments between affiliated settlement-service providers, but Maryland's statute did not recognize that exception at all: it banned the underlying kickback outright, which the opinion treated as a more protective, not less protective, state rule.

Who decides whether a state real estate law is preempted by RESPA?
Under the regulation discussed in the opinion, the HUD Secretary had authority to determine preemption on request, but the opinion noted this determination could only find preemption where the state law failed to give consumers greater protection than federal law.

Background and statutory framework

Article 27, §465A, enacted in 1967, broadly prohibited any person, firm, or corporation connected with a Maryland real estate settlement from paying or receiving a fee, gift, rebate, or other consideration in exchange for soliciting or arranging that settlement business, with a violation punishable as a misdemeanor. In November 1992, HUD adopted a final rule (Regulation X) under RESPA that permitted certain payments among participants in a "controlled business arrangement," meaning an arrangement where a person able to refer settlement business had an ownership or affiliate interest of more than one percent in the provider receiving the referral, so long as disclosure and other regulatory requirements were met.

The opinion applied RESPA's preemption provision, 12 U.S.C. §2616, which barred HUD from finding a state law inconsistent with RESPA if the state law gave consumers greater protection. Citing the Supreme Court's presumption against preemption of state police-power laws in Rice v. Santa Fe Elevator Corp. and Cipollone v. Liggett Group, the opinion read this preemption provision narrowly and concluded that Maryland's flat kickback ban, by eliminating financial inducements that indirectly cost the consumer, gave greater protection than RESPA's conditional allowance for controlled-business-arrangement payments, so it was not preempted.

Citations and references

Statutes:

• Article 27, §465A, Maryland's flat prohibition on kickbacks and referral payments in real estate settlements
• 12 U.S.C. §2607, RESPA's general prohibition on fees for referring settlement business
• 12 U.S.C. §2607(c)(4) and §2601(7), RESPA's exception for payments within a "controlled business arrangement"
• 12 U.S.C. §2616, RESPA's preemption standard, barring preemption of state laws that give consumers greater protection
• 24 C.F.R. §3500.13(b)(2) and §3500.1(b), the HUD Regulation X provisions on preemption determinations

Cases:

• Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947), the presumption against preemption of state police-power laws absent a clear congressional purpose
• Cipollone v. Liggett Group, Inc., 112 S.Ct. 2608, 2618 (1992), construing express preemption clauses narrowly
• Greenwald v. First Fed. Savings & Loan Ass'n, 446 F. Supp. 620, 625 (D. Mass. 1978), aff'd 591 F.2d 417 (1st Cir. 1979), on HUD's authority to determine state-law inconsistency

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1993/78oag086.pdf

Original opinion text

CONSTITUTIONAL LAW - PREEMPTION - PROPERTY - FEDERAL LAW DOES NOT PREEMPT MARYLAND LAW PROHIBITING KICKBACKS IN CONNECTION WITH REAL ESTATE SETTLEMENTS

January 27, 1993

The Honorable Donald C. Fry
House of Delegates

You have requested our opinion concerning the effect of recent federal regulations on Article 27, §465A of the Maryland Code. Specifically, you ask whether the Maryland statute has been preempted by the revised Regulation X of the federal Department of Housing and Urban Development.

For the reasons stated below, we conclude that Article 27, §465A has not been preempted.

I

Maryland Anti-Kickback Legislation

Article 27, §465A broadly prohibits kickbacks or other types of referral payments in connection with real estate settlements: "No person, firm, or corporation having any connection whatsoever with the settlement of real estate transactions involving land situated and lying in this State, shall, for the purpose of soliciting, obtaining, retaining, or arranging any real estate settlement for real estate settlement business, pay to or receive from, any other person, firm, or corporation any fee, compensation, gift (except promotional or advertising materials for general distribution), thing of value, rebate, or other consideration, including loans and advancements of commissions or deposit moneys." A violation of this provision is a misdemeanor punishable by fine or imprisonment.[1]

This prohibition was enacted as Chapter 756 of the Laws of Maryland 1967 in essentially its present form. Although we are not aware of any legislative history bearing on the purpose of the provision, it is evidently intended to prevent a real estate broker, for example, from having a financial incentive to steer a purchaser of real property to a particular provider of settlement services. Presumably, the General Assembly perceived that the purchaser would be better served if advice about settlement services was free of such bias.

II

Regulation X

On November 2, 1992, the federal Department of Housing and Urban Development ("HUD") adopted a final rule detailing the requirements of the Real Estate Settlement Procedures Act of 1974 ("RESPA"), taking into account certain amendments in 1983. See 24 C.F.R. Part 3500.

RESPA generally prohibits any fee or kickback for a referral of "business incident to or part of a settlement service ...." 12 U.S.C. §2607. As amended in 1983, however, RESPA allows certain payments among participants in a "controlled business arrangement." 12 U.S.C. §2607(c)(4). A "controlled business arrangement" is one in which a person in a position to refer settlement business "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 refers business to that provider. 12 U.S.C. §2601(7).

For purposes of this opinion, we need not explore the details under which payments otherwise prohibited by RESPA may be made among participants in a "controlled business arrangement."[2]

The key point is that Article 27, §465A prohibits certain payments that federal law allows in controlled business arrangements. The question, then, is whether federal law preempts the Maryland prohibition.

III

Preemption Analysis

RESPA preempts state laws only to the extent of any inconsistency with RESPA. The HUD Secretary is given authority to determine whether such inconsistencies exist but "may not determine that any State law is inconsistent with any provision of [RESPA] if the Secretary determines that such law gives greater protection to the consumer."[3] 12 U.S.C. §2616. Moreover, Regulation X states as follows:

In determining whether provisions of State law or regulations concerning controlled business arrangements are inconsistent with RESPA or this part, the Secretary may not construe those provisions that impose more stringent limitations on controlled business arrangements as inconsistent with RESPA so long as they give more protection to consumers and/or competition.

24 C.F.R. §3500.13(b)(2).

Congress and HUD enacted these preemption provisions with presumed knowledge of the well-established "assumption that the historic police powers of the States were not to be superseded by [federal statute] unless that was the clear and manifest purpose of Congress." Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947). Hence, express preemption provisions like these are to be construed narrowly "in light of the presumption against the preemption of state police power regulations." Cipollone v. Liggett Group, Inc., 112 S.Ct. 2608, 2618 (1992).

A narrow application of RESPA preemption means that the HUD Secretary could find Article 27, §465A to be preempted only if the Maryland law manifestly failed to give greater protection to the consumer than does RESPA. But surely the General Assembly could reasonably conclude that, even if a property buyer is dealing with a participant in a "controlled business arrangement" as defined by federal law, advice about settlement services should be offered without the prospect of financial inducement. Under this view, Article 27, §465A provides greater protection to consumers than RESPA by eliminating such inducements, for which the consumer would indirectly pay. While we do not doubt that economic arguments the other way could be mounted, RESPA preemption, construed narrowly as it should be, leaves such fairly debatable policy judgments to the states.

We recognize that the HUD Secretary has ultimate authority to decide whether Article 27, §465A indeed "gives greater protection to the consumer." See Greenwald v. First Fed. Savings & Loan Ass'n, 446 F. Supp. 620, 625 (D. Mass. 1978), aff'd 591 F.2d 417 (1st Cir. 1979). But, in our opinion, if the Secretary applies the law correctly, he would conclude that §465A is not preempted.

IV

Conclusion

In summary, it is our opinion that Article 27, §465A of the Maryland Code is not preempted by federal law.

J. Joseph Curran, Jr.
Attorney General

Jack Schwartz
Chief Counsel
Opinions & Advice

[1] The section contains certain exceptions that are not relevant to your inquiry.

[2] One illustration, drawn from the explanatory material in the HUD regulation, conveys the essence of what is now permitted under federal law: Suppose that A, a franchisor for franchise real estate brokers, owns B, a provider of settlement services. C, a franchisee of A, refers business to B. Under this controlled business arrangement, and assuming that certain disclosure and other requirements of the regulation are satisfied, B is permitted to make payments to A of dividends representing a return on A's ownership interest.

[3] Regulation X provides that: "Upon request by any person, the [HUD] Secretary is authorized to determine if inconsistencies with State law exist ...." 24 C.F.R. §3500.1(b).