A major federal regulation which has loomed over the title and settlement services industry since it was implemented more than a year ago is now on pause following a district judge’s order.
The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) began enforcement of the “Anti-Money Laundering Regulations for Residential Real Estate Transfers” final rule at the beginning of March, mere weeks before FinCEN was forced to announce that reporting liability under the rule was suspended.
When Celia Flowers, owner of Flowers Title Companies, LLC, originally filed her suit against FinCEN, overturning the rule was the goal, but it seemed at the time like a tall order – especially when the legal proceedings continued past the rule’s enforcement date. However, Pacific Legal Foundation (PLF) Attorney Luke Wake, who represented Flowers in the case against FinCEN, kept spirits high.
“Honestly, Luke was optimistic through the whole thing, and it helped me be a bit more optimistic,” Flowers told The Legal Description. “But when the (decision) didn’t come down by the time (FinCEN was) going to enforce the statute, then I got a little discouraged. But then, Luke said, ‘Well, you just don’t know.’ And he was right.”
On March 19, District Judge Jeremy Kernodle, representing the Tyler Division of the U.S. District Court for the Eastern District of Texas, ruled that the final rule represented a violation of the Bank Secrecy Act (BSA) and order it to be vacated.
Along with statutory issues under the BSA, Flowers and her team challenged FinCEN’s final rule from a broad front, including arguments of the rule’s unconstitutionality.
“While Congress has some leeway to delegate some authority, Congress can’t give away its power to make law, and the view FinCEN was taking of its powers under the BSA was it essentially had sweeping powers to require disclosures on literally any type of consumer transaction – essentially without limit,” Wake told The Legal Description. “So, we argued that if you did interpret the statute as giving them the authority they claimed, that was a violation of the non-delegation doctrine and relatedly, we had two other constitutional claims.
“One was that (the rule) violated the Fourth Amendment of the constitution because the government was collecting this information essentially on a fishing expedition for criminal activity,” Wake added. “When the government wants to collect papers from individuals, it has to get a warrant. And finally, we had an argument that this all violated the commerce clause. Of course, there’s a lot the federal government can do under the commerce clause, but we argued that the specific thing they were trying to accomplish (with this rule) was merely giving reports on transactions that were already consummated – that’s not regulating commerce, that’s just requiring a report on commerce that’s already happened.”
A crowded playing field
While Flowers was among the first opponents to challenge FinCEN in court over the scope and regulatory burden posed by the final rule, she was far from the last. Other concurrent cases included a lengthy Florida-based court battle between FinCEN and Fidelity National Financial and a recent lawsuit brought against FinCEN by the Puerto Rico Privacy Association, among others.
No stranger to litigating complex cases against federal agencies, Wake said it’s common to have parallel legal challenges happening that could have an impact on one’s own.
“We do a lot of this kind of litigation at PLF in our separation of powers team – pushing back against federal agencies taking very expansive views of their authority, trying to stretch their authority elastically to get at whatever regulatory agenda they want,” Wake said. “So, it’s very common for us, whether we’re suing the FTC or any other agency, for there to be other lawsuits. And of course, you’re always paying attention to everything that’s happening in these other cases because you want to be able to answer questions from your judge when you’re having an argument about what’s going on in these other cases. But also, you want to make sure if there’s anything you can do to make your best arguments – it’s just best practice, pay attention to everything. It’s all relevant.”
The prospect of Flowers and PLF prevailing may have seemed to be at a low point when the U.S. District Court, Middle District of Florida, Jacksonville Division issued its Feb. 20 ruling which found in favor of FinCEN, Treasury Secretary Scott Bessent and FinCEN Director Andrea Gacki. In that case, FinCEN and its final rule also had credible support in the form of an affirming recommendation report from U.S. Magistrate Judge Samuel Horovitz.
However, Wake noted, parallel cases don’t always determine your own outcome.
“You litigate your case, you make your arguments (and) the judge in your case is going to make a decision. They can look to decisions in other district courts and whatnot, but those are only persuasive to the extent that they’re actually well-reasoned,” he said. “And, as we argued … the magistrate’s opinion in the Fidelity case was not persuasive and frankly, the district court that affirmed that (opinion) really didn’t add much in the way of analysis. Of course, you don’t know based on oral argument how these things are going to come down. We’re arguing our case, Fidelity’s arguing their case. Of course, when we get a decision universally vacating the rule, that’s a big deal for Celia but also for everyone else who reaps the benefit of that. Of course, we need to see what happens next.”
Back to business or back to court?
Now that the rule and its transaction reporting requirements are seemingly dead in the water for the time being, business owners find themselves wondering if the legal battle is truly over or just on pause. An appeal by the Department of Justice seems likely, but Wake said he and his team are ready to return to the fight, wherever it takes them.
“At this moment, we’re waiting to see if they appeal. I think sometime in late April, we’ll have the answer to that question, but it does seem like this administration has decided to go to bat for this rule, so they very well may appeal,” he said. “If they don’t, of course that’s the end of this and that’s a very good thing, but we’re prepared to continue litigating this through the Fifth Circuit Court of Appeals if they decide to appeal. We’ve told Celia that we think this is an important issue and we’re going to fight as long as it takes, but this is a good place to be with the district court decision as it is.”
Wake later clarified that the deadline for FinCEN to appeal the decision is May 18.
For Flowers’ part, the courtroom win represents an opportunity to avoid the costs – both monetary and temporal – the rule had imposed.
“Because the implementation date was March 1, we’ve done a whole lot of work to be ready for it,” she said. “The amount of work it takes just to get ready for that – and everybody thinks they’re ready – but thank goodness there are third party vendors that come into the market that decide to fill the hole. But that really adds a lot of cost for the consumer to the product.”
While implementing this regulation, FinCEN has consistently claimed a goal of preventing title fraud, money laundering and other property crimes. However, in her position as a title agent, Flowers said she remains unconvinced of the rule’s effectiveness.
“In Texas, we had three counties that we were doing this reporting and nothing ever came of it to get the criminal. It was not effective,” Flowers said. “So, to extend it like they did, without any evidence of its effectiveness … for us businesspeople, it just didn’t make sense. For every dime I spend, you’re looking at a consumer – especially for these pass-through rules where third-party vendors get in there – that (expense is) going to be passed through straight to the consumer and that’s not good. It was just going to really make things hard. There was no buyer that was going to be happy with all that.”
Is there a better way?
Conflicting rulings from different courts, one of which resulted in a universal vacatur order, leaves the entire situation at a crossroads. Two possible directions stand out in particular; FinCEN appeals and fights to reinstate the rule, or the agency cuts its losses and goes back to the drawing board.
Regardless of what happens next, the debate will continue over the best way to address the rising threat of financial crime targeting American homeowners and homebuyers. While FinCEN and its allies seem convinced that a top-down federal regulation is the appropriate approach, business advocates and state-level regulators continue to argue for more nuance and precision.
From her perspective, Flowers believes the title industry is already doing what it can to exercise diligence and ensure clean transactions on the ground level but worries that future intervention from federal regulators can have unintended consequences.
“Every state is different, and I’m in a highly regulated state and we do a lot to protect sellers and buyers. We’re not the enforcement agency for the world … but we have a lot of things in our processes to do just that,” she said. “I get scared sometimes because the federal government … they could just say ‘we want to make affordable housing, so let’s do away with title insurance.’ Then you’ve got a problem, because then you’re not checking the title to the property – we saw all of that in 2008 and we didn’t lose the title to the property. In 2008, the collateral didn’t hold up, but the titles did.
“I think title companies are the ones that are really doing the best job of catching (deed/title fraud) but we don’t want to be the world’s policemen,” Flowers added.
Ultimately, Wake believes, mission creep and a too-broad scope may have been deciding factors in the final rule’s eventual courtroom defeat. This is exemplified by the judge’s dissent against FinCEN’s attempt to categorize all non-financed real estate transactions as “suspicious.”
“There are all sorts of legitimate reasons that people structure their affairs this way, so you cannot presume that those transactions are suspicious,” Wake said. “The reason (FinCEN was) doing that, though, was because they wanted to reach beyond the authority Congress actually gave them. And this happens all the time; federal agencies try to stretch their authority to get at their preferred agenda. But what makes this a free country is that our laws were made by our elected representatives. Now, if Congress wants to have a debate about how to deal with this problem, then people like Celia would get an opportunity to be heard, more than just some sort of comment letter or something like that. Those people in Congress have to answer to people like Celia and all of us, if they make decisions that are causing problems for our lives and our livelihoods.
“All of this just underscores why it’s important that our laws and the things that are actually affecting our lives and livelihoods are coming from those people who answer to us, as opposed to unelected bureaucrats,” he added.
For more details about the case, watch Flowers and Wake speak with October Research Chief Knowledge Officer Mary Schuster on the Keys to Real Estate podcast.