What are the differences between an Affiliated Business Arrangement (“ABA”) and a Marketing Services Agreement (“MSA”)?
There are significant differences between MSAs and ABAs. These differences relate to ownership, structure and permissible referral activities.
An ABA involves two are more entities that are under common ownership or control. An example of an ABA would be a real estate brokerage company having an ownership interest in a title company. On the other hand, a MSA involves a marketing relationship between two unrelated parties. An example of a MSA would be a lender entering into a marketing relationship with an unrelated real estate brokerage company. The parties involved in MSAs usually do not have common ownership or control.
Under a properly structured ABA, the two commonly owned or controlled entities may refer settlement business to each other. The Real Estate Settlement Procedures Act (“RESPA”) states that settlement service providers can legally refer business under an ABA relationship. Section 8 of RESPA and Section 3500.14 of Regulation X define ABAs as arrangements in which: (1) 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 one percent in a provider of the settlement service; and (2) either of such persons directly or indirectly refers such business to that provider or affirmatively influences the selection of that provider. [ 24 CFR 3500.14]
In order to properly structure an ABA relationship under RESPA, the affiliated companies must: (1) disclose the nature of the affiliated relationship to the consumer at or prior to the referral, (2) not require that the consumer use the referred service provider, and (3) not give any consideration or item of value in exchange for the arrangement, except for the fair market value of the goods, facilities or services actually furnished.
Under a MSA relationship, the two unaffiliated entities absolutely cannot have an agreement to refer settlement business to each other. Rather, a settlement service provider, such as a mortgage company, may enter into a MSA with an unaffiliated settlement service provider, such as a real estate brokerage company, to perform general marketing services in exchange for a fee. Fees paid under a MSA must be based on the fair market value of the advertising and marketing services provided and cannot be based on volume of business.
Unlike ABAs, MSAs do not have an explicit statutory basis. Furthermore, and notwithstanding that RESPA permits “the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed,” [12 U.S.C. 2607(c)(2)] the Consumer Financial Protection Bureau (“CFPB”) has cautioned against the use of MSAs and specifically indicated they cannot be established to circumvent RESPA’s general prohibition on the payment and acceptance of kickbacks and referral fees. [CFPB Compliance Bulletin 2015-05]
Given the CFPB’s position, a MSA should only be entered into after careful evaluation of the risks and rewards associated therewith. A MSA relationship must be properly structured so as not to appear to evade RESPA’s prohibition on the payment and acceptance of kickbacks and referral fees. The marketing services to be performed under a MSA must be clearly articulated and documented within the agreement between the parties. A qualified and independent third party should determine the fair market value for the proposed services and a party should not pay or receive a fee above this amount as it could be a potential violation of Section 8 of RESPA. Prior to making any payments, the parties must, therefore, verify that the services contracted for have actually been performed. If any of the services are not rendered, a regulator may determine that all or a portion of the fee paid as part of the MSA is a referral fee in violation of Section 8 of RESPA.
Executive Director/Realty Compliance Group
Director/Legal & Regulatory Compliance
Lenders Compliance Group