Question
What are the differences between an Affiliated
Business Arrangement (“ABA”) and a Marketing Services Agreement (“MSA”)?
Answer
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.
Neil Garfinkel
Executive Director/Realty Compliance
Group
Director/Legal & Regulatory
Compliance
Lenders Compliance Group
