Affiliated Business Arrangements and Marketing Services Agreements

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

Affiliated Business Arrangement Exemption

QUESTION

We are a builder that owns a mortgage company and a title company. Recently, we were told that we are exempt from the RESPA section 8 requirements. I do not want to violate RESPA and I would like a better understanding. Are relationships such as ours subject to being an affiliated business arrangement?

ANSWER

Actually, the relationship you describe is a classic case of an affiliated business arrangement, known by its most common acronym “ABA”. If you do not conform to the applicable RESPA guidelines for ABAs, your firm would be in violation of section 8. There are exemptions, but your ownership of a mortgage company and a title company does mandate compliance with the ABA requirements.

Specifically, there are three conditions for satisfying an exemption, if and only if certain requirements are implemented.

I will summarize these three conditions, cautioning you to consult with a regulatory compliance professional for guidance in satisfying all the requirements of these conditions. 

The following three conditions pertain to exemptions, such that, if implemented, the relationship between the parties to an ABA would not be viewed as violating RESPA:

Disclosure. 

The person making each referral has provided to each person whose business is referred a written disclosure, in the format of the Affiliated Business Arrangement Disclosure Statement, which outlines the nature of the relationship (i.e., explaining the ownership and financial interest) between the provider of settlement services (or business incident thereto) and the person making the referral and of an estimated charge or range of charges generally made by such provider. The disclosures must be provided on a separate piece of paper no later than the time of each referral or, if the lender requires use of a particular provider, the time of the loan application.

Choice of Provider. 

No person making a referral has required any person to use any particular provider of settlement services (or business incident thereto), except if such person is a lender, for requiring a buyer, borrower or seller to pay for the services of an attorney, credit reporting agency, or real estate appraiser chosen by the lender to represent the lender's interest in a real estate transaction, or except if such person is an attorney or law firm for arranging for issuance of a title insurance policy for a client, directly as agent or through a separate corporate title insurance agency that may be operated as an adjunct to the law practice of the attorney or law firm, as part of representation of that client in a real estate transaction.

Thing of Value. 

The only thing of value that is received from the arrangement - other than payments specifically exempted in RESPA and Regulation X - is a return on an ownership interest or franchise relationship. [24 CFR § 3500.15(b)]

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

Affiliated Business Arrangements

QUESTION 

What is an Affiliated Business Arrangement under RESPA and what is required when an originator and a settlement service provider have an affiliated business arrangement?  

ANSWER 

An Affiliated Business Arrangement is defined in Section 8 of the Real Estate Settlement Procedures Act (RESPA) and Section 3500.14 of Regulation X, its implementing regulation, as an arrangement 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 1 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.

The term “associate” includes the following: spouse, parents, or child of the referrer; a corporation/business entity that controls the, or is under common control with, the referrer; an employer, officer, director, or partner of the referrer; and anyone who has an agreement the purpose of which is to enable a financial benefit to occur as a result of the referral of settlement services.

A referral to an affiliated business is permissible if all of the following requirements are satisfied:

(1) The consumer is provided at or prior to the time each referral is made with an Affiliated Business Arrangement Disclosure which describes the relationship (explaining the ownership and financial interest) between the provider and the loan originator, and giving an estimated charge or range of charges made by such service provider; 

(2)  The consumer is not required to use the referred service provider (with certain exceptions such as the lenders attorney, credit reporting agency and appraiser); and

(3) There is no consideration or item of value received from the arrangement other than reasonable payments for goods, facilities or services actually furnished and revenues derived from a party having an ownership interest in the provider.  

A sample Affiliated Business Arrangement Disclosure can be found in Appendix D of Regulation X. 

* Michael Barone

Director/Legal and Regulatory Compliance

Lenders Compliance Group