Affiliated Business Arrangements (AfBAs)
As RESPA violations can carry serious consequences, if you have questions or concerns about your affiliated business arrangements, we encourage you to seek additional resources such as NAR's Pocket Guide on AfBAs available on this website, and obtain legal advice.
What's an Affiliated Business Arrangement?
An affiliated business arrangement (AfBA) exists when a person in a position to refer settlement business, such as a real estate broker, or an "associate" of such person has an affiliate relationship with, or a direct or beneficial ownership interest of more than one percent in, an entity to which business is referred, such as a joint venture title or mortgage entity.
The Safe Harbor Test
Section 8(c)(4) of RESPA provides that an AfBA is not a violation of Section 8 so long as three requirements are met. This three-part safe harbor test involves disclosures to consumers, required use, and returns on ownership interest. So long as an AfBA satisfies all three requirements, it will satisfy the Section 8(c)(4) safe harbor test.
- First, the AfBA owner referring business to the AfBA must provide a written disclosure on a separate sheet of paper to each consumer who is referred to the AfBA no later than the time of the referral.
- Second, the customer being referred to an AfBA must not be required to use the AfBA. In other words, the consumer's use of an AfBA may not be required as a condition to the availability of any other settlement service for which the consumer will pay.
- Finally, no payments, other than a return on ownership interest or payments otherwise permitted under the statute may be received under the AfBA. Thus, even if the two requirements above are fulfilled, any payments between or among the AfBA and its partners must be for services rendered or must constitute a return on ownership interest.
Additional Criteria Established by HUD
In addition to meeting the safe harbor test, the AfBA must satisfy certain criteria established by Department of Housing and Urban Development.
HUD has expressed concern with AfBAs that meet the safe harbor test, but that, in HUD's view, may have been designed to circumvent RESPA's prohibitions against referrals fees.
HUD's concern is that an affiliated entity, such as a real estate broker, could refer business to another affiliated entity, such as a joint venture mortgage lender, and accept referral fees masked as returns on its ownership interest.
The Department, therefore, issued Statement of Policy 1996-2, which declares HUD's intent to determine whether entities are bona fide providers of settlement services or merely "sham" business arrangements that do not qualify for the AfBA exception to Section 8 of RESPA. HUD will consider several factors in determining whether an AfBA is a "sham" and whether a Section 8 violation exists. In order to satisfy HUD's criteria, the AfBA must consider the following:
- Capitalization
- Employees
- Management
- Location
- Substantial Services
- Subcontracting
- Marketing
- Referrals
In determining whether an AfBA satisfies HUD's criteria, the Department will consider the above factors together and weigh them in light of the facts and circumstances of a specific situation. A response to any one of the above considerations by itself would not be determinative of a "sham" AfBA. The AfBA, however, does ensure its legitimacy if it satisfies all of the HUD criteria set forth above.
For more information:
How HUD Determines Whether a Mortgage or Title Company is a Sham >
