What Is An Affiliated Business Arrangement?
An affiliated business arrangement (commonly referred to an "AfBA") is a very popular way for related businesses to collectively provide goods or services to the same groups of consumers. When two or more businesses have similar ownership or management and enter into an agreement to provide goods or services to the same group of consumers, it is likely that the businesses are engaging in a covered AfBA. More specifically , an AfBA is a written agreement or arrangement in which a person who is in a position to refer business in the lending or settlement process receives any thing of value in return for making the referral. The principal industries in which AfBAs occur include real estate, mortgage, title insurance, and law in addition to the referral providers themselves. Without a proper disclosure, such arrangements have potential to create significant liability under RESPA and state law.
The Legal Obligation
The legal requirements associated with affiliated business arrangements ("AfBAs") can be broken down into two primary categories: (1) state law; and (2) federal law.
State law. At the state level, the laws governing AfBAs vary significantly. All states have either prohibitions or restrictions on the use of non-competitive steering arrangements. However, some states do allow lenders to steer loans to affiliates of their affiliated businesses if certain conditions are followed (see State Affiliated Business Arrangements).
Generally, state law prohibits lenders from using an AfBA for purposes of shifting fees or expanding the lending into areas (such as closing and title) where consumers already have the opportunity to negotiate fees with an unaffiliated vendor. In other words, lenders are primarily prohibited from using AfBAs to yield additional profits from services already contracted by consumers.
Until 2015, state laws generally imposed additional restrictions, including the statutory imposition of fee restrictions (meaning lenders could only retain a maximum of a stated dollar amount or a stated percentage of the total fee charged for services to be performed), caps on the number of AfBAs a lender could establish, and prohibitions on offering loans to consumers who did not wish to purchase AfBA services (except in specific circumstances).
In 2015, however, Congress preempted certain provisions of state law that prohibited AfBAs that provided for the lender to require the consumer to purchase title, settlement, or closing services from the affiliated provider (see The Dodd-Frank Act, Section 1473(a)). Recent amendments to some state laws now recognize this preemptive effect of federal law.
Federal law. Federal law imposes two primary requirements associated with the use of AfBAs: HUD’s AfBA Requirements and RESPA’s AfBA Affidavit requirement.
HUD’s AfBA Requirements. The Department of Housing and Urban Development (HUD), which had the sole authority to promulgate RESPA rules before the 2010 changes to the requirements, had two major requirements for the use of AfBAs:
•(1) Absent a borrower’s waiver or consent, mortgages secured by first liens on residential real property in urban areas were subject to the HUD AfBA Requirements; and
•(2) The HUD AfBA Requirements were applicable to AfBAs regardless whether the borrower was required to purchase the services from the affiliated entity at the inception of the transaction or there was simply a desire on the part of the mortgagee (i.e., the lender) to place that option before the borrower. (Although HUD’s AfBA Requirements only applied if the borrower was required to use the affiliated service, HUD stated it would be contrary to public policy to include a provision in a contract where the consumer was given the option to purchase a service from an affiliated entity without making required disclosures.)
RESPA’s AfBA Affidavit. The Real Estate Settlement Procedures Act (RESPA) requires, among other things, that lenders provide certain disclosures concerning any affiliations between the mortgagee (i.e., the lender) and other service providers. (See Section 6 of the RESPA Regulation.) Particularly, lenders must provide to borrowers a "good faith estimate" of the third-party settlement costs, which includes any fees to be paid to any provider affiliated with the lender. (This requirement is in addition to new disclosure requirements for settlement services in the CFPB’s TILA-RESPA Integrated Disclosure rule (TRID).)
In addition, before the lender can require a borrower to select a settlement service provider, the lender must obtain an affidavit from the borrower that either:
Presently, HUD and the CFPB are the bodies responsible for promulgating regulations pursuant to RESPA.
The Best Means Of Making Disclosure
Affiliated Business Arrangement Disclosure
There are three basic steps lenders can take to ensure that they properly disclose an affiliated business arrangement:
- Make sure that you have a written affiliated business arrangement agreement with each affiliate, especially if you have more than one affiliate. The agreement must include all of the in-house services offered by the Affiliate, and a general description of all other services offered to consumers. The agreement does not need to include all the prices charged by the Affiliate.
- After the borrower expresses an interest in obtaining an affiliated service, the lender sends the borrower an Affiliated Business Arrangement Disclosure Statement and at the same time the lender receives the Affiliated Business Arrangement Agreement from the Affiliate. The lender must mail, or otherwise send electronically the document to the borrower. If the property securing the loan is located in New York State (or certain other states), the disclosure must be mailed no later than three business days before closing. If the property is located in any other state, the disclosure must be mailed or otherwise sent at/or before the time of the loan application. The law requires only that lenders mail or send by email the Affiliated Business Disclosure. Most lenders include a cover letter with the HUD-1.
- The lender must obtain a written acknowledgement by any person who is required to receive the disclosure. The borrower’s signed receipt on the lender’s copy of the Affiliated Business Arrangement Disclosure Statement document is generally sufficient proof of compliance. In cases where a borrower will not sign a form acknowledging receipt of the disclosure, lenders should make sure that it keeps a copy of the disclosure together with written documentation reflecting the reason why the Borrower refused to sign (e.g., the borrower never received the disclosure document, the borrower cannot read or write) and retaining any communication between the lender and the borrower (e.g., copies of emails) to show that the borrower was given the opportunity to review the disclosure prior to closing.
Consequences Of Not Making Disclosure
The consequences of non-disclosure of affiliated business arrangements can be severe. The RESPA enforcement agencies have taken action to bring affiliated business arrangements into compliance with RESPA for not only sham or fraudulent business arrangements but also even negligent violations. For example, the RESPA enforcement agencies have taken the position that even an inadvertent failure to properly disclose to a consumer an affiliated business arrangement will subject the lender or title company to liability for treble damages and even willful or negligent violations of RESPA.
In International Mortgage Group, the Department of Housing and Urban Development (HUD) found that International Mortgage Group (IMG) failed to make proper disclosure to their borrower clients of what was a sham document in which the consumers agreed to purchase insurance on their home after closing from IMG without being told that the premium was included in the settlement charges in the HUD-1 and that the policy would not cover loss from any event that occurred before the premium was paid. HUD issued a consent order against IMG requiring it to refund to the borrowers the amount paid for the sham policy plus interest in an amount equal to treble of the total premium paid. HUD’s monetary penalties were based on the total fees collected rather than on the any actual harm suffered by the borrowers because the RESPA enforcement officials believe that the policy of RESPA is to deter sham arrangements.
Similarly, in Greater Iowa Title Company, the RESPA enforcement officials accused the title company of failing to make proper disclosures to its controlled title agency. In Greater Iowa Title Company, the title company had provided to its affiliate for processing a number of refinance transactions that were not covered by regulation X (12 C.F.R. § 1024.1(b) because they were not federally related mortgage loans). Because of their narrow view of RESPA’s section 9 prohibitions, the RESPA enforcement officials thought it necessary to include these transactions in an agreement between the title company and its affiliate for the title agency to disclose affiliated business arrangements in all transactions not just federally related mortgage loans. Although disclosing the affiliate relationship in one agreement in all transactions would seem to be adequate disclosure, RESPA enforcement officials have required separate disclosures in all transactions to comply with RESPA’s section 9 disclosure obligations.
How The Disclosure Helps You
While not a bulletproof way to ensure compliance with RESPA, a well drafted disclosure that meets all instructions in the HUD model form is beneficial. The former HUD Assistant Secretary for Housing, in a speech made at the National Settlement Services Summit summer 2014, encouraged companies to provide information about conflicts prior to referral rather than at the time of referral . Banks that are openly up front with consumers about their affiliated business arrangements, and the potential for conflicts of interest presented by them, may earn the trust of depositors and borrowers. Companies willing to be transparent about all MSAs for which they receive compensation will be viewed more positively by regulators, depositors and borrowers.
Examples Of Good Disclosure
In the spirit of collaboration, here are some successful disclosed business arrangements:
Example No. 1 – Homeowner’s insurance policy
Situation: A real estate broker wants to increase commissions on homeowner’s insurance policies.
Disclosure: The broker begins to disclose the business arrangement, list the companies involved, and describes the company’s quality products. They give an affirmative statement that the relationship will not bias the recommendation and that parties can obtain comparable insurance from other companies. They also note commissions range from 25%-100% commission. This does not guarantee any specific amount for a specific insurance agent or broker.
Example No. 2 – Closing attorney
Situation: A title company who also employs closing attorneys has several affiliate companies.
Disclosure: The settlement company discloses that it may refer you to its completely owned or controlled entities, such as the title insurance company or other affiliated companies for services in connection with this transaction. The referral of business to affiliates may result in the settlement company receiving a financial benefit. At this time, the estimated payment amount received from the other affiliates is around $00.00. You do not have to use them, however.
Example No. 3 – Mortgage company
Situation: A mortgage company and real estate agency work together to close on homes.
Disclosure: The mortgage company discloses that it has a joint marketing agreement with its lending specialist, and that it may be reimbursed for a portion of their costs or paid based on the number of clients referred.
Example No. 4 – Real estate listings publication
Situation: A realty site has agents who pay for a premium listing.
Disclosure: The website discloses the company has three types of advertising and marketing services for agents include specialty advertisements, a basic package and a premium package. The company receives fees for this service, which can go above the industry average for these services, from its affiliates.
Emerging Trends In Affiliated Business Disclosure
Emerging trends promising a brighter future for affiliated business arrangement disclosures include technological advancements and evolving regulations. Trends point to increased focus on promoting technological advances in affiliated business agreement disclosures. With the emergence of FinTech (Financial Technology), regulators are emphasizing the use of technology to advance our economy while improving regulatory compliance. New technological platforms are emerging that streamline by automating the affiliated business arrangement disclosure process. As FinTech continues to innovate, regulatory action will increase aimed at ensuring consumer protection in relation to these advanced technologies. With the ever-increasing access to real-time information, FinTech will likely lead to more automated processes which will produce the ability to make affiliated business arrangement disclosures instantaneously as transactions evolve and occur in real-time.
While the evolution of technologically advanced disclosure disclosures will drastically improve the consumer experience, there is still a long road ahead for the emergence of true comprehensive nationwide near-immediate affiliated business arrangement disclosures. As new technology continues to emerge , so will the push for nationwide implementation. Case-by-case interpretation of regulatory compliance will continue as the federal government ponders the right approach moving forward. As states look to aggregate and make more information available to consumers, they too will look to strengthen their regulatory approach to ensure consumer protection.
In the meantime, the best approach for consumers at this stage is to become accustomed to the idea of disclosure at all points throughout the transaction. The consumer should seek to retain the most transparency possible in regard to affiliated business arrangements. The trend of retailers, lenders and the real estate industry in general is to promote affiliated business arrangements within their respective scope of business. Consumers will likely even encounter affiliated business arrangements associated with their retirement and 401(k)s. For the largest consumer purchase associated with their 30-year mortgage, it is critical that consumers are empowered to have the most information possible when determining if and when an affiliated business arrangement will benefit them.
