Affiliated Business Arrangements James R. Kletke firstname.lastname@example.org Jim Gosdin email@example.com Stewart Title Guaranty Company Stewart Legal Services 1980 Post Oak Boulevard, Suite 710 Houston, Texas 77056
Federal Laws and Regulations • RESPA • Background • Section 8 (1974) • No kickbacks or referrals • “Section 8 – Prohibition Against Kickbacks and Unearned Fees • (a) No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”
RESPA (Continued) • No splits of settlement service fees other than for services actually performed. • (b) No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. • Exceptions • (c) “Nothing in this section shall be construed as prohibiting (1) the payment of a fee (A) to attorneys at law for services actually rendered or (B) by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance or (C) by a lender to its duly appointed agent for services actually performed in the making of a loan, (2) 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, (3) payments pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and brokers.”
RESPA (Continued) • Under original RESPA, no provision for exemption of ABA’s. The payment of a dividend to a business provider who referred business to and who owned an interest in a settlement service provider could be construed as a rebate. • Section 8 (1983 revision) – provided a limited exemption so long as some basic rules are followed. • “Section 8 – Prohibition Against Kickbacks and Unearned Fees • “(4) Controlled business arrangements so long as (A) at or prior to the time of the referral a disclosure is made of the existence of such an arrangement to the person being referred and, in connection with the referral, such person is provided a written estimate of the charge or range of charges generally made by the provider to which the person is referred, except that where a lender makes the referral, this requirement may be satisfied as part of and at the time that the estimates of settlement charges required under section 5(c) are provided, (B) such person is not required to use any particular provider of settlement services, and (C) the only thing of value that is received from the arrangement, other than the payments permitted under this subsection, is a return on the ownership interest or franchise relationship.”
Creating the Affiliated Business Arrangement • Section 3500.15 – ABA’s – “Controlled Business Arrangements” • “General”. A person who is in a position to refer business incident to or a part of a real 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 settlement services; and • Such person directly or indirectly refers such business to that provided or affirmatively influences the selection of that provider.
Creating the Affiliated Business Arrangement • Violation and exemption. A controlled business arrangement is not a violation of section 8 of RESPA and of 3500.14 if the conditions set forth in this section are satisfied. • The person making each referral has provided to each person whose business is referred a written disclosure, in the format of the Controlled Business Arrangement Disclosure Statement set forth in Appendix D of this part, of the nature of the relationship (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 (which describes the charge using the same terminology, as far as practical, as Section L of the HUD-1 settlement statement).
Creating the Affiliated Business Arrangement • No person making a referral has required (as defined in 3500.2(a)(11) any person to use any particular provider of settlement services or business incident thereto. • The only thing of value that is received from the arrangement other than payments listed in 3500.14(g) is a return on an ownership interest or franchise relationship.
Creating the Affiliated Business Arrangement • November 1992 Revision • employer can compensate an employee for a referral to an ABA. • can be compensated on a per transaction basis. • June 1994 Proposed Revision • withdraw 1992 exemption • cannot compensate employee for a referable if that employee performs settlement service • can compensate managers so long as compensation not based on number of value of referrals and manager performs no settlement services. • can compensate employees on a per transaction basis so long as employee does not provide settlement services.
Creating the Affiliated Business Arrangement • October Rollback • postponed until no earlier than 07/31/97 • changed CBA to Affiliated Business Arrangement • Affiliated Business Arrangements • adopted new language for disclosure • if a referral is done by telephone or electronically, verbal disclosure should be made and written disclosure must be sent to customer
Creating the Affiliated Business Arrangement • HUD Statement of Policy On Sham Controlled Business Arrangements • compliance with Section 8(c) requirements alone is not enough to exempt a ABA • ABA must be a “provider” of settlement services. • HUD will use several factors to determine if the ABA is a shell or a bona fide provider. • is there adequate capitalization • adequate staffing • management issues • office space issues • performs substantial services • does the ABA contract out business functions? • compete for other business • sends business exclusively to one venturer
Creating the Affiliated Business Arrangement • Rental of Office Space, Lock-outs and Retaliation • rental of office space • rental must be general market value • per use rental may be a rebate • RESPA does not prevent lock-outs • RESPA does not prevent retaliation
HUD ENFORCEMENT LETTER REGARDING TITLE INSURANCE PRACTICES • Directed at Florida practices, but applicable everywhere • Concerned with proforma commitments as a rebate. • If underwriter provides examined productions to the agent, agent/underwriter split must be adjusted.
Memphis/HUD Settlement Agreement • Title Groups as alleged sham controlled businesses • Cessation of Operations • Agreement for bona fide future conduct
Tulsa/HUD Settlement Agreement • Builders Title history • Changed practices • Agreement for changes in Operating Agreement and practices
Florida State ABA Settlement • 60 Title Agencies • $2.2 Million in Refunds • $1 Million Fine
Enforcement & Penalties • Penalties • Criminal penalties of up to $10,000 and/or up to 1 year imprisonment for each violation • Private cause of action for 3 times any charge paid for a settlement service plus court costs and attorney’s fees.
Picking Your Partner • Realtor • upside • high volume • high average sales price • synergy between title affiliate and mortgage affiliate • downside • sales staff are independent and in a position to refer • sales staff cannot be compensated for referrals
Picking Your Partner • Lender • upside • able to direct the business if a refi • loan officers or commercial market who refer can be compensated • downside • cyclical business • lender is not at point of sale
Picking Your Partner • Homebuilders • upside • controls 100% of sale • can compensate salespersons who are employees • downside • cyclical business • Banks • Barnett Bank case • State regulations
Structuring the ABA • “C” Corporation • majority rules • taxable at corporate level and dividend level • restrictions on stock transfers are permissible • liability shield • Partnership • majority rules • one partner can bind partnership • taxable once at partner level • buy/sell agreements among partners • partners jointly and severally liable
Structuring the ABA • Limited Partnership • control by general partner • taxable once at partner level • general partner liability • Limited Liability Company or Partnership • control by minority owner • taxable once at membership level • no personal liability • problems with succession
Completing The Proforma • Basic format • Validity of Assumptions • capture rate • average premium • costs – full service v. core service • capitalization
Controlling Expenses • Shared Employees • bona fide employees • must work allocated time • Office Space Sharing • separate designated space • signage • phone listing • fair market value • written documentation
Controlling Expenses • Equipment Sharing • fair market value • written documentation • Out-sourcing • other functions can be out-sourced • bookkeeping • management • receptionist • typing • Non-core title function • search/abstracting • examination (in some states) • settlements/closings
Marketing Issues • Cross-Marketing of Affiliates • realtor salespeople refer to title (and mortgage) • title and mortgage refer to one another • disclosure issues • compensation issues
Marketing Issues • Discounting • ok as long as consumer benefits • bundling of products • EXAMPLE: Realtor tells house buyer that if buyer uses both the affiliated title agency and affiliated mortgage company, the title company search fee will be waived and the mortgage company discount points will be reduced by 1/8%. • rewards • EXAMPLE: Realtor offers home buyer 25,000 frequent flyer miles if home buyer uses Realtor’s affiliated title agency and mortgage company.
Pitfalls • The Uninvolved Partner • views ABA as cash cow • doesn’t market ABA within own organization • The Disgruntled Partner • multipartner ABA • a partner who contributes a greater percentage of revenue than percentage of ownership