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Are ABA’s
Legal?
Yes, Congress in
1983 made them legal with the passage of the Housing
and Urban-Rural Recovery Act (HURRA).
After RESPA's passage, the Department
received many questions asking if referrals between
affiliated settlement service providers violated RESPA.
Congress held hearings in 1981. In 1983, Congress amended
RESPA to permit controlled business arrangements (CBAs)
under certain conditions, while retaining the general
prohibitions against the giving and taking of referral
fees. Congress defined the term "controlled business
arrangement'' to mean an arrangement:
In which (A) 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 settlement
services; and (B) either of such persons directly or
indirectly refers such business to that provider or
affirmatively influences the selection of that provider.
There are
also several conditions that must be met, and they are
described below:
Prior to the referral, the person
making a referral has provided to each person whose business
is referred a written disclosure, in the format of the
Controlled Business Arrangement Disclosure Statement.
This disclosure shall specify the nature of the relationship
(explaining the ownership and financial interest) between
the person performing settlement services (or business
incident thereto) and the person making the referral,
and shall describe the estimated charge or range of charges
(using the same terminology, as far as practical, as section
L of the HUD-1 or HUD-1A settlement statement) generally
made by the provider of settlement services. The disclosure
must be provided on a separate piece of paper no later
than the time each referral or, if the lender requires
the use of a particular provider, the time of loan application.
The second condition involves the
non-required use of the referred entity. Section 3500.15(b)(2)
provides that the person making the referral may not require
the consumer to use any particular settlement service
provider, except in limited circumstances. A lender may
require a consumer to pay for the services of an attorney,
credit reporting agency or real estate appraiser to represent
the lender's interest in the transaction. An attorney
may use a title insurance agency that operates as an adjunct
to the attorney's law practice as part of the attorney's
representation of that client in a real estate transaction.
3) The third condition relates
to what is received from the relationship. The rule provides
that the only thing of value that comes from the arrangement,
other than permissible payments for services rendered,
is a return on an ownership interest or franchise relationship.
The rule describes what are not proper returns on ownership
interest. These include ownership returns that vary by
the amount of business referred to a settlement service
provider, or situations where adjustments are made to
an ownership share based on referrals made.
The 10 Rules
Of A Legal ABA
(1) Does the new entity have
sufficient initial capital and net worth, typical in the
industry, to conduct the settlement service business for
which it was created? Or is it undercapitalized to do
the work it purports to provide?
(2) Is the new entity staffed
with its own employees to perform the services it provides?
Or does the new entity have "loaned'' employees of
one of the parent providers?
(3) Does the new entity manage
its own business affairs? Or is an entity that helped
create the new entity running the new entity for the parent
provider making the referrals?
(4) Does the new entity
have an office for business which is separate from one
of the parent providers? If the new entity is located
at the same business address as one of the parent providers,
does the new entity pay a general market value rent for
the facilities actually furnished?
(5) Is the new entity providing
substantial services, i.e., the essential functions of
the real estate settlement service, for which the entity
receives a fee? Does it incur the risks and receive the
rewards of any comparable enterprise operating in the
market place?
(6) Does the new entity perform
all of the substantial services itself? Or does it contract
out part of the work? If so, how much of the work is contracted
out?
(7) If the new entity contracts
out some of its essential functions, does it contract
services from an independent third party? Or are the services
contracted from a parent, affiliated provider or an entity
that helped create the controlled entity? If the new entity
contracts out work to a parent, affiliated provider or
an entity that helped create it, does the new entity provide
any functions that are of value to the settlement process?
(8) If the new entity contracts
out work to another party, is the party performing any
contracted services receiving a payment for services or
facilities provided that bears a reasonable relationship
to the value of the services or goods received? Or is
the contractor providing services or goods at a charge
such that the new entity is receiving a ``thing of value''
for referring settlement service business to the party
performing the service?
(9) Is the new entity actively
competing in the market place for business? Does the new
entity receive or attempt to obtain business from settlement
service providers other than one of the settlement service
providers that created the new entity?
(10) Is the new entity sending
business exclusively to one of the settlement service
providers that created it (such as the title application
for a title policy to a title insurance underwriter or
a loan package to a lender)? Or does the new entity send
business to a number of entities, which may include one
of the providers that created it?
Still another area that may
arise concerns the third condition of the CBA exception,
whether the only thing of value that comes from the arrangement,
other than permissible payments for services rendered,
is a return on ownership interest or franchise relationship.
Section 3500.15(b)(3)(ii) of the regulations provides
that a return on ownership interest does not include payments
that vary by the amount of actual, estimated or anticipated
referrals or payments based on ownership shares that have
been adjusted on the basis of previous referrals. When
assessing whether a payment is a return on ownership interest
or a payment for referrals of settlement service business,
HUD will consider the following questions:
(1) Has each
owner or participant in the new entity made an investment
of its own capital, as compared to a "loan'' from
an entity that receives the benefits of referrals?
(2) Have the owners or participants
of the new entity received an ownership or participant's
interest based on a fair value contribution? Or is it
based on the expected referrals to be provided by the
referring owner or participant to a particular cell or
division within the entity?
(3) Are the dividends, partnership
distributions, or other payments made in proportion to
the ownership interest (proportional to the investment
in the entity as a whole)? Or does the payment vary to
reflect the amount of business referred to the new entity
or a unit of the new entity?
(4) Are the ownership interests
in the new entity free from tie-ins to referrals of business?
Or have there been any adjustments to the ownership interests
in the new entity based on the amount of business referred?
Responses to these questions may be determinative of whether
an entity meets the conditions of the CBA exception. If
an entity does not meet the conditions of the CBA exception,
then any payments given or accepted in the arrangement
may be subject to further analysis under Section 8(a)
and (b). 12 U.S.C. Sec. 2607(a) and (b).
