Affiliated Business Arrangement Defined
An affiliated business arrangement ("AfBA") is a relationship in which two or more persons who have a relationship not otherwise covered by the AfBA definition (the "relationship affiliates"), refer business exclusively or primarily to another person with whom they have a relationship (the "arrangement affiliate"). Most often, an AfBA is a lending relationship among a lender (the "member") and the director of a company established by the lender and the other members of the arrangement. However, an AfBA can also be created between a lender and any combination of real estate, settlement service, title or mortgage brokerage persons. As a result of this relationship, the arrangement affiliate provides services or a product for the member’s use in its real estate transactions.
The general purpose of an AfBA is to allow companies which share common owners or other relationships to establish cost-sharing arrangements to benefit the companies . More specific examples of business relationships that may form an AfBA include:
• A company owned 50% by Bank A and 50% by Bank B that refers all of its data processing and equipment needs to Bank A, which earns return on its investment on a monthly basis;
• A real estate management company owned by Bank A that refers all of its insurance needs to an affiliated insurance agency;
• A title company at which Bank B has an exclusive right of first refusal for all title business generated in certain counties;
• A builder/land developer formed out of the pooling of land that all of its member banks financed into a single entity which refers all of its title, legal, accounting and construction needs to a legal/financial/accounting affiliate of the member banks to ensure the builder/developer is running as efficiently as possible;
• A marketing relationship between a lender and a real estate agent, such as one where a bank and a real estate agent share a table at local home shows to market their services to homebuyers;
• An informal relationship where one or both of the relationship affiliates regularly refers business to the arrangement affiliates.
Not all AfBAs need to be formal to comply with the requirements of RESPA. However, because the potential for abuse is high, it is always good practice to formalize the intent by having the parties sign a written agreement.
Why Disclosure Statements Are Important
Affiliated business arrangement disclosure statements provide the tangible record of compliance with the statutory requirements of RESPA. They provide the consumer with the most important information about an affiliated business arrangement, including the means and manner by which business is shared between affiliated businesses and the amount of the thing of value that is received from the business by other parties in the transaction.
The disclosure statement benefits all of the parties in an business relationship, and allows an arrangement to proceed with the knowledge that the affiliated relationships will not result in liability to anyone or reduce the right of any party to receive the benefits of the transaction.
The Affiliated business arrangement disclosure statement is perhaps the most important document in the closing and settlement disclosure process under RESPA, and should not be neglected.
Disclosure Statements and the Law
An affiliated business arrangement is defined as a "residential real estate transaction in which a person who is licensed [to provide services related to the closing of a residential real estate transaction and who is regulated pursuant to Title 33, Subtitle 25 [in Maryland, this refers to a settlement agent who is also a real estate broker] of the Business Occupations and Professions Article of the Annotated Code of Maryland, as amended… provides real estate brokerage services and directly or indirectly referrers potential settlement service providers to each other in exchange for a portion of the settlement service fees." Md. Code, Real Prop § 18-103(b).
In Maryland, an affiliated business arrangement must be disclosed pursuant to Regulation Z and the RESPA Disclosure Rule. Regulation Z is governed by the Truth in Lending Act, codified at 15 U.S.C. § 1601. The Act requires lenders to provide a "good faith estimate" of the credit terms of mortgage loans not later than three business days after the lender receives a consumer’s application. Loan originators must provide disclosures meeting the requirements of the Real Estate Settlement Procedures Act ("RESPA"), codified at 12 U.S.C. § 2601. ESL and RESPA are both enforced by the Consumer Financial Protection Bureau ("CFPB").
The RESPA disclosure rule currently requires lenders to timely provide a GFE to consumers. The GFE itemizes the cost of settlement services the consumer can expect to pay, including third-party services such as title insurances, which covers the lender against losses due to defects in title and closing protection letters, which protects consumers against errors or loss related to the settlement process. The GFE also provides consumers with a good faith estimate of the charges that the lender will require the consumer to pay at or before closing in connection with a mortgage loan.
Both ESL and RESPA require settlement service providers to provide an Affiliated Business Arrangement Disclosure Statement, which requires disclosure of any business arrangements between industries with a common purpose, such as real estate licenses and settlement services, where the affiants are made aware of the expected benefits that may arise as a result of the arrangement. When two entities share business and/or profit between them, they should consider executing a written agreement that outlines the nature of their relationship. The Affiliated Business Arrangement Disclosure Statement creates transparency by requiring affiliated businesses to disclose how the relationship may impact the consumer and whether the choice of provider is at the discretion of the consumer.
Preparing a Disclosure Statement
The Federal Real Estate Settlement Procedures Act does not require any particular "form" of disclosure statement. The proposed regulatory amendment published by the CFPB on July 16, 2012, includes guidance on what is required in an affiliated business arrangement disclosure statement: "In order to ensure that the lending public has access to all of the information needed to make an informed choice when presented with a transaction involving an affiliated business arrangement, [regulations] provide that disclosures must be clear and conspicuous, in writing, and in a manner the borrower can reasonably be expected to receive it. Accordingly, this proposal explicitly provides the required contents of the affiliated business arrangement disclosure statement. Specifically, the regulation requires that an affiliated business disclosure provided to a buyer include the name and address of the provider, a description of the business interest the provider has in the transaction, the percentage of ownership interest that the provider has in the transaction, the appropriate charges or ranges of charges determined in accordance with section 1024.10(e)(2)(i) of these rules to be paid by the buyer in connection with the transaction to the provider and each party to the transaction , the nature of the relationship between the provider and the person referring the business, and a statement informing the buyer that the buyer is free to shop around to obtain the settlement services required in the transaction and that the seller may not refuse to permit the buyer to select an available provider such as a title insurer to service the loan or an escrow company for the closing. The proposed rule also requires the disclosure to clearly state that the buyer is not required to use the provider and may select any provider of the purchaser’s choosing who is qualified to provide the desired title insurance policy, as applicable."
The existing regulation does not specify how the disclosure statement must be distributed, and the CFPB recently declined to include such a provision in its proposal; however, it does seem to be common sense that the best practice is to provide the disclosure statement to the applicants at the earliest opportunity, i.e., when they apply for credit or even prior to that, when the sale contract is executed, or at least when the credit is communicated.
What Are the Risks of Not Complying?
Aside from the immediate issues that may arise as a result of a lack of compliance with Regulation X, there can exist a myriad of potential legal and financial risks for lenders who fail to provide adequate disclosure statements in an affiliated business arrangement. A failure to comply with the disclosure requirements can result in civil liability under RESPA. First, a lender may be liable to consumers who or which incur actual damages as a result of an affiliated business arrangement where diverse settlement services are provided without the required disclosures. If a lender fails to inform consumers of the relationship between the lender and the settlement service provider, the lender is susceptible to liability under § 2607(d)(2) of the Act:
Any person or persons who violate the provisions of this section shall be jointly and severally liable to the persons or persons charged for the settlement services involved in any violation for their settlement costs incurred.
In addition to damages, a court may award attorneys’ fees to the consumer if the consumer is the prevailing party. It should also be noted that, although a consumer may only recover actual damages from each person who violated § 2607(d)(2) of RESPA on a joint and several basis (cent limiting potential recovery to the amount of settlement costs), a consumer may recover the full amount of his or her settlement costs from each person as a result of joint and several liability. Moreover, where an affiliated business arrangement constitutes a system of kickbacks and illegal referral agreements, criminal liability under federally prohibited activities may also arise.
Affiliated Business Arrangement Disclosure Statement Samples
In order to obtain proper disclosure, a mortgage lender should disclose the affiliated business arrangement both in a good faith estimate and within the HUD-1 settlement statement. The affiliates should also separately provide a disclosure statement to the consumer before the specific closing. Although it is not mandatory that the borrower consent to the relationship, at a minimum the consumer must be able to determine the cost associated with the arrangement.
The following statements may be utilized or modified to fit the circumstances and practices of the lender and their affiliated entity:
ABC Lender
ABC Title, Inc.
Relationship Disclosure:
Because ABC Lender has an ownership interest of 51% or more in ABC Title, Inc., ABC Lender may not require you to use ABC Title, Inc. as the title agent for your loan. If you do choose to use an alternate title insurance agent, the choice shall remain entirely with you and ABC Lender will work with the other title agency to ensure a smooth process and be responsible for all normal and customary related fees. Please note that the fees to conduct your title search are the same regardless of the title insurance agent you select. There are no differences in the fees between ABC Title, Inc. and those of any other agency nor will ABC Title, Inc . charge you more for any particular service.
ABC Lender
ABC Title Agency
Relationship Disclosure Statement
The relationship between ABC Lender and ABC Title Agency is one where the ABC Lender has a significant ownership interest. The ABC Lender has a direct financial interest (in excess of 51%) in the ABC Title Agency.
ABC Lender and its loan officers may receive a financial or other benefit such as a fee or commission from ABC Title Agency as a result of this referral and such arrangements must be clearly stated to the borrower in writing.
ABC Lender
ABC Title Services, Inc.
Disclosure of Affiliated Relationship
We have an arrangement with ABC Title Services, Inc. ("ABC"), located at 1234 Elm Street, to utilize ABC for the settlement and closing of this loan. ABC is affiliated with us because we own 50.1% of ABC.
ABC Company
ABC Title, Inc.
Title Company Affiliated Business Arrangement Disclosure
1. Description of Relationship. ABC Company refers business to ABC Title, Inc. for closing services. ABC Company owns 51% or more of the business of ABC Title, Inc. Affiliates of ABC Company are: ABC Trust Company, ABC Mortgage Company, and ABC Insurance Agency.
2. Charges. ABC Title, Inc.’s charges are not any greater than the charges of a title company not affiliated with ABC Company.