Is your affiliated title company a sham?Vincent Macauda Esq.ABA, title company, illegal kickbacks, compliance So, you have been approached by a title company to become a partner in an affiliated business arrangement (ABA). It sure looks attractive. By using your affiliated title company, you create an additional revenue stream and as long as the service is up to par, it seems the same as when you sent the work to your old title company. Before making a quick decision, you had better do your homework. As more and more mortgage brokers, real estate agents and builders partner with title companies in ABAs, so do the headlines: In Texas--"Chicago Title blitzed by RESPA violation charges from HUD, OTS, OCC and Texas DOI to pay $6.2 million in penalties"; Colorado--"First American to pay $24M to settle insurance investigation"; California--State probing two title insurers--Garamendi is looking into alleged kickbacks paid by the companies for client referrals"; and Maryland--"Suit: Fountainhead charging 'sham' fees." If your affiliated business arrangement is set up and operated correctly, you receive a pro-rata share of the company's profits; if not, you receive an illegal kickback or referral fee. Let's take a step back and review the history of ABAs. Both the Real Estate Settlement Procedures Act (RESPA) and Ohio law prohibit the giving or accepting of any fee, kickback or thing of value for the referral of settlement service business. An exception to RESPA's anti-kickback rule exists provided three conditions are met: 1. A written disclosure of the ABA relationship and the cost of the transaction are given to the consumer; 2. The ABA is not required to be used by the consumer; and 3. Nothing of value is received by the parties other than returns on their ownership interests. The analysis does not stop there. Next, the ABA must pass a 10-point test to determine if it is a bona fide provider of settlement services or a sham. While the ABA does not need to meet each point in the test, a thorough analysis of each should be made by all parties involved. 1. Is there sufficient initial capital and net worth typical in the industry? 2. Is there adequate staffing with real employees? 3. Is there independent control of its own business affairs? 4. Is there a separate office, or if renting from a parent, is the payment of rent on market terms? 5. Does the ABA perform "core title services"? 6. What is the extent to which the ABA contracts out work? 7. If it contracts out work, is it contracted to a third party or to its parent provider? 8. Are outside contractors paid fair market value? 9. Does the ABA compete in the marketplace for business? 10. Does the ABA send business exclusively to its parent provider? Phillip L. Schulman, a partner with the Washington, D.C. office of Kirkpatrick & Lockhart Nicholson Graham, an author and noted expert on RESPA enforcement, sees government intervention and class action litigation on the rise. "Affiliated business arrangements under RESPA offer settlement service providers a legal opportunity to achieve the perfect marriage by combining the real estate broker and homebuilder's strategic location at the point of sale with the technical and substantive expertise of the mortgage lenders and title agents who stand ready and willing to establish joint venture mortgage and title operations," says Schulman. "At the same time, given heightened scrutiny by regulators and the class action bar, now more than ever, settlement service providers must dot their I's and cross their T's to assure compliance with state and federal requirements." Charles Cain, vice president of Midwest Alliance and business manager for LandAmerica, advises that there is every reason to believe that enhanced enforcement and, perhaps, new standards for affiliated agencies will be in the offing for Ohio. "The Ohio Department of Insurance [ODI] has an invigorated interest in affiliated agencies both as to the age-old problem of defalcation and the issue of consumer protection" advises Cain. "While the ODI has commented that they do not have jurisdiction to enforce RESPA per se, there has been every indication that they would take notice of that law and subsequent statements of policy and informal advisory opinions of HUD when considering whether an agency was a sham and therefore not eligible for a license under Ohio law. For the department to take the step of canceling an agency's license would call into question the nature of the income to the mortgage broker partner, which would undoubtedly trigger questions from the Department of Commerce that may lead to a very unwelcome investigation of the broker's core business." Cain adds, "To have one's core business potentially threatened by an affiliated entity does not seem to be a productive business step. There has never been a more important time to operate in the bright sunlight, meet the criteria and stay away from the gray area." So, you have been approached by a title company to become a partner in an ABA. Look past the promises, proformas and slick marketing pitches, and perform your due diligence before you decide to partner in an ABA. It is your responsibility to make sure the ABA is structured and operated properly. Vincent Macauda is one of four attorneys certified by the Ohio State Bar Association as a specialist in residential real estate law. He is also the owner of Provident Title Agency Inc. He may be reached at (216) 261-2800 or e-mail [email protected].