To remain viable beyond the refinance boom, lenders must reduce their reliance on refi loans. Every mortgage lender would like to establish connections with direct referral sources such as real estate agents. Fortunately, there are identified acceptable, lawful means for agents and brokers to work together through compliant ABAs and MSAs.
ABAs and RESPA Section 8
An ABA, an affiliated business arrangement, consists of a profit-sharing arrangement between two settlement service providers (SSPs): Businesses or individuals who help to close a residential real estate transaction and/or conduct a residential mortgage loan.
Settlement service providers include lenders, real estate agents, attorneys, closing agents, title agents, home builders and developers, credit and appraisal companies, home and flood insurance companies, surveyors, home inspectors and home warranty firms.
When setting up an ABA, you must be aware of Section 8 of the Real Estate Settlement Procedures Act (RESPA), a rule preventing the acceptance of any fee as “part of a real estate settlement service involving a federally related mortgage loan …”
However, the rule does provide one exception to “permit payment for goods actually furnished or services performed.” But you must understand that a referral is not a compensable service. You are not allowed to compensate a business partner for sending you a referral. For an ABA to qualify under RESPA Section 8, you must pay a reasonably equivalent value for services rendered.
An ABA differs from an MSA because it has a specific expressed statutory basis. It’s right in RESPA, and RESPA states you can refer business if you properly use this method. Some of these requirements include:
►You must disclose the existence of the ABA, and in the written disclosure, you must provide an estimate of the charges. RESPA contains a promulgated form you can use.
►You cannot require a consumer to use your ABA.
►The only value you may legally receive is a return on an ownership interest in the form of a dividend or a distribution of some sort. Payment cannot be related to volume.
The U.S. Department of Housing & Urban Development (HUD) also addresses the proper nature of the participants in an ABA to ensure it is compliant. Its list includes capitalization, staffing, independent management, separate offices, core settlement services, outsourcing of services, relationship with the outsourced service provider, value and payment for outsourced services, active competition in the marketplace, and exclusivity with interest owners.
Unlike an ABA, a MSA (marketing service agreement) is not addressed on a specific statutory basis. However, HUD pointed out a few red flags to avoid. The areas of concern include direct consumer solicitation, a transactional fee paid on a per-loan basis, direct receipt and transmission of consumer information, and exclusivity between the parties.
MSAs employ two basic types of fee arrangements: A fixed-fee and a transactional, or per-loan, fee. The fixed fee involves fewer compliance risks. You need to be very careful with–even avoid–the transactional fee situation.
When using marketing services agreements, you should ensure the agreement clearly spells out what the parties are going to do; it is structured on a fixed-fee basis related to the value provided; and the relationship is disclosed to the consumer.
Government regulations specifically limit how ABA/MSA business may be conducted. In addition, individual states often enact local rules stricter than federal ones. Individual companies should provide well documented written policies and procedures about establishing and conducting business with referral partners, including periodic evaluation. But with adequate care to ensure compliance, ABAs and MSAs can play a very positive role in your business.
Joseph Cilento is director of business affiliations for Guaranteed Home Mortgage Company. Founded in 1992, Guaranteed is a licensed mortgage banking firm comprised of more than 300 mortgage professionals lending in 28 states. He may be reached by phone at (914) 696-3400.