If you offer affiliated settlement services, have you reviewed your Affiliated Business Arrangement (ABA) Disclosure lately to assure that it complies with RESPA? Have you trained your employees and sales associates on how and when it should be given, and are you regularly monitoring the means by which it is distributed?
Payments within an affiliated business arrangement cannot qualify for an exemption under Section 8’s anti-kickback provisions unless the person or company referring business to an affiliate provides an ABA Disclosure to consumers that meets certain form and content requirements.
Over the last several years, the Consumer Financial Protection Agency (CFPB) has demonstrated that RESPA enforcement is a priority and that the failure to provide an ABA Disclosure – or an insufficient ABA Disclosure – raises a red flag that can leave payments between the affiliated entities subject to scrutiny.
Here are the basic requirements to keep in mind as you review your ABA Disclosure content and procedures.
The ABA three-pronged test
The ABA Disclosure is a fundamental part of the three-pronged “safe harbor” under the RESPA statute, under which a company can refer consumers to an affiliated settlement service company and legally receive profit distributions from that company. To qualify for this safe harbor, the person or company making the referral must:
- Disclose the nature of the affiliation to the consumer.
- Not require the use of the affiliated company.
- Not receive any payment from the affiliated company other than a return on the ownership interest or franchise relationship.
Each part of the safe harbor must be satisfied for a company to avoid being scrutinized under Section 8 of RESPA.
What must the ABA disclosure say?
The disclosure must be in the format of Model Affiliated Business Disclosure Form provided in Appendix D of RESPA regulations, which contains the following:
- A statement of the nature of the relationship (explaining the ownership and financial interest) between the person making the referral and the affiliated settlement service provider.
- An estimated charge or range of charges generally made by the affiliate that describes the charges in the same terminology as in the Closing Disclosure.
- A statement, in capital letters, that the consumer is not required to use the affiliated settlement service provider, that there are frequently other providers that offer similar services, and that the consumer is free to shop around.
- An acknowledgement line that the consumer must sign and date.
The ABA Disclosure also must be on a separate sheet of paper and not combined with other disclosures or marketing information.
When must the ABA disclosure be made?
The disclosure must be made at or before the time of the referral, according to the law. Real estate employees and sales associates should provide it the first time that referrals are likely to be discussed — when they review what is needed for a closing for the buyer, or when they review the listing contract with the seller. The lender should provide it at the time a referral is made or when the Loan Estimate is given.
What if the referral is made by telephone, email or text?
If the referral is made by telephone, the affiliation should be disclosed orally and followed up within three business days of the conversation with a written disclosure form. The written disclosure should be provided in any email or text mentioning an affiliated service (subject to the E-Sign Act), and the buyer or seller should be asked to acknowledge the disclosure and return a hard copy and an electronic copy.
If the consumer does not send their acknowledgement, the person or company making the referral should record that fact and then require the signing of the acknowledgment a condition at closing.
Does the disclosure have to exactly follow the Model ABA Disclosure Form?
RESPA regulations don’t explicitly say that the Model Disclosure needs to be followed verbatim, but some companies have had to pay a price for not doing so.
In 2014, the Consumer Financial Protection Agency (CFPB) ordered RealtySouth, the largest real estate firm in Alabama, to pay $500,000 for, among other things, including marketing statements about its affiliated companies in its ABA Disclosure and not using capital letters “or other means of highlighting” the fact that consumers could obtain similar settlement services elsewhere and that they were free to shop around.
However, a federal district court granted a motion to dismiss a similar private lawsuit against RealtySouth in 2015, saying that the effectiveness of its disclosure was not impaired because it was not in the exact format of the Model ABA Disclosure.
Losing your RESPA safe harbor because of a deficient ABA Disclosure or a failure to comply with RESPA’s distribution requirements can subject payments between your affiliated businesses to CFPB scrutiny. Even responding to a regulator’s inquiries and allegations can be costly and time-consuming. So, if you haven’t recently reviewed your disclosure contents and procedures, now is the time to do so.
