What is an Affiliated Business Arrangement (ABA) and are they even legal?

ABAs are a way for real estate brokers and/or agents to legally receive a share of the profits from mortgage financing and/or title insurance when you purchase real estate.

Under federal RESPA guidelines (Real Estate Settlement and Procedures ACT), the real estate broker and/or agents that are participating in the ABA must have you sign a disclosure where they notify you that they have a financial interest in the affiliated company AND request your authorization to order title insurance on your behalf.

In PA, the consumer has no obligation to either sign the disclosure or use the title insurance or mortgage company being referred by the real estate professional. If someone is pressuring you to use a particular affiliated company, it should probably raise a red flag.

The Cautious Couple

I received a call from a guy who found us on the internet. He told me that he and his fiancée were buying a house and using a real estate agent who was a friend of his parents. He said that when they went to sign the agreement of sale they felt as if they were being bombarded with documents to sign that had nothing to do with their offer. One of the documents would give the real estate agent authorization to order the lender required title insurance with his in-house company.

Not sure what this document had to do with placing the offer, the young couple told the agent that they did not feel comfortable signing the document. The agent went on to explain that they would need title insurance to buy the house and he could take care of it for them with his company. He further suggested that regardless of where they purchased title insurance the cost would be the same, since the premiums are filed with the state. They found the disclosure to be somewhat confusing, especially when it came to the agent’s relationship with the title company and decided to shop around before agreeing to sign.

That turned out to be a wise choice.

What’s the big deal?

After finding our website and utilizing our online title insurance calculator, the buyers quickly realized that although their agent was correct about the title insurance premium being the same, there was a list of miscellaneous fees that the agent and/or his in-house title company was charging that added over $800 to their closing costs. When they challenged their agent as to the fees, they were told that “sure you can use whichever company you want, but if you don’t use our company there’s no guarantee that you’ll be ready to go to settlement on time.” If you were wondering, almost everything that the agent has told them to this point pertaining to their title insurance is in violation of RESPA.

I had the pleasure of speaking with this particular buyer on five separate occasions answering his questions and dispelling all of the inaccurate information that he received from his agent and preparing him for the objections that he would receive from the agent for exercising his legal right to choose his own title/settlement services company.  On that fifth occasion, he asked us to handle his settlement and provide the title insurance for their transaction. He was thrilled with all of the fees that we waive and even happier that we were able to coordinated the entire transaction, eliminating the need for him to pay his agent’s company an additional broker’s services fee of $395 to do it.

The last thing he asked me was, “is this disclosure that our agent was so insistent for us to sign standard in the industry and was it even legal?”

How to know if the ABA is legit

Under RESPA if the participants in the ABA do not set the relationship up to comply with the guidelines, or if the disclosure that you’re asked to sign is not in compliance with the guidelines, it is considered to be a “sham” business arrangement set-up for the purpose of paying illegal kickbacks or referral fees.

Here is a link to the RESPA approved ABA Disclosure.  It is a violation of RESPA guidelines to alter the disclosure in any way.

Legal Compliance

For the disclosure to be in compliance, it must:

• Identify the relationship between the parties
• Accurately disclose which parties are involved in the relationship (agent and/or broker)
• Accurately disclose what percentage of ownership they have in the ABA
• Be clear that you have the right to shop for these services and are not obligated to hire the company being referred to you

The disclosure must NOT contain any language that would lead the consumer to believe that:

• That the fees being charged by the parties involved in the ABA are standard or competitive with other title insurance providers within the industry
• That they may or may not be able to get these services at a lower rate by shopping with other settlement service providers

When an ABA Disclosure is not in compliance with RESPA guidelines, consumers might be entitled to compensatory damages. You can contact the CFPB (Consumer Financial Protection Bureau) via their website for further clarification.

Industry Reaction

In 2014 the lead counsel for PAR (Pennsylvania Association of Realtors) warned their members of the penalties involved if they were found in violation of RESPA, and further suggested that many of their members who participated in ABA’s were not using the proper disclosures that are required under the RESPA guidelines. In a recent publication of “Just Listed” magazine, the same PAR attorney in an article titled: Preselecting a title company: Not in a Realtors best interest, stated the following. “RESPA makes it illegal to pay someone, or to get paid for referring someone to a settlement service provider; e.g., mortgage broker or title company.”  Read the full article here.

Violations are costly

Up until about two or three years ago there had been very little enforcement for those who were in violation of RESPA, until the CFPB assumed responsibility for enforcement in 2010 as part of the Dodd-Frank Wall Street Reform Act. Since becoming the industry “watchdog” the CFPB has levied tens of millions of dollars in fines and penalties against real estate agents, brokers, lenders, new home builders and title companies that they’ve found to be in violation of RESPA and limiting consumer choice.

Fortunately for you, not every real estate broker and/or agent who suggests a particular title/settlement services company or lender participates in ABAs or receives compensation when you use the service provider that they recommend. For example, the real estate professionals who offer our services to their clients do so because ALT is an independent title insurance/settlement services company that provides excellent customer service and saves their clients hundreds of dollars in “junk fees” at the settlement table.

In our opinion all that ABAs do is limit consumer choice and drive up the cost of buying a house. So now the next time you’re confronted with this situation, hopefully we’ve provided you with enough information to make an informed decision before agreeing to anything.