Is an Affiliated Business Disclosure Statement required to be given to and signed by the homeowner?

Author: LegalEase Solutions

  1. Is an Affiliated Business Disclosure Statement required to be given to and signed by the homeowner?

 Pursuant to 12 U.S.C. Sec. 2602 (3) and § 3500.2 of Code of federal Regulations, “Settlement services” includes any service provided in connection with a real estate settlement including services rendered by an attorney, services rendered by a real estate agent or broker and closing or settlement.  Pursuant to 12 U.S.C. Sec. 2602 (7) the term “affiliated business arrangement” means an arrangement in which (A) a person who is in a position to refer business incident to or a part of a real estate settlement service involving a federally related mortgage loan, or an associate of such person, has either an affiliate relationship with or a direct or beneficial ownership interest of more than 1 percent in a provider of settlement services; and (B) either of such persons directly or indirectly refers such business to that provider or affirmatively influences the selection of that provider.

RESPA contains provisions relating to Prohibition against kickbacks and unearned fees. 12 U.S.C. Sec. 2607 (a) and 24 C.F.R. § 3500.15.  However, Pursuant to 12 U.S.C. Sec. 2607 (c)(4) and § 3500.15 (b) (1), a referral is not prohibited if the person making each referral has provided to each person whose business is referred a written disclosure, in the format of the Affiliated Business Arrangement Disclosure Statement which sets forth the nature of the relationship (explaining the ownership and financial interest) between the provider of settlement services (or business incident thereto) and the person making the referral and of an estimated charge or range of charges generally made by such provider.

Here, when the Real estate agent refers the home owner to use his law firm for legal review of the transaction, an affiliated business arrangement comes in to existence and settlement services as part of a home loan transaction are being rendered.  Therefore, an Affiliated Business Disclosure Statement is required to be given to and signed by the homeowner.

  1. Is the act of recommending the law firm a “REFERRAL OF SETTLEMENT SERVICES” to the homeowner?

A “referral” is defined by 24 C.F.R. § 3500.14(f) as any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business. Egerer v. Woodland Realty, Inc., 556 F.3d 415, 421 (6th Cir., 2009). A Person who is in a position to refer settlement service business means any real estate broker or agent, lender, mortgage broker, builder or developer, attorney, title company, title agent, or other person deriving a significant portion of his or her gross income from providing settlement services. 24 C.F.R. § 3500.15(c)(9).  Here, the homeowner engaged the real estate agent who is also an attorney to sell his property and on the agent’s recommendation engaged his law firm for the legal review of the home loan transaction.  Therefore, the act of recommending the law firm may be considered as a Referral of Settlement Services to the homeowner.

  1. When a buyer is located in this transaction, is an Affiliated Business Disclosures Statement required to be given to the buyer? 

Generally, a broker referring a seller or buyer to a service provider he owns or co-owns must disclose his ownership of the provider to the seller or buyer on or before referring them to the provider. 24 CFR §3500.15(b)(1).  The disclosure includes the nature of the business relationship between the broker and the business providing the settlement services, as well as an estimate of the cost or range of costs to be charged. 24 CFR §3500.15(b)(1).  Based on the foregoing, unless the buyer is being represented as well and being referred to a co-owned service, it doesn’t appear that an affiliated business arrangement disclosure would be needed for the buyer.

  1. Which party, the Seller or the Buyer, is the referral of settlement services being made? 

A “referral” is defined by 24 C.F.R. § 3500.14(f) as any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business. Egerer v. Woodland Realty, Inc., 556 F.3d 415, 421 (6th Cir., 2009).  Here, the homeowner has engaged the real estate agent to sell his property and homeowner is being referred to the law firm.  So, by definition, the Seller should be considered the person to whom the referral of the settlement services was made.

  1. Is the Affiliated Business Disclosure Statement only given to the party receiving the referral and selecting the services? 

Pursuant to 12 U.S.C. Sec. 2607 (c)(4) and § 3500.15 (b) (1) a referral is not prohibited if the person making each referral has provided to each person whose business is referred a written disclosure, in the format of the Affiliated Business Arrangement Disclosure Statement which sets forth the nature of the relationship (explaining the ownership and financial interest) between the provider of settlement services (or business incident thereto) and the person making the referral and of an estimated charge or range of charges generally made by such provider.  So it is to be concluded that the Affiliated Business Disclosure Statement is only given to the party receiving the referral and selecting the services.

  1. If the buyer agrees to pay for sellers legal fees, does this make the buyer the referral party under RESPA? 

If the buyer offers to pay the fee of the seller, that doesn’t necessarily fall under the definition of referral. Pursuant to the definition of “referral” in the answer to question 4, it appears that the definition of referral does not hinge on who pays the fee for the service but if there was certain action to influence party to select certain settlement service. In other words, the party who has been referred would be the party with whom the service selection decision rested.

  1. Is there liability for a violation of RESPA if the proposed real estate transaction does NOT conclude? In other words, if the parties cancel a transaction but there was a potential violation of RESPA, does the violation disappear when the transaction is cancelled? 

Yes, there is liability for a violation of RESPA section 8 even if the proposed real estate transaction does not conclude. RESPA authorizes suits only by individuals who receive a loan that is accompanied by an unlawful referral, which is plainly an individualized injury. Under the Fair Housing Act, market “testers” have the right to receive “truthful information concerning the availability of housing.”  Yet the Supreme Court has held that standing exists to vindicate this right even when the testers “fully expect [to] receive false information, and [have] no intention of buying or renting a home.” Just as a violation of the rights of “testers” to receive “truthful information” supports standing, so does a violation of the right to receive referrals untainted by conflicts of interest. In re Carter, 553 F.3d 979, 989 (6th Cir., 2009).

In order for there to be a violation of 12 U.S.C. § 2607(a) and 24 C.F.R. § 3500.14(b), three elements must be present: 1) a payment or a thing of value; 2) made pursuant to an agreement to refer settlement business; and 3) an actual referral. Egerer v. Woodland Realty, Inc., 556 F.3d 415, 427 (6th Cir., 2009); see also Joyce Palomar, Title Insurance Law, § 21:2 (“Only when referrals are motivated by an agreement that the referee will pay or kickback to the referrer a thing of value is RESPA § 8(a) [12 U.S.C. § 2607(a)] implicated.”).

“[T]he statute creates an individual right to receive referral services untainted by kickbacks or fee-splitting. § 2607(a)-(b). Congress may empower individuals to sue based only on “personal and individual[ized]” injuries. Lujan, 504 U.S. at 560 n. 1, 112 S.Ct. 2130. Standing does not exist, for example, to enforce “an abstract, self-contained, noninstrumental `right’ to have the Executive observe the procedures required by law.” Id. at 572, 112 S.Ct. 2130. Even though an injury need not be economic in nature, it still must cause individual, rather than collective, harm”. In re Carter, 553 F.3d 979, 989 (6th Cir., 2009)