Disclosure of an Affiliated Business Arrangement

Co-Author: 

I am a real estate broker. If I refer a potential mortgage customer to a mortgage business in which my husband is employed or has an ownership interest, must I give the customer an “affiliated business arrangement” disclosure when making the referral?

Under RESPA (the Real Estate Settlement Procedures Act), disclosure should be given if the spouse owns more than 1 percent of the mortgage company, but the disclosure apparently is not required if the spouse is merely an employee, not a part owner.

The disclosure form is required only for an “affiliated business arrangement.” Under RESPA, an “affiliated business arrangement” includes an arrangement where a person refers mortgage-related business to a company in which the person “or an associate of such person” has an “ownership interest of more than 1 percent” in a provider of “settlement services.” See 12 U.S.C. § 2602(7). An example is where a real estate broker or her husband has a direct or beneficial ownership interest of more than 1 percent in a mortgage company.

RESPA broadly defines the term “associate” to mean one who has one or more of the following relationships with the person [such as the real estate broker] who is in a position to refer settlement business:

(A) a spouse, parent, or child of such person;

(B) a corporation or business entity that controls, is controlled by, or is under common control with such person;

(C) an employer, officer, director , partner, franchisor, or franchisee of such person; or

(D) anyone who has an agreement, arrangement, or understanding, with such person, the purpose or substantial effect of which is to enable the person in a position to refer settlement business to benefit financially from the referrals of such business.

12 USCA § 2602(8).

Where an affiliated business arrangement exists, the person having an ownership interest may receive dividends or other returns on the person’s ownership interest, even though that person or his spouse has made referrals to his company. RESPA is not violated so long as the person making the referral timely provides the written disclosure as required by regulation, the person making the referral does not require the customer to use any particular mortgage company or other provider of settlement services (with certain enumerated exceptions), and, unless otherwise exempted, the only thing of value that is received from the arrangement is a return on an ownership interest.

A return on an ownership interest does not include a payment that is tied to the amount of referrals. See 24 C.F.R. § 3500.15(b). Although a mortgage company’s profits and dividends may increase as a consequence of referrals, it would be impermissible for a dividend or other payment to be made which varies according to the relative amount of referrals by the different recipients, e.g., based on the referrals by different shareholders. Id.

The definition of affiliated business arrangement is based on ownership interest, not employment. Thus, the disclosure for an affiliated business arrangement may not be required if a real estate broker’s husband is merely employed by a mortgage company and the couple does not have an ownership interest in the mortgage company.

Disclosure of an affiliated business arrangement is just one of RESPA’s requirements. Regardless of whether a disclosure is required or not in a given situation, a real estate broker should heed RESPA’s broad prohibitions against unearned fees and kickbacks from mortgage related business.

Brad M. Lund is no longer with the law firm of Frascona, Joiner, Goodman and Greenstein, P.C.

A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.

G. Roger Bock is a shareholder with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm. His practice areas include Litigation, Real Estate, and Employment . Contact Roger Bock.

Disclaimer -- Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

G. ROGER BOCK