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   ARTICLE   |   From Scotsman Guide Residential Edition   |   October 2013

Will Affiliated Business Arrangements Get Clipped?

Recent legislation may mean AfBAs are on their way out

Will Affiliated Business Arrangements Get Clipped?

For years, mortgage banks and large mortgage brokerages have used marketing agreements and affiliated business arrangements (AfBAs) to improve their sourcing of business from real estate brokerage companies. Recently, however, certain legal developments have caused some mortgage companies to believe that marketing agreements may be preferable to AfBAs.

In either case, the compliance and litigation risks in this area certainly have increased, necessitating greater diligence in today’s legal environment.  Considering this, mortgage companies must ask: Are AfBAs going to get cut back or will these arrangements continue to span the industry?

Historically, a marketing agreement was a good way to start a relationship between mortgage companies and real estate brokerages. An AfBA represents a markedly committed business relationship between two parties, and it often leads to more significant profits for both.

AfBA capture rates of 25 percent to 30 percent of the mortgages from buyer-controlled sales have been common if the mortgage products and services provided by the affiliated partner are competitive. Title-agency AfBAs often have experienced a significantly higher capture rate. Some of the largest real estate brokerages have mortgage and title AfBAs, and the same is true for the larger homebuilders. Not surprisingly, these organizations generally experience higher capture rates, as well.

If AfBAs have such great potential, why is there a chance that they will get cut back? Taking a closer look at recent guideline changes may reveal the answer.

Class-action challenges

Companies involved with AfBAs — formerly known as controlled business arrangements — have relied on their specific exemption from the referral fee prohibitions in Section 8 of the Real Estate Settlement Procedures Act (RESPA). Related to this has been the need for an AfBA to comply with the U.S. Department of Housing and Urban Development’s (HUD’s) “Policy Statement on Sham Controlled Business Arrangements.” This policy statement sets forth 10 key issues that HUD said it would consider in analyzing whether an AfBA was a viable and RESPA-compliant entity. There were also further policy statements and some letters issued several years ago by HUD that focused on the number and types of services deemed necessary to justify payments by a mortgage banker to a mortgage broker. These are relevant to the validity of the services being provided by a mortgage brokerage AfBA.

The validity of mortgage banker AfBAs, however, has been challenged recently through class-action litigation that charges that they’re not in compliance with RESPA. This has occurred even where the AfBA was clearly a viable business, adequately capitalized and staffed by employees dedicated to providing all of its mortgage-origination services. Although these class-action suits have not been successful to date, the risk of class action is higher for smaller AfBAs — particularly mortgage brokers — that may not have ideal facts to support their business arrangement.

The risk in this area is complicated because HUD’s 10-point test for valid AfBAs is vague, broad and overlapping. Further, HUD’s policy statements on mortgage brokerage services are outdated to some degree because of the rapid automation of the mortgage-origination process. Of even greater concern is the lack of familiarity exhibited by the courts as to RESPA and its interpretations.

QM’s involvement

Complicating the AfBA scenario for mortgage companies are the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that discriminate against the use of AfBAs by a mortgage banker or broker. Beginning in January 2014, Dodd-Frank requires that the fees of third-party service providers — title insurance companies, title agencies, escrow companies, etc. — affiliated with a mortgage company (i.e., those with 25 percent or more related ownership) must be included in calculating the 3 percent fee cap required for a qualified mortgage (QM).

This means that, for instance, if a real estate broker or homebuilder owns 25 percent or more of a mortgage company and uses its AfBA title agency in the transaction, then that title company’s fees must be included in the 3 percent fee calculation. Depending on the size of the loan, this can result in the loan not being a QM. And, of course, as a practical matter, many lenders are not expecting to originate non-QM loans because of the risk-retention requirements of Dodd-Frank. This AfBA discrimination may cause real estate brokerage companies and homebuilders that own a mortgage company and a title agency to consider whether to withdraw from one of those AfBAs.

At present, the Consumer Financial Protection Bureau (CFPB) does not believe that it should override this AfBA fee inclusion provision since it is specifically included in Dodd-Frank. Nevertheless, it is possible that the CFPB would not oppose a change to this provision by Congress. In discussing this issue in its commentary in the Ability to Repay Final Regulation, the CFPB took no position on and did not question the argument that there is no evidence of lesser service quality, higher fees or consumer dissatisfaction with AfBAs.

Future developments

There are bills pending in Congress to amend Dodd-Frank to at least remove title fees from the 3 percent QM fee limit when AfBAs are involved. The National Association of Realtors, the Mortgage Bankers Association (MBA), the Real Service Providers Organization and others support a proposed amendment, as well. This effort is politically complicated, however, as the proposed bills include other changes sought by the MBA, such as excluding broker fees when paid by the lender from the calculation of a qualified mortgage.

Additionally, several consumer groups are opposing these bills, causing a political dilemma for those who may agree with parts of the proposed changes but disagree with other aspects of the changes. Although some members of Congress have resisted opening up Dodd-Frank to amendments, there may be some opportunity before the end of 2013 for some amendments that are deemed to be technical corrections to gain momentum, and it’s possible that this AfBA issue may be included.

Alternately, if the AfBA change doesn’t happen this year as a technical correction, it probably will become part of a larger and more time-consuming effort by the mortgage industry to have all of the unintended consequences of Dodd-Frank considered by Congress. This would make it more likely that many builders and real estate brokerage-owned mortgage companies will be dropped before this issue is resolved.

•  •  •

As a result of this changing environment for AfBAs, marketing agreements are gaining favor as the best way to preserve these mutual relationships. A change to a marketing agreement should not, however, be regarded as a regression to bygone methodology. HUD altered the compliance environment for marketing agreements by making a distinction between buyer-direct marketing (which is now considered to be a referral) and general marketing. It also emphasized scrutiny of the services to be provided and validation of the amounts being paid for these services.

The CFPB, which now is the regulator for RESPA, is expected to deal with marketing agreements at some time after the current focus on adopting mortgage regulations. Under its broader legal authority beyond RESPA, the CFPB undoubtedly will shape marketing agreements beyond what HUD has done already, so it’s important for mortgage companies of all kinds to keep informed of these ongoing developments.


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