As previously discussed in What Is a Title Company?, title companies serve three roles that are heavily regulated: title insurance agent, escrow agent, and settlement agent. Part of that regulation is the requirement that they remain independent of the other entities in the transaction (i.e., the lender and Realtors). This isn’t a hard-and-fast requirement though. Through the use of an affiliated business arrangement (“ABA”), lenders and Realtors can share in some of the profits of a title company. Almost all large Realtors have a designated ABA with a preferred title company, so they prefer that a buyer use that title company, but as also previously discussed in What Is a Title Company?, the ultimate decision of what title company to use rests with the buyer. Still, a buyer (or owner refinancing their property) is likely to take the advice of their Realtor or lender.
What is an Affiliated Business Arrangement?
Federal law defines an ABA as
“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…”
12 U.S.C. § 2602. In short, an ABA describes a situation where a Realtor or lender has an ownership stake in a title company. As a partial owner, the Realtor or lender would receive a portion of the profits that title company makes, and that would be a problem under 12 U.S. Code § 2607 (a) and (b), because such returns of profit would fall under the definition of a kickback.
(a) Business referrals
No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.
(b) Splitting charges
No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.
The reason these “kickbacks” are illegal is because they’d generally result in inflated fees, and the added cost would likely not come with better service. That is, Realtors and lenders could take advantage of their clients’ ignorance in order to line their own pockets. However, 12 U.S. Code § 2607(c) expressly permits returns of profit for ABAs as long as a few conditions are met (note: some requirements for disclosure have been left out in the interests of brevity).
(c) Fees, salaries, compensation, or other payments
Nothing in this section shall be construed as prohibiting … (4) affiliated business arrangements so long as (A) a disclosure is made of the existence of such an arrangement to the person being referred and, in connection with such referral, such person is provided a written estimate of the charge or range of charges generally made by the provider to which the person is referred … (B) such person is not required to use any particular provider of settlement services, and (C) the only thing of value that is received from the arrangement, other than the payments permitted under this subsection, is a return on the ownership interest or franchise relationship.
The conditions are as follows:
- The relationship must be disclosed in writing to all parties involved with a schedule of fees (subject to details omitted from the quote above);
- No one threatens to cancel the transaction if the affiliated title company isn’t used; and
- The only monies received by the Realtor or lender are what is appropriate based on their ownership share.
Virginia enacted § 55-525.13 to make the disclosure condition a matter of Virginia law as well, adding a further requirement that the percentage of ownership be disclosed.
Violation of these statutes carries penalties as laid out in 12 U.S. Code § 2607(d), which includes a fine of up to $10,000, a prison sentence of up to one year, restitution to the client of up to three times the amount of the charges the client incurred, and injunctive relief (i.e., a court ordering the offender to stop committing the illegal act).
A Realtor and a lender can have an ownership stake in a title company and may suggest that title company to their clients; however, they must obey strict statutory requirements to avoid liability.
I haven’t worked with every ABA in existence, but in my anecdotal experience, the savings that a buyer should receive through the use of an ABA is nonexistent. In one particularly egregious case, I’ve seen a title company provide a $1,000 credit based on the ABA, which the owner of that company has proudly confirmed in at least one interview on WTOP radio, but their costs were more than $1,000 than what First Class Title normally charges. Overall, the transaction was more expensive than it would have been if the buyers had used us, but as any psychologist will tell you, seeing a $1,000 discount gives you blinders. All you see is the discount, so everything else slips by you. It’s certainly possible that only the Realtor or lender itself benefits from the ABA, so look at all the fees, and pull out your calculator. Make sure you know exactly how much it’s costing you, and in any event remember that quality of service is probably more important than cost in making your decision.
Follow Rob on Twitter @PropertyAtty
Rob Bodine is a Virginia attorney focusing his practice on real estate and intellectual property law. He’s currently Virginia counsel with First Class Title, Inc., a Maryland title insurance and settlement company. Rob is also a licensed title insurance agent in Maryland and Virginia.