It seems like it’s been a while, but title and mortgage company affiliated business arrangements, or “ABAs”, are squarely in the crosshairs of legal action once again. In January of this year, Pennsylvania’s Attorney General sued a set of related companies (Commonwealth v. Bright Financial Group, LLC, et al) for violating the Real Estate Settlement Procedures Act (“RESPA”) in several ways. If you have a title company, mortgage brokerage, real estate brokerage or other business that deals with federally covered mortgages – and especially if you are involved in an ABA – you probably want to watch this case. 

RESPA prohibits kickbacks for business referrals that are related to or part of settlement services involving a federally related mortgage loan. However, RESPA has long allowed the owners of a real estate settlement service provider, like a title company or mortgage broker, to receive a return on the ownership interest of that business (i.e., a share in the profit) – even if they make referrals of settlement services to that business. These kinds of arrangements are what we call ABAs, and sharing in the profit of an ABA isn’t an illegal kickback if it’s set up correctly. 

Some ABA requirements include that the referred consumer must be informed of the referral arrangement (i.e., that the referring person owns a piece of the business they are referring the consumer to) when the referral is made, and the consumer cannot be required to use any particular settlement service provider. Also, the ABA owners’ return on their investment in the ABA cannot be used to distinguish among owners based on actual, expected or anticipated referrals by those owners, such as by increasing or decreasing an owner’s share of the company based on the relative amount of referrals made or anticipated to be made by the owners.

In the Bright case, Pennsylvania claims that Bright and its affiliates’ ABA failed most of these requirements because the ABA:

• investigated potential new owners and offered them ownership interests in amounts that reflected anticipated referrals based on their history of success as a real estate agent;
• tracked referrals actually made and set goals for referrals for each owner, which were tracked in a monthly spreadsheet; and
• changed ownership percentages of members based on actual referrals made. 

Importantly, Pennsylvania also argued that the entities’ various operating documents served to make this illegal scheme “more effective” by: prohibiting ownership of another title company; having the right to buy out an owner at a set price if they are no longer licensed or active enough in the industry; having the right to kick out members for any reason; and preventing owners from selling their ownership without approval (effectively letting the ABA ensure that only other referral capable persons would become owners). Pennsylvania argued that these operating provisions more readily allowed the company to implement ownership changes in order to track referrals. 

If your RESPA regulated company has any similar provisions, it’s not time to panic – yet. This case has yet to be decided, and Pennsylvania didn’t necessarily argue these kinds of provisions, in an of themselves, are outright violations of RESPA. Rather, Pennsylvania argued that they were used to support a scheme that involved violations of RESPA. In addition, many kinds of companies – both ABAs and non-ABAs – often have similar provisions for legitimate reasons in their ownership documents. However, while I tend to think these provisions (if not used to effect RESPA violations) have legitimate uses unrelated to RESPA violations, it’s possible a Pennsylvania court will disagree. 

It is important to note another argument advanced by Pennsylvania. Pennsylvania argued that the price paid for ownership interests in the ABAs was severely discounted, and that the discount itself was a prohibited kickback. Pennsylvania claims the return was, in some cases, over 900%. If your ABA hasn’t assessed the price at which it offers its ownership interests for sale, that would certainly be advisable as this is not the first time such arguments have been made against ABAs.

The ABA enforcement landscape has been relatively quiet in recent years. Whether this recent case signals a shift in regulatory activity remains to be seen. If your operations include practices similar to those Pennsylvania identified as potential RESPA violations, now may be an opportune time to revisit Section 8 of RESPA and carefully evaluate how your ABA is structured and conducted to avoid becoming the focus of regulatory enforcement. If you have any questions regarding your company’s affiliated business arrangements or compliance with RESPA, please reach out to partner Kim Decker or any member of Barley Snyder’s Business Practice Group.