What to Look for in Your Contract: Affiliated Business Arrangement Disclosures

A real estate contract can be over 50 pages long.  How can you know what to look for in your contract?  Affiliated Business Arrangements (“ABA”) are agreements between two or more parties in a real estate transaction that allow for the services of one party to economically benefit the other party in the ABA.  In an ABA, a real estate settlement services provider such as a title company, mortgage lender, or real estate agent may have an affiliate relationship with, or a direct beneficial ownership interest in, an entity to which settlement business is referred such as a joint venture title or mortgage entity.

In simpler terms, this means a title company, a real estate agent, or a mortgage lender may refer a buyer or seller to use the affiliate. The referring party may receive financial benefit from the referral.

When executed lawfully, ABAs are a way for real estate service providers to legally receive a share of the profits from mortgage financing or title insurance when you purchase real estate.

RESPA

Under federal RESPA guidelines (Real Estate Settlement and Procedures Act), the real estate broker or agents that are participating in the ABA MUST have you sign a disclosure notifying you that they have a financial interest in the affiliated company and may receive financial benefit for your use of the services of the affiliate.

Where to find the disclosure?

If an ABA exists, your agent MUST have you sign an Affiliated Business Arrangement Disclosure. Typically, these disclosures are found towards the end of your contract or within a disclosure package sent to you by your agent.

If I am a homebuyer or seller, why does it matter?

Homebuyers and sellers often rely on the expertise of their real estate agent or mortgage lender for referrals for real estate settlement services. Real estate agents and mortgage lenders are inclined to refer a client to use the services of those participating in the ABA. Usually, the affiliates are reputable providers of their services. However, there remains a question of conflicts of interest. At the end of the day, it takes money to provide an incentive to create an ABA. The question then is who is bearing the cost of the financial benefit between the ABA member? Most homebuyers and sellers are surprised to learn they are the ones covering the cost of the financial benefit. Here’s an example:

You are a homebuyer. Your real estate agent, a title company, and a mortgage lender have an Affiliated Business Arrangement and create a joint venture. Your agent provides you with an ABA disclosure to sign in the offer or contract. If you choose to settle with the title company or the mortgage lender listed in the ABA, the fees you pay to the lender or title company may lead to a financial benefit for the real estate agent for the referral.

Are you getting the best services at the best price?

This practice obviously leads to the question of whether you are getting the best services at the best price. There is less incentive by the title company and mortgage lender to find any available discounts or reduce fees, because in the end, a portion of the fees is needed for the joint venture members. Thus, if you are charged less, there is less benefit to the members. Meanwhile, a non-affiliated title company or mortgage lender may be able to provide the same quality of services at a far less price. In this market, I think every buyer or seller would like to keep costs as low as possible.

Questions When Making an Offer or Signing a Contract:

Often times ABAs are complex and the benefit of the ABA is difficult to understand, even for real estate attorneys. Unfortunately, the disclosures are not required to break down the arrangement in layman’s terms and are often signed by a buyer or seller without understanding the meaning and underlying consequences of signing. Here are some questions to ask your real estate agent if you are given an ABA disclosure to sign:

1. Who are the companies listed in the disclosure?
2. Who is receiving a financial benefit from the use of a company listed in the disclosure?
3. Am I paying more to the affiliated company than other non-affiliated companies would charge?
4. Can you please give me a guaranteed or detailed quote from the title company?
   1. ABA disclosures typically show a range of the possible fees. Check with the agent or title company to get an accurate estimate. An affiliated company may be more than $1,500 more expensive than a non-affiliated company for the same services.
5. Can I use my own mortgage lender or title company instead?
   1. If you are a buyer, the answer is always YES. If you are told you must use the affiliated company or that it is “too late to switch”, you are being misled.