On our campus tour, we’ve covered the basics of the prohibition on kickbacks and the splitting of fees, explored the lighthouse in the Section 8(c) safe harbor, reviewed how to set up a compliant joint venture, and took a peek at the AP course in setting up affiliated business arrangements (AfBAs). Before the final bell, our RESPA professors gave us their takeaways – the habits to hone and the practices to avoid – for those looking to add RESPA compliance to their course load.

Holly Bunting, partner at Mayer Brown, recommended those wanting to do RESPA legal work have a solid understanding about how the different businesses in the real estate ecosystems interact and how they conduct their business. Knowing what their economic incentives are, the challenges they face in obtaining customers, and how they work together is effective when evaluating the many fact patterns that arise under that statute.

“As you discuss with clients about the various business scenarios that are proposed, all of them require you to ask questions about how the business is operating,” Bunting said. “You have to understand the motives of the parties involved. By asking those questions in various fact patterns, you really start to be able to piece together how the businesses work.”

What would set a new associate looking to make a RESPA career apart is curiosity – asking the good questions and thinking through the business motivations and what pressure points could turn into legal fault lines.

Florida Agency Network chief operating officer Mike LaRosa mentioned in his dealings with affiliated business arrangements (AfBAs), he would recommend sticking with the federally prescribed disclosure forms.

Sometimes issues can arise when clients want to bury the disclosure language, or change what it says on the disclosure form, to promote the AfBA. But, as LaRosa pointed out, there is a form included in the statute, and language promoting the AfBA is not on it.

“The RESPA guidelines have a form and says your form should look basically like this,” he said. “If you read the opinion letters, they don’t look kindly upon taking that form and turning it into a marketing piece. … Give the consumer the form, in the manner it was laid out. It’s very specific, very dry, but I’ve literally, in 20 plus years in the industry, never seen a single transaction fail because of a provision in an affiliated business arrangement form – a proper one.”

Consumers have declined to use the AfBA, but the lender has never lost the deal. Using the federal form is important, because the disclosure is not supposed to be hidden, or buried amongst myriad other disclosures.

“They don’t want to see the language squished into other paragraphs, or, say, a Realtors’ listing agreement,” he added. “The regulators want a separate page in normal font, with very specific language that states, ‘I’m referring you to this title company because I have a financial interest in it.  I have a vested interest, and could benefit financially, or otherwise. You’re free to shop around – you’re not required to use [the affiliated business] for the deal to be consummated.’ It’s pretty basic stuff.”

Franzén & Salzano President Loretta Salzano said when it comes to AfBAs and disclosure forms, she has seen instances where the disclosure form doesn’t appropriately describe the settlement services offered through the AfBA, or doesn’t provide accurate estimations of the ownership interests. This should be avoided.

“There’s not a lot of detail about how you have to describe the relationship,” Salzano said. “It says you should include a percentage of the ownership, but it can be very complex if you have multiple parties with indirect ownership.

“So, whenever we prepare a disclosure, we try to prepare it so that it’s as technically compliant as possible, but at the same time, not confusing to a consumer.”

Salzano said a lot of the time, these subpar disclosure forms are due to sloppiness, or a lack of understanding by the person who drafted them. Another issue she has seen is the disclosure not being included on a separate sheet of paper, but instead combined with other documents, or with the disclosure about a marketing services agreement. But these, she said, are not the same thing.

“The best practice is the way the form reads, or the way the law reads,” she said. “It requires you to disclose the fees, the way they would be disclosed in a HUD-1 settlement statement. The law never changed to say ‘closing disclosure,’ because this was not changed post-TRID, but we assume you’re supposed to do things the same way post-TRID.”

As an example, if it’s a title fee that needs to be disclosed, then it should be “Title -” and then list the disclosure the same way it would be on the closing disclosure. A similar process should be followed for the AfBA disclosure, Salzano said, and some people aren’t doing that.

Salzano said some of the largest pitfalls she has seen is the timing of the disclosure occurring too late. Unless you are a mortgage professional, she said, the disclosure is supposed to occur at the time of the referral. A lot of the time, that doesn’t happen, and the disclosure doesn’t occur until closing, and by that point, it is too late for it to be a meaningful disclosure that gives the consumer choice.

“If you’re dealing with a real estate broker, with a brokerage company as the owner [of the AfBA], it’s easy to build that into your processes, so that any time you have someone sign a buyers representation agreement, a listing agreement, or contract, that piece of paper will just go in with everything, whether it’s electronic or not.

“Even though it has to be on its own separate piece of paper, that doesn’t mean it can’t be part of a stack of documents.”

Another challenge that can pop up is with the provision of Section 8(c) that states the only thing of value that can be received by the parties is a return on the ownership interest.

“That’s a quagmire for a lot of reasons,” Salzano said. “One is that you clearly cannot be messing with distributions or percentages of ownership based on referrals. There’s a lot of direction in the regulations about that.”

A significant concern is where there are multiple parties, like in agent-owned ventures. While the amount of business that each agent brings in may vary each month, the return they receive cannot be constantly changed to reflect the business brought in. If each agent came in with a 10 percent interest, they should be receiving a return reflecting that amount.

“HUD [The U.S. Department of Housing and Urban Development] used to say it was OK to consider the transactional volume of people before you invite them to join, but once they’re in, there’s no fooling around with that ownership interest, and no fooling around with the distributions or priority of distributions. Everyone has to be treated the same based on their ownership interest.”

While things can be straight forward when the ownership interests and structures are simple, Salzano cautioned the fancier the structure, the more sensitive to this issue you need to be. Creating an exit strategy for participants also presents its own challenge.

Forcing someone out based on non-referral reasons, such as a loss of license, a felony conviction, or a death triggering a sale to the remaining partners as opposed to going to heirs, is all right and common. But forcing a party out because they are not bringing in business can be problematic, because it is untested.

Salzano also said there also can be issues when one of the owners of an AfBA, often the non-referring owner, is giving things away to support the venture, such as additional management services or office space. This should not happen, as AfBAs are meant to be able to operate independently to be compliant, but also because that means the non-referring partner is giving something of value that isn’t shared equally among the owners.

Marx Sterbcow, managing attorney at The Sterbcow Law Group, LLC, recommended finding an attorney who specializes in RESPA if you are unsure about setting up an AfBA.

“These operating agreements [for AfBAs] aren’t your standard operating agreements,” Sterbcow said. “These are very customized operating agreements for joint ventures. You don’t want to go find a corporate business attorney to draft these things up. You need somebody that has the relevant expertise to draft up the agreement and the accompanying documentation as well.”