Federal Title is an independent title company, which means that, unlike most of our competitors, we do not enter into Affiliated Business Arrangements ("ABAs") or Marketing Service Agreements ("MSAs") with lenders and/or real estate agents.
An ABA is an arrangement where someone who is in a position to refer settlement business has an affiliate relationship with or an ownership interest in a provider of settlement services and refers business to that provider. An example of this would be a real estate brokerage that has part ownership of a title company and refers business to the title company.
ABAs are permitted under the Real Estate Settlement Procedures Act of 1974 ("RESPA") as long as certain requirements are met.
An MSA is an arrangement under which a settlement service provider, such as a real estate broker, agrees to market and promote another provider’s services, such as that of a title company, in exchange for payment. MSAs are viewed as falling under a provision in RESPA that allows for "the payment to any person . . . for services actually performed."
MSAs are becoming more and more popular amongst real estate brokerages and title companies here in the DC area.
We think that these types of arrangements are bad for consumers. Many times homebuyers are not adequately made aware that choosing a title company is their choice. Second, when a Realtor refers their client to the "in-house" affiliate title company, chances are good the client will pay more in settlement fees, since they are not shopping for title services. Third, the affiliate title company is more likely to turn a blind eye and insure over potential title or marketability issues relating to the property, because the affiliate title company’s allegiance extends to the referral source.
We are not alone in our belief that these arrangements are bad for consumers. Consumer advocate groups, such as CAARE, have spoken out against ABAs.
Moreover, the Consumer Financial Protection Bureau ("CFPB"), the government agency that is now responsible for policing RESPA violations on behalf of consumers, has been focusing on ABAs. It recently entered into a settlement agreement with a Texas homebuilder and lender regarding the alleged violation of RESPA rules with respect to ABAs.
In many cases, ABAs are merely shams that operate to allow for payment for the referral of business, which is illegal under RESPA.
What about MSAs? How do they fit under RESPA? In some ways, they may be even more dangerous for the consumer than ABAs. One of the requirements for ABAs under RESPA is that the consumer must be informed in writing of an affiliated business arrangement. In contrast, there is no requirement under RESPA that an MSA be disclosed to the consumer. And MSAs, just like ABAs, can operate as shams that allow for the improper funneling of referral fees.
A federal class action lawsuit filed in March of this year in the U.S. District Court for the District of Maryland sheds some light on these arrangements.
In that lawsuit the plaintiffs allege that a title company paid a real estate brokerage as much as $12,000 a month in exchange for referrals under a sham MSA that was not disclosed to the plaintiffs, which resulted in depriving the plaintiffs of competition between settlement providers.
The plaintiffs were referred to the title company by their real estate agent and used the title company for their home purchase closing. The lawsuit seeks $11.2 million in damages against the real estate company, the real estate brokerage, the real estate agent, the title company and the president of the title company.
With all of the potential dangers of MSAs, you can expect that they will be reviewed by the CFPB in the near future. If you are a Realtor, would your broker’s MSA survive the CFPB’s scrutiny? If you are a homebuyer, did your Realtor just refer you to a title company with whom they have an MSA?