To ensure a free, competitive market in residential real estate, statutes (primarily the Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. § 2607 et seq.) and regulations (such as 24 C.F.R. § 3500.15, concerning Affiliated Business Arrangements) seek to prevent tying arrangements, kickbacks, fee splitting, hidden fees, etc.

Required use (as defined in 24 C.F.R. 3500.2(b))  means a situation in which a person must use a particular provider of a settlement service and pay their fee in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service.

HUD established strict guidelines for the affiliated-business-arrangement exemption, which elaborates on the RESPA requirement that a customer cannot be required to use a particular settlement service provider. 24 C.F.R. § 3500.15(b)(2). Thus, no person making a referral can require (as defined in section 3500.2, “required use”) any person to use any particular provider of settlement services .

It is essential to look to HUD to determine the underlying policy and consumer protections that HUD wished to implement after RESPA's passage in 1974. Congress specifically stated it intended to eliminate kickbacks and referral fees that tend to increase unnecessarily the costs of settlement services. 12 U.S.C. Sec. 2601(b)(2). RESPA was intended to promote choice and competition. Therefore, HUD needed to address the question of when referrals between settlement service providers and their affiliates violated RESPA. In short, “...in 1983, Congress amended RESPA to permit controlled business arrangements (CBAs) under certain conditions, while retaining the general prohibitions against the giving and taking of referral fees.” See  HUD Statement of Policy 1996-2.

A.  Affiliated Business Arrangements

Congress defined the term ``controlled business arrangement'' to mean an arrangement:

[I]n 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. See 12 U.S.C. 2602(7) (Emphasis Added).

In November, 1992, HUD issued its first regulation covering these controlled business arrangements. See 57 FR 49599 (Nov. 2, 1992), codified at 24 CFR 3500.15. The provision then spawned the three-part Safe Harbor Test.  This test specifies that three conditions be present in order to satisfy HUD’s exemption from liability with respect to Section 8. Plaintiffs were entitled to the full protections guaranteed to them by RESPA under the so-called Safe Harbor Test. See  HUD Statement of Policy 1996-2, Regarding Sham Controlled Business Arrangements; 61 Fed.Reg. 29258 (June 7, 1996).

Specifically, it allowed an individual, such as a builder or other settlement service provider, the ability to refer business to an affiliated settlement service provider (i.e., lender or title insurance company) so long as: (1) The consumer receives a written disclosure of the nature of the relationship and an estimate of the affiliate's charges; (2) the consumer is not required to use the controlled entity; and (3) the only thing of value received from the arrangement, other than payments for services rendered, is a return on ownership interest.  See HUD Statement of policy 1996-2, sham controlled business arrangements.

B.  The Three-Part Safe Harbor Test

There is no better reference than HUD’s own policy statement (“SOP”) when one looks to dissect the Safe Harbor provisions in an attempt to determine whether an Affiliated Business Arrangement is genuine or a sham. RESPA Section 3500.15(b) sets out the Safe harbor test in which all three conditions must be met:

The first condition concerns the disclosure of the relationship. The rule provides that the person making the referral must provide the consumer with a written statement, in the format set out in appendix D to part 3500. This statement must be provided on a separate piece of paper. The referring party must give the statement to the consumer no later than the time of the referral. 24 CFR 3500.15(b)(1).

The second condition involves the non-required use of the referred entity. Section 3500.15(b)(2) provides that the person making the referral may not require the consumer to use any particular settlement service provider, except in limited circumstances. A lender may require a consumer to pay for the services of an attorney, credit reporting agency or real estate appraiser to represent the lender's interest in the transaction. An attorney may use a title insurance agency that operates as an adjunct to the attorney's law practice as part of the attorney's representation of that client in a real estate transaction. 24 CFR 3500.15(b)(2).

The third condition relates to what is received from the relationship. The rule provides that the only thing of value that comes from the arrangement, other than permissible payments for services rendered, is a return on an ownership interest or franchise relationship. 24 CFR 3500.15(b)(3). The rule describes what are not proper returns on ownership interest at 24 CFR 3500.15(b)(3)(ii). These include ownership returns that vary by the amount of business referred to a settlement service provider, or situations where adjustments are made to an ownership share based on referrals made.

See HUD Statement of policy 1996-2, sham controlled business arrangements; See also 24 CFR § 3500.4(a)(1)(ii) (the HUD Statement of Policy imbues with the force of federal regulations).

C.  12 U.S.C. § 2607 Prohibition Against Kickbacks and Unearned Fees

(c)(4) [Affiliated Business Arrangements (AfBAs)]

Nothing in this section shall be construed as prohibiting … affiliated business arrangements so long as (A) ...disclosure is made of the existence of such an arrangement … (B)  …[the consumer is] not required to use any particular provider of settlement services … [except that the lender may select the appraiser] 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…

(d)(2) [Penalties For Violations]

Any person or persons who violate the prohibitions or limitations of this section shall be jointly and severally liable to the person or persons charged for the settlement service involved in the violation in an amount equal to three times the amount of any charge paid for such settlement service.