Beware: "Affiliated Business" or Illegal Kickbacks?

Walks like a Duck, talks like a Duck…
There is a booming new business that consumers deserve to fully understand. It is called an “Affiliated Business Arrangement” or ABA. A new stream of income for some Realtors. You deserve full disclosure and whether your Realtor is getting an indirect kickback from his “recommended partners”

“Affiliated” businesses. Are they a Godsend, barely legal, just plain illegal, or just unethical?

FIRST OF ALL LETS DEFINE RESPA? (The law designed to stop kickbacks)

  • RESPA is about closing costs and settlement procedures. RESPA requires that consumers receive disclosures at various times in the transaction and outlaws kickbacks that increase the cost of settlement services.” Respa website.

Could a Realtor that is in “partnership” with a Title company, please help me understand why it is ok to skirt around this law? More frequently I am finding large real estate companies (and the agents) “partnering” with settlement companies and doing so in a manner that technically gets them around the kickback laws.

One Real Estate company even uses the loophole as a recruiting technique:

  • Mortgage and Title Income . We share income with our agents under a RESPA compliant platform. As the leader in this field we have developed the only legal way to offer you this additional income.”

Yippee!!! Translation: “We are smart, cunning and sneaky enough to have figured out a loophole to get around the basic intent of the law… at least for now or until we get caught.”

Another website lists the following reason for agents to join their Real Estate company:

  • “Does the company own affiliated businesses? Do the agents share in this?”

But I thought the earlier company was the only one that knew how to do it legally?

RATS!

So the law was designed to stop Real Estate Agents from getting a $100 or $300 incentive to drive business to a particular Title company. Yet that doesn’t stop the “brilliant” realty firms that found a loophole around this.

This is one of the loopholes as I barely understand it:

  • The agent becomes a tiny % part owner in the settlement company’s newly formed subsidiary LLC . I don’t have the exact details, but this part ownership is a legal way for them to get an indirect kickback, since revenue can’t go to agents unless they happen to own part of the company. So while they don’t get directly $300 per deal, they get a year end revenue share that is somehow tied to the # of closings with that company. One Realtor said it isn’t tied to that, but I would have to see details before I believed that an agent would be allowed to own a part of 1 title company, while sending ALL your business to another
  • And once the new year hits, a newly formed LLC is created to bring on new agents.

So please, agents that are part of these big companies, please help me understand how you rationalize this. While some of you might say that you have the client sign a disclosure form, how many of you with a straight face can tell me that your client “gets” that you are making $300 off them if they go with a particular company? As if we don’t make enough money on the deal, we need to bilk them for a couple hundred more bucks?

Most buyers sign that disclosure because:

  • They think it is normal and are already signing 20 documents
  • They feel pressured into it or confused
  • They can’t read between the lines that say: “Your Realtor makes $300 if you use XYZ”
  • They have no other alternatives.

Instead of the intent of the disclosure which is to let people understand that they have a choice and that their agent makes money if you sign that paper. Note that it used to be more common for the firm to make money, and not the agent. Now firms are sharing that money back with the agents as a recruiting technique.

What can you do? (I’m not one to bitch about something and not give suggested remedies)

  1. Avoid the companies that have these ABAs. If they do shady things like this, what else are they going to do that is shady? (see blog on Shady 10% Buyer Agent Bonuses or the blog “Don’t Trust Realtors that Sell You on Buying“)
  2. Demand that the Realtor put in writing exactly how much they are getting (once you get that in writing, send it to me to review)
  3. Ask the Realtor how he can justify this bonus/kickback/revenue share if he already agreed in another contract that a) he was making X% and b) working for you, the buyer.
  4. Demand that bonus in the form of a Rebate back to the buyer.
  5. If he won’t rebate his bonus, use another settlement company.


Aren’t you just jealous that you don’t have these partnerships?

No. I could easily get them and I have been offered them.

The conversation goes like this (but with a lender),

  • Lender: “Let us be your in house lender and you can get 35% of the revenue”,
  • I say: “Um, don’t you have to make a living and won’t that fee have to be passed on to the client?”
  • Lender: “No, I’ll give them a great rate and you make $500″
  • I say: “So why don’t I just pass on the kickback and you give the savings to the customer?”
  • Lender: “Ok, lets do it!”
  • I say: “No thanks, I don’t trust kickbacks, so how can I trust that you wouldn’t just charge $500 more (which is REALLY easy to do with loans as the fees can be hidden in a dozen places including a slightly higher rate)

Ok some Realtors getting revenue sharing might say “but the price is the same everywhere,” don’t believe your own BS. In the long term this is price fixing, limiting choices and a RESPA violation. When you limit competition through Realtor bribes, the consumer is hurt.

If an agent isn’t sharing reve
nue, but the firm has an ABA? Still watch out!

Ok some real estate companies won’t pay the agents a cut (they claim it is not legal, how convenient), but instead of rewards, they punish. They shun the Realtor if they don’t use their ABA partner. One large NoVa company stripped a top agent of her “#1 in office” title for not using the Affiliated Partners on her deals. How is that in the best interest of the client? So even if a Realtor doesn’t get paid, you have to wonder what it in it for them to push the ABA.

I wouldn’t be surprised if soon there is a class action lawsuit that will come after these firms and the Realtors that are colluding to the detriment of their client.

Are you ok with the “one stop shop”, even if the price is the same to you and your Realtor gets a bonus?

Oh and don’t get me started about $400 Home Warranties that frequently result in a $70 bonus to the company, and oftentimes passed back to an agent. Note that insurance can only be sold through licensed insurance dealers. Yet these 15% bribes are called “admin fees.” If an agent is selling you on a warranty, ask if he or the firm makes a cut on your sale, and ask for that bonus back.

If you have questions about something that seems shady, ask me, I’ll give you the inside scoop.

- Frank Borges LL0SA – Broker FranklyRealty.com


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  • 30
  • January
  • 2007

27 Responses to “Beware: "Affiliated Business" or Illegal Kickbacks?”

  1. Nick M.Florida says:

    Hey Frank..
    thats the way to shed light on the situation. Kickbacks are so common that people dont even think twice about it! very sad to risk your license over something so minimal. Give them business because they get the job done..! Its all I ever ask for! You also brought up the point about the home warranties..

    This is all against RESPA, just ‘dressed up’ in a different manner. Like the teacher says in the appraisal class, “if it looks like a duck, sounds like a duck, then no matter what its made out to be.. it’s still a duck”.

    (we need simple examples down here is SE Florida!! haha joke!! but yer guds back into yer holsters people)

  2. Tchaka Owen- Lender says:

    Frank, I’ve wondered about this and haven’t quite figured out how it legally works. When I was in the DC area I recall that one of the Realtors I worked with was with Weicher t at the time and they had an in-house lender they were encouraged to do business with. He didn’t because he didn’t think it was right, but there must be a way that it’s legal. I will follow this thread and hopefully a lot of people will chime in.

    - Tchaka Owen

  3. Brian Brady says:

    It does not violate RESPA. You asked for an explanation how it DOESN’T violate RESPA on my post. I can only tell you the opinion of HUD. You make compelling arguments against these actions, however, HUD states that common ownership, if disclosed properly, is allowed.

    Real estate licensees may also earn a loan commission if they fulfill 7/13 loan origination functions.

    Don’ shoot the messenger! You need to take this to HUD.

  4. FRANK LL0SA Broker says:

    Brian, I respectfully disagree.

    HUD’s intent is to not allow these 12 month temporary revolving LLCs designed to creatively give kickbacks to Realtors, regardless of clients signing a piece of paper saying that there might be affiliated partnerships.

    Google: RESPA sham.

    Somebody please give me an example of a SHAM and an example of a NON-SHAM that includes a Realtor pocketing money from a Title company.

    I want details! If it is legit, tell me how you do it!

  5. still priced out of my hometown says:

    Frank, you are the man… thanks for addressing the practices most of us prospective buyers didn’t even know existed.

  6. Anonymous says:

    This is illegal. I heard that one huge Real Estate company’s title business grew 45% in this past year.

  7. Anonymous says:

    It isn’t the brokerage firm’s fault. The agents are squeezing them and demanding a better broker/agent split, so they have to make money somewhere. That somewhere happens to be from the agent’s customer. As long as it doesn’t affect the agent’s pay cut, they allow it.

  8. Realtor says:

    I’m a Realtor.
    Thanks for your posting, and yes buyers should understand better how everyone gets paid. The inside scoop of sorts.

    But there is one part that I object to.

    My company has an ABA with a closing company and a lender. I don’t like the lender so I don’t use them, regardless of the broker initially pushing me on to them.

    But the Title company is another story. They are partners with my firm. I don’t make a cut, but I DO love their services. Why should I NOT use a partner just because my boss (not me) might make a cut?

    I use them because I feel they are the best for my client. Are they getting ripped off? No way!

  9. FRANK LL0SA Broker says:

    Dear Realtor,
    Ok, I hear you. Having a reliable partner that you trust is MORE important then chasing a discount fly by night place (I do believe this).

    But lets say you DID get $300. If you signed a contract saying you would make x%, is it ok to also get another $300 on the side? I don’t think so.

  10. Diane Cipa, The Closing Specialists® says:

    Frank: You have guts posting this topic. Was really busy today and didn’t have time, but I want to read, think and respond. This is great. In the meantime, would everyone take a moment to check out the Coalition Petition linked at Radical? Appreciate it. Thanks!

  11. Rhonda Porter says:

    Bravo, Frank! In the Seattle area, the larger real estate companies have ABAs with lenders, title and escrow. Many have closed their offices to outside reps and won’t allow competition or lower rates to be promoted to their agents. How is this better for the consumer?

  12. D'Ann says:

    I completely agree in full disclosure to clients, but am not 100% against ABAs. I work for a company that has an ABA because we rent office space in all 5 of our DC/VA offices to different lenders. Our agents are not pushed to use these lenders at all, and receive no kickback other than that the broker’s office rent is less. We still disclose this to our clients so that they are aware as to why we have a Wachovia (or BOA, or BF Saul) loan counselor in-house.

  13. Anonymous says:

    In my opinion the examples you’ve given are RESPA violations.

    A quiz for brokers who are thinking about participating:

    1a. are you being compensated on a percentage basis for loans/titles closed(as opposed to compensation for services actually rendered?
    1b. do you wish to assume any liability for advice given in connection with a mortgage application?
    1c. do you know anything about title examination/clearance/closing other than what you learned in your sales licensing class? and 1d. does your E & O cover the activities for which you are supposed to be providing services?

    2a. does your state require licensing of mortgage brokers?

    3a. Do you wish to be considered an employee or part owner of a mortgage broker?
    3b. Do you know the legal and tax issues that arise from ownership of, or earning income from, a limited liability company?

    Last, are you comfortable taking legal advice from a mortgage broker?

    You can skip the quiz if you answered NO to the last question.

    BTW, props again for an excellent blog.

  14. FRANK LL0SA Broker says:

    Hello D’ann

    I’m also not necessarily 100% against all ABAs. The point here is for the consumer to better understand what and ABA is and to ask the right questions to make sure they aren’t being taken advantage of.

    I understand that your ABA does not include agent’s getting paid or given bonuses. That is the issue I am highlighting. You brought up whether the Real Estate Brokerage gets paid.

    D’ann wrote: I work for a company that has an ABA because we rent office space in all 5 of our DC/VA offices to different lenders. Our agents are not pushed to use these lenders at all, and receive no kickback other than that the broker’s office rent is less.

    Well I am glad to hear that you are not pushed to use these lenders.

    But, I don’t get it. You are telling me that
    a) The broker does not get ANY cut of the loans.
    b) The rent is LOWER then it should be (for the lender).

    That makes no sense. I could understand A and then the lender OVERPAYING for the rent (an indirect kickback). But what I don’t understand is no cut and lower rent. Does he do it out of the kindness of his heart? He likes to lose money?

    Quick story:
    I was once told by a lender that he was not able to give me a cut of his deals as per RESPA. However he could buy me $1,000 worth of advertising as long as 10% ($100 value) had his name on it? So this is an indirect and barely legal $900 pay off.

  15. D'Ann says:

    Sorry I wasn’t clear in my post, the overall rent is lower for the broker, not necessarily for the lender..it’s generally market rent for s.f. of office space in the area. It allows the lender to have a market presence in another location without having to rent a whole building and allows the broker to have the appearance of “in-house” financing, which is nice if you need to get some pre-qualified on the spot. Over my last ten transactions, my buyers have ended up using our in-house lender once. I always encourage my clients to shop around for the best loan/program/rate for them. So, in essence, I guess my point is that I pretty much agree with your blog, just wanting to point out that not all ABAs= RESPA violation.

  16. inSTYLE says:

    My listing agent is taking commission plus a $395 adminitrative fee. What is the adminitrative fee all about?

  17. FRANK LL0SA Broker says:

    Dear inSTYLE
    Brilliant question. I will make that my next blog. It is a crap fee. I’ll explain what your options are. Make sure you sign up for the Feedblitz service for a spam free summary of new blogs. Also read why Most Listing agents SUCK (another blog)

    Frank

  18. Diane Cipa, The Closing Specialists® says:

    We have a serious CONFLICT OF INTEREST dynamic underlying many transactions due to the rise of ABAs, legal and illegal. The compulsion to disregard underwriting guidelines, standards, and ethics in fear of retribution and loss of referrals has contributed to high delinquency rates, foreclosures, fraud, and predatory lending more than any single other factor.

  19. Anonymous says:

    I have no proof, but I feel a subtle pressure from my current realtor to go along with the program and use his lenders, his title companies, and pay a higher price for property than I should have too, being steered to properties that I’m not that interested in, and he seems to have an aversion to new condo projects in Arlington for some reason (says they are a rip off) etc. etc. I am only a single woman and feel like I am getting fed to the vultures out there. I would like to work with someone who is helpful, ethical and not greedy.

  20. dougmiller says:

    Realtor ABA’s are about to be challenged on an entire new front. Imagine a class action lawsuit that doesn’t allege RESPA violations, but instead calls RESPA a minimum standard. Imagine a lawsuit against a large real estate firm for breaching their fiduciary duty to their clients by training and selling agents on their ancillary services. That case just got filed last week in Minnesota against Coldwell Banker Burnet Realty. And its about time. Fiduciaries are not supposed to sell to their clients, they are supposed to advise them. If anyone wants a copy of the case, e-mail be at dougmiller@title-1.com
    Realtors, as fiduciaries, have a much a higher standard. Do you want to be held to the same standard as a car salesman or a toll booth operator? Fiduciaries have very special, almost sacred relationships with their clients. RESPA was designed to be a minimum standard for everyone. Realtors are much different. I’ve been saying this for years. I own an independent title company in Minnesota – this is where controlled business all started. Its also where undisclosed dual agency came from… Minnesota now has the highest closing costs in the Nation. Do you think it has anything to do with the fact that we have more ABA’s than anyone else? I think so. My competitors are no longer other title companies – my competition has become Realtors who know nothing about title insurance.

  21. Anonymous says:

    Ok , here is my story. I am a Realtor from a large State. One of the biggest firms here(owned, ultimatly, by Warren Buffet) has ABA with a lender and a title company. The lender is in every office. The company managers actually train their new agents that they only have to give their clients one name, the name of their affiliate of course. Now, if you have a contract, when it comes across the desk of the manager and it does not have this lender on the contract,you are read the riot act. It is definately a hostile enviroment for anyone who does not use their lender. There are two kickers to this story, kicker #1. The manager gets a yearly bonus, part of that bonus is based upon them getting their office to have a minimum percentage using this lender. Kicker #2. These agents were steering their clients, mostly fist time buyers to this lender,and they would be put in sub-prime loans rather than a conventional loan. Now this particular lender did not have a conventional program for these particular clients that fell into a particular category( I am guessing hundred if not thousands city wide) Yet a lender down the street, did. Now, the agents knew fine well that the lender down the street had a better program, but because of the hostile enviroment(most of these agents were new a were taken advantage of)they did nothing. This is a company that sold over 10 billion worth of property last year. It disgusts me and I believe is a significant part of the sub-prime mess. As agents we have a fiduciary responsibility to our clients…Sad

  22. Anonymous says:

    I work in an office that has AB associated with us, but I always thought it was for the convenience of the client. I never recommend these vendors even when a client asks for a recommendation. I have never received a “kickback” from these vendors, but I do not doubt that the broker manager or owner might be getting something, as it is true they encourage their newer agents to use them. It’s too bad that your generalizations make even honest industry people look bad. If you spent more time reflecting on positive energy, your business would be better.

  23. Frank says:

    You all see that MSNBC picked up this post: http://redtape.msnbc.com/2008/07/traditionally-b.html
    or
    redtape.msnbc.com

  24. Houston search engine optimization says:

    Hi Frank, I have just come across this blog, This is really help to solved out queries about Affiliated Business. Blog is really informative and entertaining same time.

  25. [...] (wow that really is a word!), I wrote about this topic months ago with my “Affiliated Business” or Illegal Kickbacks? [...]

  26. Frank says:

    Need I say more: http://www.abneyclassaction.com/downloads/Stipulation_of_Settlement.pdf

    Class Action settlement for home warranty RESPA kickback violation.

  27. [...] I called it in 2007 when I said that those $60-90 “processing fees” were illegal “kickbacks” that Realtors and Brokers got for pushing Home Warranty companies. (see 2007 post). [...]

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