Wise lawyers and compliance professionals advise clients to handle an Affiliated Business Arrangement (AfBA) cautiously. Under guidelines established by the Real Estate Settlement and Procedures Act (RESPA), anyone in the real estate industry might enter into an affiliate arrangement, including real estate brokers, realtors/agents, builders, title companies, mortgage brokers, and lenders. The problem with these agreements is that it’s easy for an individual to fail to comply with applicable state and federal laws.
This brief guide provides points we feel anyone in an AfBA, or interested in one, should keep in mind to maintain compliance.
What is an AfBA?
Anyone in the real estate industry might receive profits from a relationship with a business in the industry via an affiliate relationship, which is also sometimes referred to as a joint venture agreement. By law, people involved in AfBAs must inform their clients. Otherwise, they risk being accused of failing to disclose, noncompliance, and illegal activities.
Learn Required AfBA Basics
It’s not difficult for real estate professionals in an AfBA to meet RESPA requirements if set up correctly. They must provide clients with written disclosure before mentioning the other party and receiving permission to act on the client’s behalf when setting up a service through the affiliate business. They must also not require or pressure the client to go to that business. Any pressure tactics are considered illegal action. Lastly, any profits from the AfBA must come from distributions from an ownership share in the AfBA entity rather than a referral fee or other service payment.
Learn Modern Compliance Problems
Sometimes issues occur because agents and other professionals in the industry rely on technologies for every aspect of the transaction. It’s easy to send a referral accidentally before disclosure.
Although a professional can set up an eSign consent for electronic disclosures and a read receipt feature to guarantee all is read before referral, several pages may exist before the AfBA disclosure. Worse, if the professional, their agency, or firm make any changes to their software or hardware, they must inform the client and go through extra, time-consuming disclosure processes.
The Fair Credit Reporting Act and privacy laws also pose problems for professionals in AfBAs. A professional might accidentally share client data with an affiliate business that includes credit details. To prevent noncompliance, they must provide an opt-out option.
Speak With an Experienced Lawyer or Compliance Professional
One of the best ways that anyone interested in entering into an Affiliated Business Arrangement can guarantee compliance is by seeking the counsel of a lawyer or compliance firm with expertise in this area. After all, many states have their own rules about AfBAs, privacy, fair credit reporting, data breach notifications, information security, and telemarketing contacts. For example, many professionals don’t realize they can be fined if the affiliate business uses an auto-dialer to contact their client or leaves a voicemail or text message without client consent.
An experienced lawyer can review a potential arrangement and determine if it’s an AfBA, discuss financing, outline all state and federal requirements, explain tax obligations, negotiate and draft documents related to the agreement, and perform a wide range of additional related services to guarantee compliance.