Attorney-Controlled Title Agencies: Affiliated Business Arrangements
Under RESPA and Virginia Law

R. Michael Smith is Mid-Atlantic Division Counsel and Assistant Vice President of Stewart Title Guaranty Company. A member of the Virginia State Bar since 1973, he is also a member of the Construction Law, Corporate Counsel, and Real Property Sections, the latter of which he is currently a Northern Virginia Area Representative.

(*) Indicates footnotes, which can be found at the end of this article.


You are a licensed and experienced real estate settlement attorney, a "dirt lawyer," operating your own business and making a fair living. Supplementary to your essential law practice, you own an interest, directly or indirectly (through a family member or a practice partner), in a title agency that issues insurance on the cases you close. Setting aside for the moment the ethical implications of this business relationship, your controlled title agency is what the Real Estate Settlement Procedures Act ("RESPA") refers to as anaffiliated business arrangement ("AfBA"). Although you will not find the term, affiliated business arrangement, in the Virginia Code, the AfBA concept is the essence of the exception for bona fide ownership of a title agency under Virginia's title insurance "anti-kickback statute." Va. Code § 38.2-4614.C. Note that under both RESPA and the Virginia statute that an AfBA is a permitted exception to an otherwise illegal referral fee system. Stated another way, an AfBA is an authorized violation of the law. As such, any attempt to establish or to continue an AfB must begin with the premise that the conduct is illegal unless the exacting standards of the exceptions in state and federal law are met. Failure to walk the narrow path successfully can mean serious consequences.


Congress adopted the Real Estate Settlement Procedures Act in 1974. Widely viewed as consumer protection legislation, Congress did not intend to eliminate consolidation of settlement services(*1) among related business entities. In fact, Congress' view was that the consumer would benefit most by disclosure of settlement costs rather than regulation of fees or prohibition of pooled settlement services. Congress confirmed its belief that combined services delivery was in the consumer's best interest by codifying the AfBA exception into the anti-kickback provisions of RESPA in 1983(*2).

In November 1992, the Department of Housing and Urban Development ("HUD") issued its Regulation X, Final Rule, which included more detail on the AfBA exception. As part of the rule-making process, HUD published an economic impact study which analyzed the effects upon consumers of combining settlement services into packages and affiliated companies. The study found:

...[A]pproximately 55 percent of all home sales involved affiliated settlement service providers -so-called controlled business arrangements - through affiliated realtors, mortgage banks, title insurance... Vertically integrated settlement service firms are organized as affiliated firms" primarily due to State laws and regulations"Because of these separate incorporations, compensation arrangements that are efficient and legal" within a single firm become suspect under RESPA among even wholly-owned affiliates....It may well be that the vertically integrated companies are more efficient and also that they have some "market power" with respect to selling additional services to an already "captive" customer. It also may well be that this "market power" actually consists of true convenience and "one stop shopping" for the customer. If the affiliated arrangement saves the customer time, he or she may be better off to take it even if the price is higher...(*3)

Although HUD had hinted at revisions to the AfBA rule, it did not issue any changes to the 1992 Final Rule until 1996.(*4) Significantly, the only change to the AfBA rule was technical amendments to the form of the affiliated business arrangement disclosure. There was a change to the employer/employee exception to the general Section 8 anti-kickback provisions which may impact the effectiveness of an AfBA, but the AfBA exception was unchanged. Consequently, it should be assumed that AfBAs are a reality and that Congress and HUD support their existence. In fact, the history of the legislation and its supporting regulations indicate that Congress and HUD believe that AfBAs will function more often than not in the best interests of the consuming public.


A primary goal of RESPA was the prevention of kickbacks or unearned referral fees in residential mortgage loan transactions. Section 8 begins as follows:

No person shall give and no person shall accept any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person. (*5)

Moreover, no fee may be split except "for services actually performed."(*6) That is, the fee for a settlement service may not be shared except among persons who are actually performing services.

The Section 8 prohibition reaches essentially all residential institutional loan transactions. Cash deals and commercial transactions are not covered.(*7)

RESPA and HUD's supporting Regulation X do exempt other activities from violating Section 8. Such exemptions have a common theme: They are based upon an actual performance of work necessary to completion of the settlement service being delivered. Excepted practices include attorneys' fees "for services actually rendered," commissions of title agents "for services actually performed in the issuance of a policy of title insurance" and affiliated business arrangements.(*8)

Regulation X also permits "normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto."(*9) This latter exemption is particularly relevant to an AfBA title agency. The need for promotion of the business is recognized in the industry and by HUD. If your source of business partner is a real estate broker, how much can you spend and on what activities to develop referrals from the broker's agents? It appears a rule of reasonableness would apply. It is probably permissible to publish an advertisement in the broker's customer flyer. On the other hand, it would probably be impermissible to pay for the entire publication. One is normal promotion, but the other is paying the expenses that the broker would otherwise usually incur. It is important to note that there is no dollar limit. It must be a "normal" expenditure. Consequently, coffee and doughnuts at a Realtor's sales meeting is likely all right, but sending the Realtors to the Bahamas for three days to listen to a one hour lecture on affirmative mechanic's lien coverage is almost certainly not all right.

Remember that Section 8 violations carry criminal penalties. In addition to civil regulatory fines, a violator is subject to a criminal fine of $ 10,000 and/or up to one year in jail for each separate offense. In a civil suit brought against an offender by a consumer, the plaintiff can recover three times the settlement charge paid plus reasonable attorneys' fees.(*10)


Little in the 1992 Final Rule had as much impact on the title industry as the "core title services" rule. Reference to it must be made when reviewing affiliated business arrangement title agencies because the AfBA must deliver core title services even if the AfBA meets all the other tests as a AfBA. That is, an otherwise valid AfBA must, in fact, provide core title services or else it will be construed as a sham agency. Such a conclusion was reasonable under the 1992 Final Rule(*11) and confirmed under the 1996 Final Rule.(*12)

Congress did not intend for the controlled business arrangement ("CBA") amendment to be used to promote referral fee payments through sham arrangements or shell entities. ...(Cite omitted). In order to come within the CBA exception, the entity receiving the referrals of settlement service business must be a "provider" of settlement service business. If the entity is not a bona fide provider of settlement services, then the arrangement does not meet the definition of a CBA. If an arrangement does not meet the definition of a CBA, it cannot qualify for the CBA exception, even if the three conditions of Section 8(c) are otherwise met.(*13)

Although the 1992 Final Rule was the first instance in statute or regulation in which the core title services concept appeared, Congress hinted at the future rule during study of the original legislation. Consider this comment to the Section 8(c) exemption for title agents' commissions: "...Such agents...typically perform substantial services...[which]...may include a title search, an evaluation of the title search to determine the insurability of the title..., the actual issuance of the policy on behalf of the title insurance company, and the maintenance of records relating to the policy and policy-holder."(*14) Having hinted at the core title services' idea as a requisite to accept a fee for title services by a provider of another settlement service in the Intercounty Title Agency settlement, HUD stated the exception for a multiple provider of settlement services in the title field:

When a person in a position to refer settlement service business...receives a payment for providing additional settlement services as part of a real estate transaction, such payment must be for services that are actual, necessary and distinct from the primary services provided by such person. For example, an receive compensation as a title agent, the attorney must perform core title-agent services (for which liability arises) separate from attorney services, including the evaluation of the title search to determine the insurability of the title, the clearance of underwriting objections, the actual issuance of the policy or policies on behalf of the title insurance company, and, where customary, issuance of the title commitment, and the conducting of the title search and closing.(*15)

What this means to the AfBA is that the AfBA title agency itself must provide (and be liable for) the core title services enumerated by HUD. These services, examination of the title search, clearance of title objections and issuance of the policy, cannot be "out-sourced." The essential requirement is that to be lawful an AfBA title agency must in fact be a title agency first by delivering those services that define the sine qua non of a title agency. A title agency that does not underwrite titles is not a title agency. Consequently, at the very least, an affiliated business arrangement title agency will have to hold all proper licenses to do business as a title agency and employ (if required by state law) an individual who is a licensed title agent duly appointed as a signatory of a state registered title insurance company.


Assuming that the new entity you are contemplating with your source of business partner or your own attorney-controlled title agency will provide core title services, you are ready to structure your entity so that will comply with the AfBA rules. Never forget that the business you are structuring is an exception to a criminal statute. Failing to set up or continue the business properly will subject you to severe penalties. The AfBA exception is technical and must be followed explicitly. Fortunately, HUD has provided some guidance in the interpretation of the technical rule so that compliance may be more readily achieved.

The basic rule: An affiliated business arrangement is permissible if (a) there is a written disclosure of the existence of the AfBA, including a written estimate of the settlement service provider's charges and a signature line for the consumer to acknowledge receipt of the disclosure;(*16) (b) there is no requirement that the consumer use the settlement service to which he/she is being referred;(*17) and (c) there is no payment or other thing of value received by the referral partner except for fees for work actually performed or a return upon the ownership interest in the AfBA.(*18) Section 3500.15 of Regulation X provides further understanding of the AfBA concept as do the Policy Statements issued with the 1996 Final Rule.

An affiliated business arrangement is one in which a person in a position to refer settlement service business or an associate of such person, has an affiliate relationship with or a direct or beneficial ownership interest greater than one percent in a settlement service provider, and such person directly or indirectly refers such business to the settlement service provider.(*19) An AfBA title agency exists, in fact, if an attorney (a person in a position to refer) owns a direct fifty percent interest in a title agency organized as a limited liability company in Virginia and refers the title insurance business (one of RESPA's defined settlement services) to the entity in which the attorney owns the interest. Given that it is a simple matter to establish compliance with the first two prongs of the AfBA exception (make the disclosure and have no required use), the real test of an AfBA's legality is its structure for passing revenues to the referral partner.

The return on ownership interest may be in the form of bona fide dividends or other capital distributions based upon the ownership interest. Bona fide business loans from the AfBA to the referral party are permissible "so long as they are for ordinary business purposes and are not fees for the referral...or unearned fees." A payment is not bona fide if its calculation has no apparent business motive other than as a mechanism to reward referrals of business in relation to the volume of referrals. Specifically suspect are payments that vary in relation to the level of referrals or ownership interests that vary periodically as adjustments are made retroactively for the level of referrals.(*20) (Virginia's anti-kickback statute excepts ownership interest from its ambit. Given the 1996 amendment to the anti-kickback statute that incorporates RESPA definitions, Regulation X would be instructive when considering the bona fides of a Virginia title agency under Va. Code § 38.2-4614.C.) Thus, a redistribution of member's interests quarterly based upon referral volumes would be unlawful.(*21) Also most attempts to disguise the referral fees in inventive ways will fail. Some examples of improper payments are unreasonably high fees for attending Board of Directors' meetings, consultation fees for "work" that has no relationship to the essence of the business and salaries for positions that do not contribute toward completing the mission of the title agency (e.g., a high salary for an executive officer who has no decision-making authority and no liability for any decisions actually made, but who is the referral person).

The last issue of concern is avoiding the appearance of a sham AfBA title agency. Although guidance in the form of common sense has been available since the 1992 Final Rule, HUD has provided its own guidance as to its perspective on the bona fides of affiliated business arrangements that are not shams. This guidance is found in HUD's Statement of Policy 1996-2, Sham Controlled Business Arrangements, 61 FR 29264. Key to HUD's analysis of "shamness" is the AfBA's lack of core services in that such services are contracted out to the related settlement service provider in whole or in substantial part. HUD stated it this way: "[I]n RESPA enforcement cases involving a controlled business arrangement created by two existing settlement service providers, HUD considers whether the entity receiving referrals of business (regardless of legal structure) is a bona fide provider of settlement services. When assessing whether such an entity is a bona fide provider of settlement services or is merely a sham arrangement used as a conduit for referral fee payments, HUD balances a number of factors in determining whether a violation exists..."(*22)

Some of the factors that HUD will consider:

  1. Does the new entity have sufficient initial capital and net worth, typical in the industry...or is it undercapitalized to do the work it purports to provide?
  2. Is the new entity staffed with its own employees...[o]r does the new entity have "loaned" employees?
  3. Does the new entity manage its own business affairs? Or is an entity that helped create the new entity running the new entity...?
  4. Does the new entity have an office for business which is separate...If [it] is located at the same business address...does [it] pay a general market value rent for the facilities actually furnished?
  5. Is the new entity providing substantial services...? Does it incur the risks and receive the rewards of any comparable enterprise...?
  6. Does the new entity perform all of the substantial services itself?
  7. If the new entity contracts out some of its essential functions, does it contract services from an independent third party [o]r...from a parent, affiliated party or an entity that helped create the controlled entity?
  8. . ...[I]s the contractor providing services or goods at a charge such that the new entity is receiving a "thing of value" for referring settlement service business to the party performing the service?
  9. Is the new entity actively competing in the market place for business?
  10. Is the new entity sending business exclusively to one of the settlement service providers that created it (such as the title application for a title policy to a title insurance underwriter...)?(*23)

Note that complying with each of these factors does not assure a valid AfBA. The other three tests of an affiliated business arrangement have to be met. Conversely, it is not necessary to comply with each of the ten factors HUD lists in order to have a lawful AfBA. HUD's analysis of an affiliated business arrangement as a sham is going to be based upon a case by case review of all the facts surrounding the entity.


Required Use

Under RESPA, an attorney may require that title insurance be issued by an AfBA title agency, which agency is " adjunct to the law practice of the attorney or law firm, as part of representation of that client in a real estate transaction."(*24) More specifically, "Section 3500.15(b)(2) clearly allows a lawyer to require a title company in which the lawyer or his firm has an interest."(*25) (Emphasis added.) This is not an absolute safe harbor. The AfBA agency must provide core title services, as it appeared that HUD targeted attorney-controlled title agencies when codifying that rule in 1992. Moreover, caution must be exercised in such a required use scenario, if the seller (e.g., a builder/client) refers the purchaser for closing to the attorney, who in turn requires use of the AfBA title agency. Such a situation might cause the seller to violate Section 9 of RESPA.(*26)

Disclosure of the AfBA

An attorney who intends to require the use of the adjunct AfBA title agency must, under RESPA, provide the RESPA AfBA disclosure form to the client "no later than the time the engaged by the client."(*27) This would seem to mandate disclosure when the attorney is in receipt of the contract of purchase. Disclosure of the AfBA at closing would be too late.

Ethical considerations require that the disclosure of an attorney's relationship with a title agency be in writing and accepted by the client in writing. Further, the disclosure should list all title insurance charges.(*28) While the RESPA AfBA disclosure form is probably sufficient for ethics? compliance, an attorney must disclose an AfBA relationship in circumstances in which a RESPA disclosure is not required...e.g., cash or commercial transactions, or in which the attorney's interest is less than one percent. Also, although RESPA does not require it, if the attorney requires the use of the adjunct title agency, ethically it would be best to disclose the required use to the client. A disclosure is required "prior to closing" that an attorney is not personally searching the title to property and is, instead, relying on the work product of a title agency (whether an AfBA or not).(*29)

Compensation by the AfBA

RESPA only addresses the reality of return on equity as evidence of a legitimate AfBA. Consequently, the AfBA agency can pay the attorney for legal services rendered to it so long as the fees are reasonable and not based upon the volume of referrals. Fees for services as counsel to the agency or as an officer or director may be alright. Fees for such services that vary based upon comparative volumes of referrals, however, would probably be found to be a kickback.(*30) There is probably no ethical violation in adjusting stock in a title agency owned by several attorneys, but such a scheme may be violative of Virginia's anti-kickback statute and would fail RESPA's threshold test as to return on equity (but then the RESPA violation might violate the ethical prohibition against criminal conduct deriving from the law practice).(*31)


In response to a Congressional mandate, HUD and the Board of Governors of the Federal Reserve System submitted a report to Congress in July 1998 in which the two agencies recommended legislative changes to disclosure requirements under RESPA and the Truth-in-Lending Act ("TILA").(*32) For attorneys in the real estate settlement business, with or without AfBA title agencies, two of the recommendations, if enacted, will substantially impact such business. First, there is a recommendation to provide the borrower with an "accurate" HUD-1 settlement statement three (3) days prior to closing. Second, in order to predict more accurately the costs of loan settlement at the "good faith estimate" stage, the agencies recommend that lenders be required to project the costs within a fixed tolerance level (the example is ten percent) or that the lenders be permitted to bundle settlement services (closing, title insurance, title search, survey, credit report, etc.) into a guaranteed price. The latter option has the support of lenders (and, consequently, will probably be adopted in some form). As such, it is proposed with a Section 8 exemption. That means that a lender (or any other party "bundling") would be able to contract fee agreements with its AfBA settlement service providers and non-AfBA providers within the bounds of a fixed fee to the consumer. The lender could pocket the difference, if any, between the service providers...fees and the consumer's guaranteed price. A settlement attorney will have to look at any such legislation as a prospective "bundler" of services (settlement, title search, title insurance, etc.) and as a "bundlee." Note that an attorney might be both bundler and bundlee in the same transaction (e.g., a lender engages an attorney to settle its loans and the attorney, in turn, bundles settlement, title search, title insurance, etc.; but the lender engages others to provide other settlement services, all of which are "grossed up" into one fee to the borrower).


In order to create or continue a lawful affiliated business arrangement title agency under RESPA, you should be sure that your entity, at least, does the following. First, you must make absolutely sure that it is duly organized (and authorized to do business if required) under state law and has all the usual trappings of a regular business...e.g., minute books, good standing, tax payer identification numbers, etc. Next, you must make absolutely sure that is licensed as a title agency with the Bureau of Insurance and duly appointed as a signatory with a title insurance company. There is no way HUD will excuse an AfBA title agency from the requirement to provide core title services. (State law has a similar requirement.) Thus, you have to have a licensed title insurance agent employed by or a principal of the entity either full or part-time. When capitalizing the business use cash. Pledges of future services or business are very likely to be inadequate. Separate space is best, but if it is impractical, lay out separate floor space, pay market rent for it, try to give it a separate entrance or reception services, provide separate phone and facsimile lines, and equip the business appropriately with copying and computer services, signage and stationery. In the future, maintain the corporate and financial books of the entity, maintain liability insurance, continue to provide core title services and only distribute profits in accordance with ownership interests that do not vary and pay salaries only in proportion to actual services provided to the entity in support of its mission. If you, as an attorney, provide legal services to the agency, permit yourself to be paid only your reasonable fees for work actually performed. Avoid "retainer fees" and, in all events, avoid fees that are tied to the number of files you refer to or review for the AfBA agency.


1 See, RESPA Senate Report; S. Rep. No. 93-866, 93rd Cong., 2d Sess. (1974).

2 12 U.S.C. § 2607(c)(4). Note that AfBAs were then called "controlled business arrangements" or "CBAs."

3 Regulatory Impact Analysis of Regulation X, 1992 Final Rule, FR-1942, pp. 18-19.

4 1996 Final Rule, FR-3638-F-06, 61 FR 29238, June 7, 1996, 65 pages. Due to a Congressional moratorium, the Rule was not effective until 1997.

5 12 U. S. C.§ 2607(a). "Settlement service" and "federally related mortgage loan" are defined in

24 C. F. R. § 3500.2. 24 C. F. R. § 3500.14(e) states that an agreement or understanding, in addition to being oral or written, may be "established by a practice, pattern or course of conduct." In fact, the repeated receipt of a thing of value connected in any way to a referral of a settlement service is itself evidence of the existence of an illegal agreement of referral.

6 12 U. S. C. § 2607(b).

7 Note the impact of Virginia's anti-kickback statute, Va. Code § 38.2-4614, which is not similarly limited. Virginia's statute does reach cash and commercial transactions. Considering the amendments to the statute in 1996 which have incorporated RESPA definitions of thing of value, etc., will there be an effort by prosecutors to proceed under Virginia's law to prevent commonly occurring discounts of settlement fees, attorneys' fees or premium on builders' development or construction loans in exchange for larger fees from the builders' purchasers at unit delivery?

8 12 U. S. C. § 2607(c).

9 24 C. F. R. § 3500.14(g)(2)(i). Not addressed in this article is the special employer/employee referral fee exemption as same would seem to have little practical impact in a law office.

10 12 U. S. C. § 2607(d).

11 See, for example, RESPRO's "RESPA Primer on Controlled Business Arrangements/Joint Ventures," 1995, which is cited by HUD in its March 25, 1996, Congressional Staff Briefing, "RESPA Rulemaking."

12 HUD Statement of Policy 1996-2, "Sham Controlled Business Arrangements," 61 FR 29264.

13 Id., 61 FR 29264, 29261-29262. Emphasis added.

14 RESPA Senate Report, S. Rep. No. 93-866, 93rd Cong., 2d Sess. (1974).

15 24 C. F. R. § 3500.14(g)(4). Note that in Virginia it may now be customary to issue a title commitment as a core title service due to the defined duties of a title insurance agency or agent to include "the actual issuance of a title commitment or binder and endorsements." Va. Code § 38.2-4601.1.

16 See Appendix D to the 1996 Final Rule for the current HUD form for the AfBA disclosure.

17 The "no required use" rule has two exceptions: (i) a lender's required use of an attorney, credit reporting agency or appraiser to represent its interests and (ii) an attorney's affiliated title agency. 12 U. S. C. § 2607(d). Recently, in Virginia, a bank's loan instructions call for an attorney with an affiliated title agency to produce for the bank's review a copy of the attorney's AfBA disclosure. The bank has its own AfBA title agency. While such conduct probably limits the consumer's ability to shop for title services outside the bank and the conduct may be tantamount to a restraint of trade, HUD would probably not prosecute this because it has opined in the 1996 Final Rule that RESPA limits its jurisdiction to referrals and related things of value and not to incidents that might be construed to be retaliatory actions or lockouts. That is, prosecution of this conduct would probably have to be pursued in a forum other than before HUD.

18 12 U. S. C. § 2607(c)(4).

19 24 CFR § 3500.15(a). The italicized terms are defined in § 3500.15(c). Essentially, an associate is anyone related by blood to the person or a spouse, any business entity which is controlled, any employer, franchise, etc. Affiliation and ownership are functions of control and relationship.

20 24 CFR § 3500.15(b)(3).

21 Such a result would be reached from another direction in Virginia in the multiple attorney-owned title agency in which ownership levels varied periodically based upon referrals. See LEO 1647. Further, on the issues of disclosure and other related, but earned, fees in the attorney ownership scenario consult LEO 1564, which reads as if its authors had RESPA and Regulation X on the edge of the desk during drafting.

22 61 FR 29264, 29262.

23 Id.

24 C. F. R. § 3500.15(b)(2).

25 HUD Ruling, August 26, 1993 (Meza). Ruling in response to inquiry of Richmond attorney, Craig C. Erdmann.

26 "No seller of property that will be purchased with the assistance of a federally related mortgage loan shall require directly or indirectly , as a condition to selling the property, that title insurance covering the property be purchased by the buyer from any particular title company." (Emphasis added.) 12 U. S. C. §2608(a).

27 24 C. F. R. § 3500.15(b)(1)(ii).

28 LEO # 1564.

29 LEO # 1509.

30 Cf., LEO # 1564.

31 LEO # 1647.

32 Joint Report of the Board of Governors of the Federal Reserve Board and the Department of Housing and Urban Development to Congress, July 22, 1998. Cf., Testimony of Governor Edward M. Gramlich before the Subcommittee on Financial Institutions and Regulatory Relief and the Subcommittee on Housing Opportunity and Community Development of the Committee on Banking, Housing, and Urban Affairs, U. S. Senate.

By: R. Michael Smith, Esq.