A title company is a neutral third party employed to insure the title to the home and issue title-insurance policies to the buyer and mortgage lender. Title officers therefore research the history of the property to identify potential problems, claims, or discrepancies that may interrupt the transaction. Based on the fact that the title company is charged with formally transferring ownership from the seller to the buyer, it is critical that they serve in an impartial manner.

But what happens when the title company is owned, either in whole or in part, by the agent or broker representing a party in the transaction? Is disclosure of this fact required? Consider the following:

FACTS:  Agent Joe Smith and Smith Title Company are affiliated businesses in that Agent Joe Smith owns a portion of Smith Title Company.

SCENARIO:  Buyer is represented by Agent Joe Smith who recommends that Buyer utilize Smith Title Company in conjunction with Buyer’s purchase of the real property. Relying on their agent’s recommendation, Buyer identifies Smith Title Company on Line 117 of the Arizona REALTORS® Residential Resale Real Estate Purchase Contract.

ISSUE:  Must Buyer and Seller be notified of the common ownership interest between Agent Joe Smith and Smith Title Company?

DISCLOSURE TO BUYER

Section 8(a) of the Real Estate Settlement Procedures Act (RESPA) prohibits giving or accepting a “fee, kickback, or thing of value” for business referrals to settlement service providers. Nonetheless, Section 8(c)(4) of RESPA provides a “safe harbor” for affiliated businesses[1] provided that certain criteria are met. Foremost among the criteria is that the client is provided a written disclosure in a specific format identifying the nature of the joint affiliation and a written estimate of the charges generally made by the company to which the client is referred. This written notice must be given to the client at or before the time each referral is made.

In the scenario outlined above, Buyer is represented by Agent Joe Smith who is referring Buyer to Smith Title Company in which he has an ownership interest of one percent or more. Agent Joe Smith should therefore provide Buyer with a written Affiliated Business Arrangement Disclosure that: (i) identifies the consumer and the entity making the referral; (ii) discloses the business relationship between Agent Joe Smith and Smith Title Company; (iii) contains a signature line for the client; (iv) identifies the estimated charges; and (v) clearly states that the client is not required to use the affiliated company and that they are free to use any settlement service provider of their choice.

DISCLOSURE TO SELLER

A.A.C. R4-28-1101(E)(4) states:

A real estate salesperson or broker shall not act directly or indirectly in a transaction without informing the other parties in the transaction, in writing and before the parties enter any binding agreement, of a present or prospective interest or conflict in the transaction, including that the salesperson or broker…has a financial interest in the transaction other than the salesperson’s or broker’s receipt of compensation for the real estate service.

This Administrative Rule is complemented by A.A.C. R4-28-1101(G), which states in part:

A salesperson or broker shall not accept any compensation, including rebate or other consideration, directly or indirectly, for any goods or services provided to a person if the goods or services are related to or result from a real estate transaction, without that person’s prior written acknowledgment of the compensation.

Once again considering the scenario outlined above, and assuming that Seller accepts Buyer’s offer, Agent Joe Smith will: (i) have a financial interest in the transaction other than receipt of compensation for real estate services; and (ii) be indirectly compensated as a result of the services provided by Smith Title Company in the real estate transaction. Even though Agent Joe Smith does not represent Seller in the transaction, in order to comply with the aforementioned Administrative Rules, Agent Joe Smith should nonetheless disclose to Seller his ownership interest in Smith Title Company.

It should be noted that this scenario and subsequent analysis apply only to the stated facts in which the individual agent (or broker) maintains an ownership interest in the title company. In many instances, the nature of the joint ownership or affiliated business relationship is far more complex and may involve multiple legal entities, holding companies, parent corporations, subsidiaries, and franchises. As the complexity of the arrangement increases, legal compliance becomes far more technical, thus falling outside the scope of this article. It is recommended that independent legal counsel be retained in all cases of affiliated business relationships and joint ownership of settlement service providers.

The laws surrounding these types of disclosures exist to protect the parties in a real estate transaction by allowing them to make informed decisions. The practice of real estate itself is driven by credibility and trust. Transparency in real estate transactions is therefore critical, especially for licensed professionals. Agents and brokers with common ownership interests that result in affiliated business relationships must therefore ensure that disclosure is made to all appropriate parties.

[1] 12 U.S.C. § 2602(7) defines the term “affiliated business arrangement” to mean “an arrangement in 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 one 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.”

This article is of a general nature and reflects only the opinion of the author at the time it was drafted. It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.

Scott Drucker

A licensed Arizona attorney, Scott is General Counsel & Assistant CEO for the Arizona REALTORS® serving as the primary legal advisor to the association.

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