Many real estate brokerages have joint ventures, or affiliated business arrangements (“ABAs”) with settlement service providers such as mortgage lenders and title companies.  Under federal law, in order to comply with the Real Estate Settlement Procedures Act (RESPA), brokerages referring clients to their ABAs must provide a written disclosure to the client explaining the nature of the relationship and their estimated range of charges no later than the time of referral.  12 CFR § 1024.15.  Recently, the Arizona Department of Real Estate has determined that Arizona law imposes additional requirements on  ABA disclosures, above and beyond what is RESPA compliant.  The issue becomes more complicated as individual real estate licensees form their own ABAs separate from those of their brokerage.[1]  This article and frequently asked questions (FAQs) attempt to provide guidance on the proper manner for real estate licensees to disclose their ABAs in compliance with Arizona law as seemingly interpreted and enforced by the Arizona Department of Real Estate.

A licensee owes a fiduciary duty to the client.  Ariz. Admin. Rule R4-28-1101(A).  A fiduciary is required to disclose any potential conflicts to the client and act in their client’s best interest.  When a licensee has a financial interest in the service provider, that interest could in theory conflict with the client’s interest in finding a quality service provider at a lower cost.  Therefore, a licensee must not only provide a disclosure to the client in writing, but should also obtain their informed consent and provide adequate time for the client to compare service providers should the client choose to do so. 

Disclosure should include all ABAs of the licensee, their real estate team (if applicable), and their brokerage.  Informed consent means the client must knowingly choose the service provider and the licensee should document that decision appropriately.  Finally, when circumstances allow, the client should receive the disclosure with adequate time to shop for alternative service providers.  Because a client can change mortgage lenders, disclosure of the licensee’s mortgage lender ABA at the time of referral is probably adequate.  In contrast, disclosure of the licensee’s title company ABA could prove tardy under some circumstances if made while drafting an offer or counteroffer since there is little time allowed for the client to shop for alternatives.

Best practice would be for a licensee to provide a written disclosure to their client of all ABAs of themself, their team members, and their brokerage upon first contact.  Doing so ensures the client has the most time available to shop other service providers and make an informed decision on which to choose when making an offer or counteroffer.  Furthermore, should the seller prefer a title company affiliated with the licensee/team/brokerage, the licensee should confirm the preference by obtaining written instruction from the seller prior to advertising the preference in the MLS or otherwise.

A licensee shall not act in a transaction when they or their broker have a financial interest in the transaction without informing the other parties in writing and before the parties enter any binding agreement.  Ariz. Admin. Rule R4-28-1101(E).  Furthermore, a licensee shall deal fairly with all other parties to a transaction.  Ariz. Admin. Rule R4-28-1101(A).  The Department of Real Estate has expressed there is a need for transparency to other parties of any potential conflict a service provider may have and do so prior to the consummation of a binding contract. 

Therefore, should a party prefer their licensee/team/brokerage’s ABA as a proposed service provider, best practice would be to deliver disclosure of the ABA to the other party at, or before, the time an offer or counteroffer is made.  This would ensure all parties have knowledge of ABA service providers prior to signing a binding contract.

Frequently Asked Questions

Q1. Can a licensee/team/brokerage continue to use its standard ABA disclosure?

A1. Federal law includes an ABA Disclosure Statement Format Notice.  If the licensee/team/brokerage’s ABA disclosure mirrors this format, the disclosure should be compliant with Arizona law.

Q2. Why should a licensee disclose a team member’s ABA?

A2. Licensees who choose to work on a team may have financial ties to their team.  Thus, a financial incentive to any team member would benefit the whole team.  The duty to inform the client of the potential conflict arises as a fiduciary.  Likewise, the duty to deal fairly to the other party implies written disclosure of the ABA should be delivered prior to signing a binding contract.

Q3. What is informed consent?

A3.  The fiduciary duty of a licensee includes a duty of obedience.  It is the client’s decision to choose or consent to the use of a specific service provider in the transaction.  It is probably inappropriate to advertise a preference or pre-print the choice of a specific service provider on an offer or counteroffer without consultation and direction from the client first.

Q4. Should a listing agent get written instructions from their seller client prior to advertising their preference for the licensee’s title company ABA?

A4. It is always best practice to document the seller’s decision regarding the preference for the licensee/team/brokerage’s title company ABA.  Since the buyer typically chooses the title company in their offer, documentation of the seller’s preference avoids the appearance that the licensee chose their title company ABA without the consent of their client.

Q5. Should a buyer agent get written instructions from their buyer client prior to including the buyer’s choice for the licensee/team/broker’s title company ABA in an offer?

A5. If the licensee followed best practice and delivered written notice of all ABAs at first contact, the date stamp was likely prior to an offer being drafted.  However, if circumstances demand that the licensee’s ABA disclosure is on the same date as an offer, it may be prudent to have documentation from the buyer that they chose the title company ABA.

Q6. How much time is adequate for a client to have an opportunity to evaluate alternative service providers, if they choose to do so?

A6. The answer to this question may vary based on the situation. Sufficient time for a client to investigate alternatives prior to choosing a service provider is not definitive. Rather, it probably depends on the circumstances.  A seller preparing to list their home for sale may have a week or more to search multiple service providers.  Conversely, a buyer meeting their agent for the first time at a house viewing may only have minutes to choose a service provider if they decide to immediately make an offer or risk losing the home to other potential buyers.  Again, the best practice would be to disclose all applicable ABAs at first contact to ensure the client has the most time available to shop other service providers, should they decide to do so.

Q7. Is a licensee/team/brokerage required to have the other party sign their ABA Disclosure?

A7. No. The licensee/team/brokerage is only required to have their own client sign the ABA Disclosure to document their client’s informed consent. The signature of the other party is not required, and the other party cannot be forced to sign the ABA Disclosure.

Q8. Can a licensee/team/brokerage deliver its standard ABA disclosure to the other party to fulfill its written disclosure?

A8. The Arizona REALTORS® cannot speak on behalf of the Department of Real Estate. However, the licensee/team/brokerage’s ABA disclosure, or any other written disclosure, delivered to the other party probably satisfies Arizona disclosure laws. Questions on this topic can be posed to the Department of Real Estate by contacting them at (602) 771-7700 or via its Message Center.

Q9. Can a licensee/team/brokerage deliver written notice of its ABA disclosure via email?

A9. The Arizona REALTORS® cannot speak on behalf of the Department of Real Estate. However, delivery of the ABA disclosure via email to the other party, or their agent if represented, probably satisfies Arizona disclosure laws. Questions on this topic can be posed to the Department of Real Estate by contacting them at (602) 771-7700 or via its Message Center.

Q10. Can a licensee/team/brokerage deliver written notice of its ABA disclosure by posting it in the MLS or website?

A10. Probably not.  Written disclosure of the ABA must be delivered to the other party.  Advertising probably does not constitute delivery.

Q11.Can a licensee/team/brokerage deliver written notice of its ABA disclosure simultaneously with an offer or counteroffer?

A11. Probably.  Written disclosure of the ABA should be delivered prior to a binding contract.  An offer or counteroffer must be accepted to be valid, and thus occurs prior to a binding contract.

Q12. Must a licensee/team/brokerage deliver written notice of its mortgage lender ABA to the other party?

A12. A licensee/team/brokerage representing a buyer utilizing the licensee/team/brokerage’s mortgage lender ABA is encouraged to deliver written notice to the seller prior to the signing of a binding contract.  Alternatively, a licensee/team/brokerage representing a seller using the licensee/team/brokerage’s mortgage lender ABA does not need to disclose the relationship because the seller will not utilize mortgage lender services in the sale transaction.

Q13. Must a licensee/team disclose its ABAs of other licensees/teams within the same brokerage?

A13. If other licensees/teams within the same brokerage are not representing a party to the transaction, there is probably no requirement to disclose their ABAs.  Alternatively, if the other licensees/teams are representing the other party to the transaction, they should deliver written disclosure of their ABA and deliver it prior to the signing of a binding contract.

Q14. Must a licensee/team/brokerage deliver its ABA disclosure to the title company, mortgage lender, appraiser or others participating in the transaction?

A14. Probably not.  Those participants in the transaction are not prejudiced by use of the licensee/team/brokerage’s ABA, and thus disclosure is probably not required under Arizona law. Questions on this topic can be posed to the Department of Real Estate by contacting them at (602) 771-7700 or via its Message Center.

Q15. What system must a designated broker establish to monitor their licensee’s compliance with Arizona ABA disclosure laws?

A15. The Arizona REALTORS® cannot speak on behalf of the Department of Real Estate. Questions on this topic can be posed to the Department of Real Estate by contacting them at (602) 771-7700 or via its Message Center.

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[1] It is recommended that prior to an individual real estate licensee entering into their own ABA, they first discuss it with their Designated Broker and ensure that they are permitted to do so pursuant to their independent contractor agreement and Broker’s Policy and Procedures Manual.

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