If you are thinking about forming an affinity relationship, it’s important to decide which relationship is right for you. It’s also important to recognize that once you’ve formed that relationship, you need to stay compliant under federal consumer protection laws. Affiliated business arrangements (AfBA) and marketing agreements are some of the most popular affinity relationships. There are, however, others to choose from. Those include leads, workshare and technology agreements.

In part three of this three-part series, RESPA News summarizes the compliance concerns associated with these other types of agreements.

Lead agreements

According to Jeffrey Arouh, a partner with McLaughlin & Stern LLP, a leads agreement is considered the simplest alliance arrangement because it isn’t actually an alliance at all; rather, it is simply a payment per lead.

“It’s easy,” Arouh said at the Real Estate Services Providers Council’s (RESPRO) 2012 Annual Conference. “You’re just paying for the lead.”

Arouh indicated that both drafting the agreement and determining the fair market value of the service are easy. With a leads agreement, you don’t have to jump through the same hoops that accompany a marketing agreement.

But you still have to be aware of RESPA’s prohibition on referrals. You cannot agree to make a payment only if the lead works out, because that would be a payment for a referral. Along the same vein, you cannot pay more for leads that work out because that would also be a violation of RESPA. Arouh said endorsements may also be an issue. He indicated that if a lead is coupled with an endorsement of the lead provider it may be viewed as a referral.

State law compliance is also important. Certain services require state licensing.

“If you are selling mortgage leads, then about 28 states would consider that as you are being paid for a referral of a mortgage and therefore need to be licensed as a mortgage broker,” Phil Schulman, a partner with Washington, D.C.-based K&L Gates, said. “So, be careful.”

Workshare agreements

“Basically a workshare agreement is a situation in which you are paying your partner to perform services that you might otherwise either do yourself or pay a third party to perform,” Arouh said. “Under Section 8(c)(2), which is the exception in RESPA that permits marketing agreements, the same kinds of assessments have to be made.” 

This means that the compliance questions you ask when forming a marketing agreement must be asked when forming a workshare. Such questions include:

• Are you providing real services?
• Are the services duplicative?
• Are the services necessary?
• Are you getting paid reasonable compensation?

“Typically marketing agreements give you greater flexibility in determining the amounts that you can pay than workshare agreements do because workshare agreements tend to be more refined, and by refined I mean, they spell out in greater detail what the activities are that you expect to be performed,” Arouh said. “That makes it easier to determine a value that can be attributed to those activities. Then, you are in a position where you know you have to pay for those activities when they are performed. When you perform those activities under a workshare agreement, you get paid for performing the activity, not whether the deal closes.”

Workshare agreements are simple to implement, Arouh said. You also do not need to provide an AfBA disclosure, although he recommends that the relationship be disclosed.

Again, state licensing laws are important. A license may be required under state law to perform and get paid for certain services.

To avoid having your payments viewed as referrals, Arouh said it is important to do the services you were paid to do. If you say you are going to do a service and get paid, but you don’t actually perform the service, the payment could be considered payment for a referral.  

Technology agreements

Technology agreements are similar to workshare agreements. They can be used to provide desk top or file management software. They can be tricky, Arouh said, because they were not contemplated when RESPA was written. That means that much remains uncertain.

“My judgment is that technology arrangements are absolutely permissible,” Arouh said. “I believe that any arrangement in which you license technology, as long as it’s an open platform available to anybody and as long as the compensation for the use of the technology or access to the technology is reasonable, is entirely consistent with the requirements of RESPA. There has been a U.S. Department of Housing and Urban Development (HUD) claim against one provider of technology services that resulted in a settlement. It was not litigated to a conclusion. It is my judgment that the entity could have contested that but elected not to do so. I think technology is a valuable product.”  

Arouh was referring to the settlement between HUD and Fidelity National Financial Inc. That settlement resulted in some questions about the value of the technology services.

“There are some interesting questions that come out of this, largely relating to the value of the license and whether technology as a product has any value that can be licensed because it creates interesting questions,” Arouh said. “If technology has a value then presumably you can license it. If technology doesn’t have a value then presumably you can give the technology to whomever you wish.”

Because the issue has not been litigated to a conclusion, there are no direct answers to those questions.

If you plan to form a technology agreement, it is important to look at pricing. If the technology licenses are reasonable, Arouh said, it’s likely they won’t be challenged. The payment should be for access to the technology. Payment should not be contingent on whether the files close. It should be an open platform with no exclusivity to avoid RESPA violations.