In the mid-90’s, HUD became aware of some affiliated business arrangements (AfBAs) that the agency believed were shams. It received complaints indicating that, in some cases, the entity formed by a joint venture between two businesses was not performing settlement services and was merely a way to pay illegal referral fees. HUD decided that Congress did not intend to allow for shell entities to be used for payments of referral fees, and it determined that in RESPA enforcement cases involving joint ventures, it would consider whether the new entity was a bona fide provider of settlement services. HUD released its statement of policy 1996-2, setting forth 10 factors it would weigh in determining whether an entity is bona fide.
The use of the test has been a point of contention for some businesses with AfBAs, and it’s not just businesses who take issue with it, there are also judges who agree the test isn’t clear enough.
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