The industry’s biggest challenge today isn’t just better transactions, it’s more housing. The goal is to preserve consumer protections in RESPA while enabling the kind of coordination and investment that meaningfully increases the housing supply.

That’s according to Craig Cheatham, the CEO of The Realty Alliance.

From a brokerage perspective, creating a joint venture requires determining if the brokerage can use it to deliver a better consumer experience, if it is financially sustainable and if it is RESPA compliant, Cheatham said.

While RESPA’s required use prohibition and disclosure requirements are important protections, “they do make it harder to fully realize the efficiencies of affiliated services,” Cheatham said. “You can build a highly integrated experience, but you can’t require the consumer to use it, which naturally limits adoption.”

Marx Sterbcow, managing attorney at Sterbcow Law Group, has worked in the RESPA compliance area for over 20 years listed the same mistakes he’s seen in forming a JV or affiliated business arrangement (AfBAs)

Thin capitalization when the entity gets formed, but nobody actually funds it at a level that supports real operations,” he began. “No dedicated employees, so everything gets outsourced back to the parent [company], and the JV is essentially a shell with a logo. Profit distributions that track referral volume instead of equity percentage, which is nothing more than a per-referral payment no matter what you call it in the operating agreement. AfBA disclosures treated as a paperwork exercise delivered at the wrong time or drafted to disguise the fees charged or who the actual owners are.”

Loretta Salzano, president of Franzen and Salzano, stated that AfBA disclosures appear to be the area of the most common compliance mistakes.

“While I think the AfBA disclosure is the easiest condition of the safe harbor to satisfy, we rarely see compliant AfBA disclosure content and oftentimes disclosures are not provided in a timely manner,” she said. “A tougher compliance issue is how to deal with owners who don’t refer to the affiliated venture, and this challenge often results in RESPA noncompliance. RESPA doesn’t permit monkeying with distributions or ownership interests based on referrals — and that includes ousting non-referring members. There are exit strategies that can be effective, but these are generally untested for RESPA compliance.”

Cheatham, Sterbcow and Salzano go on to discuss how builder-lender-title JVs, vertically integrated builders and “one-stop shops” may impact the housing supply.

To read more, download the complimentary Housing Inventory Solutions report here.