Controlled Business Arrangements

1. What is a controlled business arrangement (CBA)?
Answer: A CBA is an arrangement in which an individual/entity has more than a 1% ownership interest in more than one settlement service provider and directly or indirectly refers business to that provider.

2. What is a sham CBA?
Answer: Sham CBA’s are business arrangements designed to avoid RESPA’s prohibition on referral fees. HUD provides a list of factors they will consider to determine whether a CBA is bona fide. These factors include how adequately an entity is capitalized, whether it has its own employees, whether it contracts out all or most of its work back to the parent company and whether it incurs the same risks and rewards of any other such business in the marketplace. No single factor is determinative.

3. If a real estate broker refers a buyer to an affiliated lender, must the fact that these settlement service providers are affiliated be disclosed to the buyer?
Answer: Yes. The 1996 RESPA rule contains a CBA disclosure form which must be provided to consumers referred to affiliated entities. The form discloses the affiliation, an estimated charge for the services to be provided, and a notice that the consumer is not required to use the provider and that they are free to shop around to determine if they are receiving the best services at the best rate.