Pub. 7 2012-2013 Issue 5

January | February 2013 13 Extraordinary Service for Extraordinary Members. There can be substantial costs incurred in ensuring that an affiliated business arrangement constitutes a bona fide settlement service provider and otherwise operates in compliance with RESPA. expected referrals to be provided by the referring owner to a division within the entity? 3. Are dividends, partnership distributions, or other pay- ments made in proportion to the ownership interest (proportional to the investment in the entity as a whole)? Or does the payment vary to reflect the amount of busi- ness referred to the new entity or a unit of the new entity? 4. Are the ownership interests in the new entity free from tie-ins to referrals of business? Or have there been any adjustments based on the amount of business referred? 6 HUD has stated that the affiliated business arrangement exemption is only available where referrals are made to a “bona fide provider of settlement services.” The exemp- tion does not authorize the establishment of shell entities or sham arrangements that are merely conduits for the payment of illegal referral fees. Thus, compliance with the affiliated business arrangement conditions concerning dis- closure, optional use, and return on ownership interest do not exempt payments that flow through an entity that is not a bona fide provider of settlement services. In determining whether an entity is a bona fide settlement service provider or merely a sham arrangement, HUD considers the follow- ing 10 factors: 1. Does the new entity have sufficient initial capital and net worth, typical in the industry, to conduct the settlement service business for which it was created? Or is it under- capitalized to do the work it purports to provide? 2. Is the new entity staffed with its own employees to per- form the services it provides? Or does the new entity have “loaned” employees of one of the parent providers? 3. Does the new entity manage its own business affairs? Or is an entity that helped create the new entity run- ning the new entity for the parent provider making the referrals? 4. Does the new entity have an office for business which is separate from one of the parent providers? If the new entity is located at the same business address as one of the parent providers, does the new entity pay a general market value rent for the facilities actually furnished? 5. Is the new entity providing substantial services, i.e., the essential functions of the real estate settlement service, for which the entity receives a fee? Does it incur the risks and receive the rewards of any comparable enterprise operating in the marketplace? 6. Does the new entity perform all of the substantial services itself? Or does it contract out part of the work? If so, how much of the work is contracted out? 7. If the new entity contracts out some of its essential func- tions, does it contract services from an independent third party? Or are the services contracted from a parent, affiliated provider, or an entity that helped create the controlled entity? If the new entity contracts out work to a parent, affiliated provider, or an entity that helped cre- ate it, does the new entity provide any functions that are of value to the settlement process? 8. If the new entity contracts out work to another party, is the party performing any contracted services receiving a payment for services or facilities provided that bears a reasonable relationship to the value of the services or goods received? Or is the contractor providing services or goods at a charge such that the new entity is receiving a “thing of value” for referring settlement service business to the party performing the service? 9. Is the new entity actively competing in the marketplace for business? Does the new entity receive or attempt to obtain business from settlement service providers other than one of the settlement service providers that created the new entity? 10. Is the new entity sending business exclusively to one of the settlement service providers that created it (such as the title application for a title policy to a title insurance underwriter or a loan package to a lender)? Or does the new entity send business to a number of entities, which may include one of the providers that created it? 7 HUD has not formally stated that any factors weigh heavier than the others. Furthermore, there are few cases, administrative decisions, or advisory opinions discussing the 10-factor test. Thus, it is difficult to draw any clear conclusions regarding the relative importance of the fac- tors; however, it appears that an entity may be considered a bona fide settlement service provider even if there are a few factors that indicate a sham arrangement. In summary, in order to be exempt from Section 8 li- ability, an affiliated business arrangement must be a bona fide provider of settlement services and meet the disclosure, Q RESPA — continued on page 14