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Office of the Commissioner of Financial Regulation

 

Affiliated Business Arrangements Advisory 02-01 - Advisory Notices

 

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August 26, 2002

Mortgage Lender Licensees - Affiliated Business Arrangements
Joint Ventures between Maryland licensed mortgage lenders and Maryland licensed title companies

The Commissioner has become aware of increased activity in the formation of joint venture companies between Maryland licensed mortgage lenders and title companies. Licensees are strongly advised to review with their legal counsel RESPA, 1 HUD Regulation X and Maryland laws governing affiliated business, if they are currently involved in or intend to create a joint venture.

No Maryland law specifically prohibits affiliated business arrangements. However, creation of "sham entities" to create and funnel additional unearned fees to the lender or broker are prohibited under RESPA (12 U.S.C. Sections 2601, et seq.). As a general matter joint ventures are permitted if:

  • all RESPA requirements on affiliated business arrangements are met;
     
  • the joint venture title entity is properly licensed by the Maryland Insurance Administration;
     
  • the joint venturers receive no payments other than a return on their ownership interest, and the liability of each is based on its ownership interest;
     
  • no rebate is paid on the transaction; and
     
  • customers of the mortgage lender are not required to use the joint venture title agency. The mortgage lender must avoid any communication that limits or influences the borrower’s free choice of title services.

Article 27, Section 465A of the Maryland Code, the Maryland Real Estate Settlements Act (the "Act") provides that:

"no person, firm or corporation having any connection whatsoever with the settlement of real estate transactions involving land situated and lying in this State shall , for the purpose of soliciting, obtaining, retaining, or arranging any real estate settlement or real estate settlement business, pay to or receive…any fee, compensation, gift…,thing of value, rebate, or other consideration…."

Although the Act permits payment of fees or commissions to agents who have been licensed by the Maryland Insurance Administration, it prohibits the payment of fees in most instances. Compliance examinations will include review of all settlements to determine whether third party joint ventures are paid fees that may not be supported by reasonable services provided. Further, disclosure of the joint venture relationship will be examined for compliance with applicable laws.

1 Also refer to HUD Statement of Policy on Sham Controlled Business Arrangements