Multiple Choice Question: You are the buyer’s agent. Your buyer receives an Affiliated Business Arrangement Disclosure Statement (ABAD) from the listing agent. The listing brokerage’s ABAD is 5 pages long, and it lists a lot of charges and fees. The buyer wants to know what the buyer is being asked to sign. Which of the following is a good explanation of the ABAD? Pick the best answer:

A. It provides a list of companies owned by the listing brokerage that may be charging certain fees to the buyer.
B. It provides a list of preferred companies that the listing brokerage is referring to the buyer to use if desired.
C. It provides a list of companies affiliated with the listing brokerage that will also profit from the buyer’s sales transaction.
D. It provides a list of companies affiliated with the listing brokerage that the buyer is not required to use. 

Answer: As background, the Real Estate Settlement Procedures Act (RESPA) prohibits a real estate broker from giving or receiving anything of value in exchange for the referral of business for certain types of real estate transactions. More specifically, RESPA pertains to the sale of one-to-four residential units where the buyer obtains a federally-related mortgage loan (including most conventional mortgage loans and FHA/VA loans).

Although RESPA prohibits referral fees, it generally allows a real estate brokerage to refer affiliated settlement service providers if the brokerage provides the seller and buyer with an ABAD. The formatting of the ABAD, including the charges or range of charges, is dictated by the RESPA law.

Answer A is wrong. The companies listed on an ABAD are not necessarily “owned” by the listing brokerage. They are companies that are “affiliated” with the listing brokerage, which means that the listing brokerage may have an ownership interest in, or a franchise relationship with, those companies.

Answer B is a correct statement, but it’s not the best answer, as further discussed below.

Answer C is wrong. A buyer is not required to use the services of an affiliated company. If the buyer opts not to use an affiliated company, that particular affiliated company will not necessarily profit from the buyer’s sales transaction.

Answer D is the best answer. A listing agent must generally provide the ABAD to the seller or buyer by the time the listing broker is referring an affiliated company to the seller or buyer. Hence, the ABAD itself specifically informs sellers and buyers that they are not required to use any of the listed service providers. Of course, after the seller and buyer have already entered into a purchase agreement, they may have agreed to, and therefore, are “required” by contract to use a certain affiliated service provider.

As between Answers B and D, Answer D is a better answer, because the ABAD is supposed to include a list of affiliated companies, not preferred companies. Answer D is also better because the ABAD is not just a list of referrals. It must include very specific language, including the notice that the seller and buyer are not required to use any affiliated service provider.

-Thank You to Marcille Dilsaver Hughes (Pasadena Office) for suggesting this week’s legal tip!

Copyright© 2024 Berkshire Hathaway HomeServices California Properties (BHHSCP). All rights reserved. Any unauthorized reproduction or use of this material is strictly prohibited. This information is believed to be accurate as of April 15, 2024. It is not intended as a substitute for legal advice in individual situations, and is not intended to nor does it create a standard of care for real estate professionals. Written by Stella Ling, Esq.