Partnering with a Lender

What you need to know...

by Marianne McCarty,
CBR Affiliate Director
Broadview Mortgage

I'm sure most of you have received those solicitations to be an owner in a mortgage company for only a $500 investment. Sound too good to be true? It may be, if you do it correctly, according to HUD's RESPA Statement of Policy 1996-2. Although ownership in an affiliated mortgage operation is legal, to stay out of trouble with the feds, you must follow strict guidelines. HUD will otherwise consider the business a "Sham", and merely a way to collect illegal referral fees.

First of all, the company must be staffed by it's own employees. Employees from the partner lender cannot do the work of the affiliated mortgage company. In other words, the affiliated company needs to generate enough business to employ it's own loan officer and support staff, paid by the affiliated business, not by the partner lender. This has been one of the most widespread violations in these types of arrangements.

The company should provide the majority of the substantial services itself. Some, but not the majority of it's services can be contracted out. HUD looks much more favorably at contracted services if done by an independent third party, rather than the partner lender. When contracted services are provided by the partner lender, HUD's question is, "What does the new entity provide in the way of value to the settlement process?"

The affiliated mortgage company must have it's own office space. If the company shares the same address as one of it's parent providers, it must pay market value rent for it's space.

The partners may not receive referral fees, only distributions based on percentage of ownership. Lets say there are 14 real estate agents, each making a $500 investment, owning 49% of an affiliated company. Each agent would own 3.5% of the company. If the company makes a net profit, each agent would receive 3.5% of the profit. If one agent sends the company 10 loans per month and another only sends 1 loan per month, they would each receive the same amount of profit. Many high producing agents do not like the fact that they are carrying more of the weight than lower producing agents, and receiving the same amount. Also, if the company does not generate enough profit to pay the bills, the shareholders must invest additional funds into the company on a stock ownership proportionate basis.

The company must have sufficient initial capital and net worth, typical in the industry, to conduct the business for which it was created. Using the above example, the 14 real estate agents would invest a total of $7,000 for 49% of the company and the lender would invest $7,286 for 51% of the company, totally $14,286. Hardly enough to furnish an office, pay for equipment and supplies, and cover payroll.

HUD requires the company to solicit business outside of the circle of owners. Also some loans should go to lenders other than the partner lender.

The company should also manage it's own business affairs and be the actual provider of the actual functions for which it receives a fee. The company should also incur the risks and receive the rewards of any comparable enterprise operating in the market place.

When referring business to the affiliated lender, the consumer must receive a written disclosure concerning the nature of the relationship and an estimate of the controlled entity's charges at the time of the referral. At no time can the consumer be required to use the affiliate lender for their financing.

Always exercise caution and make sure the affiliated business covers all the bases if considering making the investment.

Marianne McCarty is the Executive Vice President/Partner in Broadview Mortgage Company and the CBR 2005 Affiliate Director. She is the Legislative Committee Vice Chair and a member of the Board of Governors, the RESPA At Large Group and the Residential Board Advisory Committee for The Mortgage Bankers Association in Washington, DC.