The Ramblings of a Title Man

Shared Employees in an Affiliated Business Arrangement Environment

?At a recent conference, a speaker discussed challenges with complying with Section 8 of the Real Estate Settlement Procedures Act (RESPA) of 1974. Within the act and rules established by the Department of Housing and Urban Development (HUD), the Consumer Financial Protection Bureau (CFPB) and several court decisions, it is permissible for producers of settlement services (i.e.,?real estate agents, mortgage lenders, homebuilders, etc.) to invest in and have ownership of settlement service providers (i.e., title companies, escrow companies, etc.).

?In 1996, HUD issued a bulletin offering guidance on how to identify if an affiliated business arrangement is compliant (Federal Register, June 7, 1996 (Volume 61, Number 111). One of the factors in the bulletin is:

???????????The Department will consider the following factors and will weigh them in light of the specific facts in determining whether an entity is a bona fide provider: ?(2) Is the new entity staffed with its own employees to perform the services it provides? Or does the new entity have “loaned'” employees of one of the parent providers?

The speaker discussed how it is highly unlikely that any type of employee sharing or loaning in the context of an affiliated business arrangement would be compliant.?

?Take a common scenario: A title company works with two real estate brokers, Broker A and Broker B. The title company sets up two affiliated businesses or joint ventures with the brokers – Title Agency A and Title Agency B. The two title agencies (A and B) process only a limited number of orders on behalf of each broker, and they only require a part-time employee to transact the business functions of the agency. The title company decides to “loan” an employee from the title company to work 15 hours a week in each of title agency A and B. The Title company pays the wages of the employee, and “charges” a monthly fee equal to the 15 hours per week the employee works in each agency to title agency A and title agency B. Is this legal? No, this is a highly suspect business practice, and it flies in the face of the 1996 bulletin from HUD.?

?Most important to note in this scenario is that loaning employees is not permissible. The employee in question should be paid for hours actually worked from each company. In other words, they should get 3 paychecks – one from each of that person’s three employers. Second, this type of employee sharing is not practical. Breakdown a typical day for this hypothetical employee: They should be working 3 hours at Title Agency A, 3 hours at Title Agency B and 2 hours at the original Title Company. Does this mean they are physically getting up and moving to a different location when they switch work between the companies? Does that employee ever get work calls for one of the other two companies while on the clock for one company??Do they answer urgent emails for one company when working at another one? Finally, do they record minute-by-minute the work they are doing for each company??In reality, what often happens in non-compliant iterations of employee loaning is the employee sits at one desk and computer all day, and works on files for more than one company, switching between companies as files are processed.?

?The general best practice for setting up affiliated business/joint venture title agencies is that each agency must have its own employee, who works exclusively for the individual affiliated business or joint venture. While it is hypothetically conceivable to construct a situation where an employee may have two jobs – working for two different title agencies --?great care would be needed to construct a complete segregation of the jobs. The employee would need to receive paychecks from the two different companies (not from one and charge the other for half of the employee’s cost). The employee would need to record hours and work exclusively on one company’s files during established working hours for that company. The employee would need to change locations when switching between working for one agency to another. Finally, the employee could not take calls or handle business for one agency while working for the other agency.?

?If your company has an affiliated business or joint venture, take time to look at your employee set-up.?Is it compliant with the industry standard? If you have shared or loaned employees, consider making changes to how that employee is paid, work is directed, and where they do their work. RESPA compliance is a serious consideration, and should be approached with the utmost focus on compliance. Remember: Violations of the portions of RESPA that are the subject of this article may lead to fines of up to $10,000 per infraction, and expose you to civil lawsuits seeking treble damages.

?Also remember that most states have their own RESPA-like statutes, and some are stricter than the federal statute, both in terms of the activities they permit and the penalties for violations. It is always advisable to seek the counsel of an attorney familiar with RESPA before entering into affiliated business arrangement and joint ventures with other settlement service providers, as well as conduct periodic compliance checks as the arrangement grows.