The following is an excerpt from Chapter 14 of Volume I of The Mortgage Professional's Handbook:
THE FUTURE RESURGENCE OF JOINT VENTURES
by Blair R. Allan, CEO HomeOwnership Corporation
As the risk of an MSA has increasingly been highlighted by the CFPB, discussions about the JV structure generally within the mortgage industry and among large channel customers have notably increased.
Once again, the legal framework for mortgage joint ventures in the industry is anchored, in significant part, by section 8(c) of RESPA. Specifically, section 8(c)(4) outlines that affiliated business arrangements -- also known as JVs -- are not a violation of RESPA, as long as three, critical criteria (the “Three Criteria) are met:
1. A written disclosure must be given to explain the existence of the arrangement, along with a written estimate of the charge or range of charges imposed by the affiliated business entity (in this case, the mortgage joint venture company), and this disclosure must be made at least by the time that the referral is made;
2. The person being referred must not be required to use the affiliated business -- here, the mortgage joint venture company; and,
3. Other than the distribution of profit proportionate only to the equity interest in the JV of the distributee, no other payments may be made under this arrangement.
In addition to meeting this three-part, safe-harbor test, a joint venture must satisfy certain criteria that was established by HUD and issued in a Statement of Policy 1996-2. This policy statement outlines the so-called 10-part Balancing Test to determine if a JV is a bona fide provider of settlement services or a “sham” that does not qualify for the affiliated business arrangement exception to the anti-kickback provisions found in section 8 of RESPA, as follows:
“...in RESPA enforcement cases involving a controlled business arrangement (JV) created by two existing settlement service providers, HUD considers whether the entity receiving referrals of business (regardless of legal structure) is a bona fide provider of settlement services. When assessing whether such an entity is a bona fide provider of settlement services or is merely a sham arrangement used as a conduit for referral fee payments, HUD balances a number of factors in determining whether a violation exists and whether an enforcement action under Section 8 is appropriate. Responses to the questions below will be considered together in determining whether the entity is a bona fide settlement service provider. A response to any one question by itself may not be determinative of a sham controlled business arrangement. 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:
(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 undercapitalized to do the work it purports to provide?
(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?
(3) Does the new entity manage its own business affairs? Or is an entity that helped create the new entity running 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 market place?
(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 functions, 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 create 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 market place 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?
Even if an entity is a bona fide provider of settlement services, that finding does not end the inquiry. Questions may still exist as to whether the entity complies with the ... (Three Criteria) of the controlled business arrangement exception. 12 U.S.C. Sec. 2607(c)(4)(A-C). Issues may arise concerning whether the consumer received a written disclosure concerning the nature of the relationship and an estimate of the controlled entity's charges at the time of the referral. 12 U.S.C. Sec. 2607(c)(4)(A); 24 CFR 3500.15(b)(1). Other issues may arise concerning whether the referring party is requiring the consumer to use the controlled entity. 12 U.S.C. Sec. 2607(c)(4)(B); 24 CFR 3500.15(b)(2).
Apart from the changing perspectives on MSAs, mortgage companies have historically had a variety of motives to launch JVs despite their complexities, including:
1. The opportunity to use a JV to enter new markets: The task of achieving a notable presence in new geographies has become increasingly difficult and has historically been a factor leading to an increase in the use of JVs. By virtue of the JV with an established, brand name channel customer in the new market, the mortgage company can potentially accelerate its entry to the new market. These structures can provide an impactful point of entry into strategically important, purchase mortgage production.
2. The ability to enhance a purchase mortgage strategy: In many other instances, JVs have historically been used to supplement the existing purchase mortgage strategies of a mortgage company, because JVs are typically formed with channel customers that sell homes and create a purchase mortgage production opportunity.
Read the rest of this chapter in The Mortgage Professional's Handbbook!
Blair Allan is the CEO of the HomeOwnership Corporation -- an asset-holding entity with investments in mortgage originations that are focused on its relationship with larger real estate companies. Previously, Blair worked as an Executive Vice President within Strategic Business Alliances in Countrywide Financial Corporation’s Consumer Markets Division (the prime retail division of the company). After Bank of America’s acquisition of Countrywide Financial Corporation, Blair was appointed the Senior Vice President, National Executive to lead the combined Strategic Business Alliances organizations of Bank of America and Countrywide, which focused on the Bank’s relationships nationally with real estate companies and homebuilding companies. Then, prior to his present role, Blair accepted the role as the National Executive for the Retail and Partnership Channel of Citigroup, and built a new distributed retail organization for Citi. Originally trained as an English barrister (lawyer), Blair’s passion in mortgage banking is working in relationship with America’s Realtors and homebuilders.
 See page 2.
 This was reaffirmed by HUD in November 1992 in its first regulation covering controlled business arrangements; see 57 FR 49599 (Nov. 2, 1992), codified at 24 CFR 3500.15. That rule provided that a controlled business arrangement was not a violation of Section 8 and allowed referrals of business to an affiliated settlement service provider (JV), so long as the Three Criteria are met.
 See 61 Fed. Reg. 29, 258 (June 7, 1996)
 Federal Register: June 7, 1996 (Volume 61, Number 111), p.29262