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Industry News

Industry defends affiliated business arrangements

March 23, 2005

Trade group says partnerships save consumers time, money

By Janis Mara
Inman News

Affiliated business arrangements among real estate providers can save consumers time and money, an industry organization said last week in a letter to regulators investigating the practice.

The letter, written by The Real Estate Services Providers Council to the Title Insurance Working Group of the National Association of Insurance Commissioners, cited two studies and three economical analyses suggesting that ABAs can save consumers time and money.

The NAIC committee is probing ABAs, or affiliated business arrangements, for suspected illegal kickback schemes, Working Group Chair Erin Toll, who is also deputy insurance commissioner for Colorado, told Inman News last Thursday.

Colorado's investigations of title insurance companies sparked nationwide probes of industry practices in other states. Investigators allege that title insurers, real estate brokers, developers, home builders and lenders had arrangements by which title insurers would kickback a portion of their fees in exchange for volumes of business.

Affiliated business arrangements are partnerships between real estate entities such as title insurance companies, mortgage lenders and real estate brokers. The arrangements are legal under the Real Estate Settlement Procedures Act, as long as certain guidelines are followed. RESPA regulates referrals and other practices in the real estate closing process.

"We hope the Working Group will focus on violations of current federal and state laws, while recognizing the many consumer benefits offered by the numerous affiliated businesses…that comply with the laws," Susan Johnson, executive director of RESPRO, said in the letter.

RESPRO, a 13-year-old national nonprofit trade association of service providers across the residential home buying and financing industry, has about 300 members, most of which are engaged in affiliated business arrangements.

The letter, sent to Sherwood Girion of the California Department of Insurance, cited two studies and three economical analyses.

Title companies in the Minneapolis-St. Paul, Minn., area that were involved in affiliated arrangements charged about $13 less for a basket of title services than unaffiliated title companies, according to one study cited in the letter. Anton Financial Economics surveyed16 Minneapolis-St. Paul, Minn. firms with 77 offices in that area.

Anton Financial Economics also researched title and closing rates in Wichita County, Kan., before and after legislation that shut down real estate broker-owned title companies in the area, the letter said. After affiliated title companies were closed down, the two largest title companies in Wichita County raised their rates from 50 to 60 percent, according to RESPRO's letter.

A 1994 study commissioned by RESPRO analyzed the title and closing costs of more than 1,000 home sale transactions for affiliated and unaffiliated title agencies during a one-week period in September 1994. According to the letter, the study concluded that services for transactions involving affiliated title companies resulted in a 2 percent cost saving.

The letter also cited economic analyses by the U.S. Office of Housing and Urban Development, all three of which accompanied RESPA.

"Controlled business arrangements and so-called 'one-stop shopping' may offer consumers significant benefits including reducing time, complexity, and costs associated with settlements," the letter quoted HUD's July 21, 1994, proposed RESPA regulation as saying.

Of 2,052 recent and future home buyers surveyed by Harris Interactive in 2002, 82 percent said they would "strongly" or "somewhat" consider using a one-stop shopping service for their home buying experience, the RESPRO letter said.

The letter also cited a 1995 decision by NAIC's Title Insurance Working Group to drop a former recommendation of a 20 percent cap on the amount of gross revenues a title insurer or agency could receive from an affiliate.

The letter said the Working Group decided to present the cap as an optional regulatory approach to affiliated businesses along with two other options.

These were: first, a state law modeled on RESPA requiring disclosure of financial interest, no required use, and no payments otherwise prohibited by RESPA. The second option was net worth and "core title service" requirements.

Copyright 2005 Inman News



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