Ohio officials are drafting new regulations governing affiliated real estate business arrangements, but have backed away from tightening restrictions on how much of a stake real estate and mortgage brokers can own in title insurance agencies.
Affiliated business arrangements, or ABAs, are legal, but investigations in several states have turned up instances in which they were allegedly used to facilitate the illegal payment of referral fees and kickbacks to generate business for affiliated title insurance companies, stifling competition.
In Ohio, where consumers have sued a number of companies that use such arrangements, the Department of Insurance is drafting new restrictions on ABAs. One early draft of the new rules would have prohibited real estate mortgage brokers, builders and developers from owning more than 10 percent of a title insurance company. But the latest draft of the rules would maintain the current limit of 50 percent.
The latest draft is an apparent response to industry claims that tighter restrictions on ownership would discourage competition by reducing the number of title insurance companies. Regulators should instead concentrate on stopping illegal practices when they occur, the industry has argued. The federal Real Estate Settlement Procedures Act, or RESPA, prohibits rebates, referral fees and kickbacks in real estate deals.
The industry has made its views known through The Real Estate Services Providers Council, or RESPRO.
“RESPRO members tend to be very diligent about RESPA compliance,” said Sue Johnson, RESPRO’s executive director: “Legitimate businesses support better enforcement of current laws. We certainly have no problem with the overall intent of Ohio regulators in that regard.”
But RESPRO members “have a general problem” with any percentage cap on ABA ownership, Johnson said. “It’s an artificial way of regulating that doesn’t look at the practices of individual businesses. It applies to everybody, whether or not there are illegitimate practices.”
When Kansas adopted a 25 percent cap on ABA ownership in 1992 — effectively closing down all ABAs in the state — title insurance rates in the state’s most active county increased by 25 percent, Johnson said. Kansas has since raised the ownership limit to 70 percent, Johnson said.
When Colorado lawmakers introduced new legislation that would have imposed an ownership cap on ABAs, the Department of Insurance persuaded lawmakers to scrap the provision in favor of other measures aimed at illegal activities, Johnson said. Colorado’s new rules include more severe penalties for lawbreakers, and stiffer capitalization and licensing requirements.
“We believe most of the abuses in the marketplace today, and we don’t deny there are abuses, can be dealt with using RESPA and state laws,” Johnson said.
In addition to banning referral fees, kickbacks or gifts, RESPA requires companies that send customers to affiliated title insurance companies to disclose their financial interests in them. They are also prohibited from requiring that their clients do business with an affiliated company. But critics say home buyers are unlikely to shop around for title insurance, and may accept the coverage they are offered by ABAs even if cheaper policies are available.
As currently proposed, Ohio’s regulations would seek to prevent the formation of “sham” ABAs that are created as a conduit for kickbacks. The Department of Insurance would have the power to determine an ABA is a sham arrangement if it did not have the initial capital and net worth typical of the industry, or if it does not have its own office or is not staffed with its own employees, for example.
Robert Denhard, a spokesman for the Department of Insurance, said comments on the latest draft of the proposed rules, which are not available on the Internet, are due next week.
Denhard would not comment on changes made to the draft rules so far.
“I can’t get into any specifics … because it is still in the discussion phase,” Denhard said. “The goal of the Ohio Department of Insurance is to establish a framework that addresses eliminating sham affiliated business arrangements, and it appears the interested stakeholder parties do want to accomplish this.”
Once the proposed rule has been submitted to the Department’s Joint Committee on Agency Rule Review, or JCARR, a public hearing will be scheduled before the rule is finalized and approved by JCARR. Details on participating in the rulemaking process are available on the Department’s Web site, at http://ohioinsurance.gov/Legal/Rules/rulemaking.pdf