A new report from the federal government presents a useful overview of the inner workings of the title insurance industry, but falls far short of good recommendations to solve systemic problems in the way real estate settlement services are sold to home buyers and sellers.
The usual unimaginative remedies, which again include more law enforcement and more consumer education, won’t be any more effective in the future than they have been in the past because they don’t fix the core problem, which is the conflicts of interest created by affiliated business arrangements, or ABAs.
ABAs are permitted by federal law, but these kickbacks disguised as referrals seem purposefully designed to hoodwink consumers into mistakenly thinking that such referrals are unbiased and impartial when, in fact, ABAs legalize the very anti-consumer behavior that the Real Estate Settlement Procedures Act (RESPA) was supposed to outlaw.
The report, “Title Insurance: Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers,” was prepared by the federal General Accounting Office based on a yearlong review of industry practices in California, Colorado, Illinois, Iowa, New York and Texas.
ABAs should be eliminated since there is no other way to eliminate the conflicts of interest that are inherent in these arrangements. As Diane Cipa, a title agent and owner of The Closing Specialists, told Inman News, “You just can’t define the lines in a way that will eliminate that conflict of interest.”
The report stated that conflicts of interest can arise when the real estate or mortgage broker or agent who makes a referral “has a financial interest in directing the consumer to a particular title agent.” In such situations, the report added, the broker or agent may be motivated to make a referral “not based on the customer’s best interests but on the professional’s best interests.”
The report also said regulators and industry participants had expressed concerns about “the growing use” of ABAs. According to the report, officials of the U.S. Department of Housing and Urban Development, said ABAs can provide some consumer benefits, but also can “create an inherent conflict of interest.” Officials were concerned that ABAs could be used “to mask referral fees, which are generally illegal under RESPA” and that more complex ABAs were making it “increasingly difficult to trace the flow of money.”
More enforcement is a popular remedy of government reports. But HUD and local officials have already stepped up enforcement of RESPA, though there is little reason to believe that more enforcement will solve the problems cited in the report as long as ABAs remain legal. Insurance regulators in six states achieved fines and settlements worth more than $90 million in 2003-06 and HUD’s investigations added another $10.7 million during that time period, according to the report, yet the problems still exist.
The report also recommended that HUD be given the power to levy civil fines against title insurers. Harsher penalties are another popular remedy in government reports, but again, this remedy can’t fix the problems as long as ABAs are legal. Rather, more enforcement authority is likely to encourage the industry to fight back harder in court to protect the lucrative ABAs.
The report also suggested that HUD should clarify the regulations that apply to ABAs, but again, this solution doesn’t address the problem. Yes, the regulations are a mess of contradictory rules, but this regulatory confusion is only a distraction from the main problem and any effort to clarify matters would only cast more light on the fact that the law itself is sickeningly flawed.
Nor is the report’s recommendation that HUD provide more information for home buyers and sellers helpful. Disclosure requirements already exist, yet home buyers and sellers still don’t understand the effect of affiliated business. As the report stated, home buyers “often know little about the insurers themselves or the title insurance industry,” and since most consumers buy title insurance only infrequently, “they are not familiar with what title insurance is, what reasonable prices might be, or which title agents might provide the best service.”
The bottom line is that ABAs simply don’t work. Or rather, they work all too well to create cozy relationships and lucrative behind-the-scenes payoffs that don’t benefit home buyers or sellers. The only real solution is to eliminate them.
Marcie Geffner is a real estate reporter in Los Angeles.
Copyright 2007 Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.