National Association of Insurance Commissioners (NAIC)

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National Association of Insurance Commissioners
(NAIC)

• Title Insurance Working Group
• Affiliated Business Arrangements
• June 12, 2005
• Boston, Massachusetts

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Affiliated Business Arrangements

• Todays Topics
• Current regulatory framework for affiliated
  businesses
• Consumer benefits of affiliated businesses
• Myths and facts about affiliated businesses

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About RESPRO

• A national non-profit trade association
• Of 260 companies across industry lines
• Real estate brokerage firms
• Home builders
• Mortgage lenders
• Title insurers/agencies
• Vendor management companies

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About RESPRO

• The common bond of RESPRO members
• Is that they are all offering diversified
  services (one-stop shopping) for home buyers
  through affiliated businesses
• Real estate brokers/home builders offering
  mortgage, title, etc.
• Mortgage lenders with real estate broker/builder
  affiliations
• Title insurers/agencies with real estate
  broker/builder affiliations

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About RESPRO

• What We Do
• Represent affiliated businesses before Congress,
  HUD, and the states
• Help our members comply with RESPA and other
  federal/state laws governing affiliated
  businesses
• Publications and audio cassettes
• Seminars
• Web site regulatory compliance library
• Handling member questions through our Washington
  office

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Regulatory Background of Affiliated Businesses

• 1974 RESPA Law
• Enacted to prevent unnecessarily high
  settlement service costs through disclosures (the
  GFE and HUD-1) and a prohibition on referral fees
  (Section 8)
• But did not say whether a person could earn an
  ownership interest through more than one
  settlement service provider under Section 8

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Regulatory Background of Affiliated Businesses

• 1983 Congress Accepts Affiliated Businesses
• Congress rejected ALTA proposal to amend RESPA to
  prevent settlement service providers from
  obtaining more than 20 of their gross revenues
  from an affiliate
• Congress enacted proposal to amend RESPA to allow
  affiliated businesses as long as three-pronged
  test is met

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Background for Affiliated Businesses

• Congressman Barney Frank (D-MA), Sponsor of 1983
  RESPA Amendment To Allow Affiliated Businesses
• I do not believe there is evidence that
  controlled business arrangements are
  anti-consumer or lead to higher prices or
  inferior services.

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Regulatory Environment of Affiliated Businesses

• RESPAs Three Pronged Test for Affiliated
  Businesses
• Must provide a written disclosure of the
  financial interest and range of charges at or
  before time of referral
• No tying the consumer must not be required to
  use the affiliated service
• No referral fees otherwise prohibited under RESPA
  can be paid among affiliated companies

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Regulatory Environment of Affiliated Businesses

• HUDs 1992 RESPA Rule Provided
• Guidance to Affiliated Businesses
• Clarified that the 1983 RESPA amendment provided
  a safe harbor as long as RESPAs three-pronged
  test was met
• Provided a model affiliated business disclosure
• Allowed companies to offer consumers rebates or
  discounts if they purchase more than one
  affiliated service

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Regulatory Environment of Affiliated Businesses

• HUDs 1996 Sham Joint Venture Guidelines
• Designed to prevent companies from passing
  illegal referral fees through sham joint
  ventures and affiliated businesses
• Outlines characteristics of a legitimate
  affiliated business
• Adequate capitalization
• Has own employees performing core services
• Has look and feel of separate business (e.g.,
  own office space, separate phone, tangible
  assets)
• Does not subcontract out substantial amount of
  functions
• Competes for business and/or sends business to
  multiple sources
• Return cannot be based on amount of business
  referred or generated

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Regulatory Environment of Affiliated Businesses

• HUDs 1996 Office Lease Guidelines
• Designed to prevent mortgage, title, and other
  recipients of referrals from making excessive
  payments to real estate brokers, builders, and
  other producers for renting space and facilities
  in their offices

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Regulatory Environment of Affiliated Businesses

• 1996 NAIC Model Title Agency Act
• After two years of research and testimony on
  affiliated businesses
• NAIC modified its recommendation for a 20 cap on
  business that a title agent can receive from an
  affiliate
• In favor of recommending three optional
  approaches
• A state RESPA law that applies to all title
  companies
• Net worth standards that apply to all title
  companies
• A percentage cap restriction

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Consumer Benefits of Affiliated Businesses

• Convenience of one-stop shopping
• Accountabilitythe referrer of business cannot
  blame someone else for problems with title
  services
• Potentially lower costs

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Consumer Benefits of Affiliated Businesses

• Recognized by
• Economic Studies
• HUD
• Consumer surveys

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Consumer Benefits of Affiliated Businesses

• 1992 Economic Study by Anton Economics, Inc.
• Telephone survey of title companies in
  Minneapolis-St. Paul marketplace
• A basket of title/closing services offered by
  an affiliated title company was 13 lower than a
  basket offered by an unaffiliated company
• Competition in the marketplace had increased
  since the entry of affiliated businesses in the
  1980s
• After Kansas legislation drove affiliated
  businesses out of the state, title/closing rates
  increased in Wichita county (the largest county)

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Consumer Benefits of Affiliated Businesses

• 1994 Economic Study by Lexecon, Inc.
• Compared title/closing costs between realty-based
  and independent title companies
• In over 1000 home purchase transactions
  throughout seven states (FL, MN, TN, WI, MI, PA
  and CA)
• Concluded that title/closing costs for
  realty-based title companies were not only
  competitive but resulted in a 2 cost savings

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Consumer Benefits of Affiliated Businesses

• 1996 HUD Economic Analysis
• Referral activity among affiliates might still
  benefit consumers because of the possibility of
  immediate savings in shopping time and hassle and
  future reductions in prices due to lower
  marketing and other costs.
• Taking these benefits into account, referrals
  among affiliated firms are probably neutral and
  possibly beneficial to consumers.

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Consumer Benefits of Affiliated Businesses

• 1996 HUD Economic Analysis
• HUD is aware of only one study that compares
  prices of settlement services provided by
  affiliated and non-affiliated firms Lexecon.
• the study is biased in favor of the
  unaffiliated firms. Therefore, the results might
  suggest that affiliated firms on average have
  lower prices than their competitors.

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Consumer Benefits of Affiliated Businesses

• 2002 Consumer Survey
• 2052 recent and future home buyers
• Performed by Harris Interactive (parent of Harris
  Poll)
• Funded by RESPRO, The Realty Alliance, and Murray
  Consulting

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Consumer Benefits of Affiliated Businesses

• 2002 Consumer Survey
• Over 90 of home buyers who did not use one-stop
  shopping programs believed that if they had used
  one, they would have had a better overall home
  purchase experience because
• They would have had just one person to contact
• They would have saved money if the company
  offered discounts on the purchase of multiple
  services
• It would have sped up the home buying process
• It would have prevented things from falling
  through the cracks
• It would have assured one standard level of
  brand-named service from all providers

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Consumer Benefits of Affiliated Businesses

• 2002 Consumer Survey
• 82 of home buyers would strongly or somewhat
  strongly consider using a one-stop shopping
  service for their home purchase
• 64 of home buyers who recently used one-stop
  shopping programs had a much better overall
  experience with their home purchase transaction

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Consumer Benefits of Affiliated Businesses

• 2004 Consumer Survey by Weston Edwards
• Over 3000 home buyers over the previous year
• How likely would you be to take advantage of a
  one-stop shopping service?
• 35 highly likely
• 35 likely
• 21 somewhat likely

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Myths and Facts

• Myth Affiliated businesses cause the adverse
  steering of consumers and need to be regulated
  more than they are now.
• Fact RESPA requires anyone who refers business
  to a settlement service affiliate to provide a
  written disclosure on a separate paper at the
  outset of the transaction (at or before the
  referral) that informs the consumer
• About the relationship
• The range of charges
• About the fact that the buyer does not have to
  use the affiliate and can shop around
• That the referring party can benefit from the
  referral
• The consumer is required to acknowledge receipt
  of the disclosure in writing

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Myths and Facts

• Myth Affiliated businesses have been the subject
  of more HUD and state investigations than
  unaffiliated businesses.
• Fact Competitors of affiliated businesses have
  always alleged this but have never provided
  evidence in fact, RESPROs research has shown
  that RESPA enforcement actions against all
  providers have increased, regardless of whether
  they are affiliated.
• In any case, RESPRO and legitimate affiliated
  businesses that comply with RESPA and state laws
  welcome increased enforcement against sham
  affiliated businesses.

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Myths and Facts

• Myth Affiliated businesses are the cause of
  more title defalcations in the country than
  unaffiliated businesses.
• Fact Competitors of affiliated businesses have
  consistently alleged this without being able to
  provide any evidence. RESPROs own research has
  shown as many, if not more, defalcations of
  unaffiliated title companies than affiliated
  companies.
• After they were not able to provide evidence
  supporting this allegation during NAICs
  deliberations on its 1996 Model Title Agency Act,
  NAIC decided to recommend options for states to
  impose enhanced net worth requirements for all
  title companies, both affiliated and unaffiliated
  businesses.

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Myths and Facts

• Myth State regulators should force affiliated
  businesses to compete by passing percentage cap
  restrictions.
• Fact Percentage restrictions are
  protectionistic, limit consumer choice, and
  arbitrarily permit some consumers to get the
  benefits of one-stop shopping but not others.
• Congress explicitly rejected percentage
  limitations in 1983 and the NAIC modified a
  recommendation that state pass these laws in 1996
  after two years of deliberations.

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Affiliated BusinessArrangements

• Conclusion
• There are violations of RESPA and state laws in
  the home buying marketplace by both affiliated
  and unaffiliated title companies
• The most effective way of dealing with these
  abuses is through enforcement of current federal
  and state laws for all providers

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Affiliated BusinessArrangements

• How to Obtain More Information
• Contact sjohnson_at_respro.org
• Visit RESPRO at www.respro.org