On May 28, 2009, I and many of my colleagues headed to our state capital to testify before the Insurance Commission regarding title insurance matters in the Commonwealth of Pennsylvania. Some of us focused on the rate structure and others on the lack of competition in the marketplace. I chose to try and shed light on the important role that the Independent Title Insurance Agent plays in protecting the consumer and maintaining a system of checks and balances in the real estate process
Representatives from the Pennsylvania Attorney General’s office also testified before the Commission as well as economists, representatives of title insurance underwriters and a real estate company owner with affiliated title and mortgage businesses (ABA’s/CBA’s).
My testimony focused on ABA’s and Controlled Businesses and why real estate agencies and lenders should not own or have any financial interest in a title agency. This is also known as vertical integration.
What most consumers do not know is that in some offices, managers are compensated when their real estate agents get the consumer to use affiliates. In addition, the real estate agent might also be compensated for steering consumers by receiving relocation deals or higher commission splits or may have a stake in the profits of the title business. Another little known fact is that some banks with affiliated title agencies will pay their loan officers to steer borrowers to their affiliate. Every day, the real estate and banking industries are disregarding the best interest of the consumer by not only allowing, but encouraging, conflicts of interest in real estate transactions. And it appears the Attorney General of the Commonwealth of Pennsylvania agrees.
The Attorney General Weighs-in on ABAs
In the Attorney General’s July 2 letter in response to the Hearings of May 28, the AG concluded:
ABA’s create tremendous opportunity for illegal rebating and referrals.
He went on to say:
a real estate agent or mortgage broker that owns or earns profit from a title agency may have a conflict when there is a defect in the title.
He also states:
This conflict may be best resolved by eliminating affiliated business arrangements and precluding vertical integration.
The big real estate conglomerates, especially in southeastern PA, will often preach “one-stop” shopping and “convenience” when it comes to their group of businesses. This ideology should be saved for the big box stores or the fast-food window, not an important financial transaction where consumers are relying on their professional advice.
The AG’s comments on one-stop shopping:
ABAs may provide some consumer benefits, they also create an inherent conflict of interest as the owner of the ABA is in a position to refer a customer to that same ABA…title agents at that ABA might not be as interested in competing on price or service.
Independent Agents are important, if not essential to combat fraud
An Independent Title Insurance Agent is a consumer’s freedom from conflicts and fraud. As the AG states:
The independent title agent, which has his or her insurer’s money on the line, is the last bulwark against fraud. Truly independent title agents may be necessary to prevent fraud.
I call on my colleagues, real estate agents, and mortgage professionals to encourage consumers to shop for a title insurance provider. Price is not the only factor. Reputation, knowledge, and expertise go a long way in making for a smooth and efficient settlement with no surprises. Unfortunately, the real estate agent is the first person to meet with the consumer and the duty to encourage the consumer to shop is trumped by the promise of a reward.
How do we better serve the consumer? The first step might be to destroy the parts of RESPA that allow for ABA’s and CBA’s. Can the policy makers in DC take this simple step and say NO MORE to the parties that are receiving the largest benefit from regulations allowing ABA’s and CBA’s? Their pockets run deep but a swipe of the pen can bring integrity and transparency back to a real estate transaction which is lacking both and restore a system of checks and balances.
Remember, independence is what this country is all about and let’s not forget that our three branches of government are separate for a reason – maybe we should honor the concept and keep real estate, title, and mortgages separate.
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Dave,
I’m surprised not see a mention of NAILTA here
Art, at the time of my writing this piece, NAILTA was still in the process of reviewing the AG’s letter and formulating a response. You can read NAILTA’s response to the AG at http://www.nailta.org. Thanks. Francine
What I see as the most important aspect in Real Estate Agent/Broker ABA’s is the fact that the consumer is unfairly being charged more. It is well know that Real Estate Agents have the trust of the consumer when they are dealing with them. What happens is, even though there is knowledge by the Realtor that by using another Title Company other than the Realtor in-house, they could save the consumer money. The consumer is still coerced into using the Realtors in-house Title Company because the Broker and or Agent get compensated, though the consumer suffers. Another aspect I see is that the Real Estate Agents now charge conveyancing fees to the seller and the buyer that go to the Realtors in-house Title Company because they can. When, they all know that using a conventional Title Company, as my office, this fee is included in the title insurance. I believe that it is covered in either the Realtors Code of Ethics or By-Laws that the Realtor is always to look out for the consumers best interests. It further goes on to state that they are to put the consumers monetary interest first before the Realtor’s. And yes you do have the disregarding of the best interest of the consumer by not only allowing, but encouraging, conflicts of interest in real estate transactions.
Mr. Commiso, great input. I consider the charging of the conveyancing fee/administritative fee/broker’s fee just another way to slam the consumer. Unfortunately, the buyers and sellers don’t know that they should refuse to pay it. I once had a closing where a large national real estate brokerage had both sides of the transaction. I handled all the conveyancing on a deal valued at $27,000 (that is the sale price of the home). The seller was an executrix of an estate, there were multiple municipal liens, past due taxes, and inheritance tax issues to clear. The total premium was $420. The settlement was approximately 45 minutes from my office. I probably put 20 hours into clearing all the issues and then another 3 hours after settlement because of an inheritance tax escrow. It never crossed my mind about the number of hours spent on a deal that netted me about $211.20 – not even counting the time just my expenses and remittance. The dollar value of the deal only crossed my mind when I received a call from the “conveyancer” at the brokerage that there would be a $295 conveyancing fee on the seller’s side and the buyer’s side – so the real estate office walked away with $590 for doing nothing at all on a cash deal and this is outside of the commission. In addition, the notice of settlement was issued by me as well as the closing cost estimate – which I consider my job to do at NO charge!!
And now with the new HUD1, the conveyancing fee will just be thrown into the commission, which by the way, no longer will be represented by a percentage.
But that is a post for another day.