OAITA Public Response to HUD's ANPR on RESPA Section 8

8/8/2019 OAITA Public Response to HUD's ANPR on RESPA Section 8

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OAITOhio Association of Independent Title Agents

September 1, 2010VIA OVERNIGHT MAILDavid H. StevensRegulations DivisionOffice of General CounselU.S. Department of Housing and Urban Development451 7 th Street, SWRoom 10276Wash ington DC, 20410-0500

Re :eal Estate Settlement Procedures Act (RESPA): Strengthening and ClarifyingRESPA's "Required Use" Proh ibition Advance Notice of Proposed Rulem akingDocket No. FR-5352-A-01Dear C omm issioner Stevens:On behalf of the independent title insurance agents, independent title insurance underwriters andinterested title insurance industry stakeholders who are members of our organization, pleaseallow me to formally introduce you to the Ohio Association of Independent Title Agents(OAITA ww w.oaita.org) OAITA was formed in August, 2008 by concerned independent titleinsurance agents from across Oh io wh o are determined to foster transparency, promote educationand understanding and preserve th e value of th e land title process.OAITA is the only state land title association in the United States that comprises its completeorganizational document on the issues affecting independent land title insurance agents and like-minded independent real estate settlement service providers. Moreover, OAITA is the only landtitle association in th e United States th at h as recently surveyed the general public concerning theimpacts of controlled business arrangements on the real estate settlement process. Informationconcerning our settlement preference survey is provided herein. OAITA is uniquely situated tomake comments regarding HUD's Advanced Notice of Proposed Rulemaking (ANPR) becauseOAITA has extensive experience and knowledge of the harms caused by affiliated businessarrangeme nts (also known as controlled business arrangements or CBA s).OAITA along with the National Association of Independent Land Title Agents (NAILTA) --has been vocal in its stance against the proliferation of CBAs in the title insurance industry.Both organizations believe that CBAs unfairly restrict healthy competition in the title insurance

216 Bradenton Ave nue, Dubl in , OH 430 17www.oaita .org (216 ) 373 -28 00


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Page 2 of 12Letter to Comm issioner David H. StevensSeptember 1, 2010industry, create inexorable conflicts of interest between referral sources, land title agencies andtheir consume rs at the closing table, and impair the traditional barriers of access to th e insuranceprocess all to the detriment of hom eowners and borrowers.We are pleased to take this opportunity to address you and your staff in connection with theANPR to strength en and clarify the proh ibition against th e "required use" of affiliated settlementservice providers in residential mortgage transactions under section 8 of RESPA. 1 The goals ofthe ANPR mirror those that OAITA has sought since its founding. However, we believe thatmore work is needed as the AN PR seems too narrow to properly address th e problems caused byCBAs. With this in mind, OAITA advises HUD of the following and asks that it be included asan interested industry stakeh older for purposes of further developing and implementing the finalrule.

I.ntroduction and Background.Title insurance may be one of the least understood and most maligned forms of insuranceavailable to the American consumer. Since its inception in 1876, title insurance has sufferedfrom th e same prob lem -- the inability of th e producer to effectively comm unicate its value to theconsumer. The reasons for the breakdown in communication are plentiful. The most importantof which is the fact that title insurance is not marketed to the ultimate consumer of the product.Instead, it is marketed to the referral source (i.e. the real estate firm, mortgage company,h ome builder, lender, developer) wh o, in exch ange for the referral, often times receives incentivesor other kickbacks to encourage the affiliation. Consumers rarely participate in the process ofselecting their title insurance provider and often, whether voluntarily or involuntarily, defer theselection of title insurance provider to the referral source. As a result, title insurance is a closedsystem of competition.The harms of unfair competition in the title insurance industry have been well-documented.2Since the 1990's, the title insurance industry has been slowly devolving into a form of quasi-casualty insurance. With the help of massive lobbying efforts on the part of banks, mortgagecompanies, home builders and real estate companies, the title insurance industry has beencollectively overrun by its referral sources. The title insurance industry, which continues to bedom inated by four national title insurance underw riters controlling over 90 % of all title businessconducted in the United States, has tacitly supported referral source infiltration as a means toacquire additional market share. Unfortunately, in doing so, the title insurance industry hasallowed this referral source infiltration to color its perception of risk to the insurance product.

I Fed. Reg. 31334, Vol. 75, No. 106, Thursday, June 3, 2010.2 Jack Guttentag, "Real Estate Settlement Services Take Bite Out of Borrowers," Inman News, September 6, 2005;see also, The Pricing and Marketing of Insurance: A Report of the Department of Justice to the Task Group onA ntitrust Im m unities, January 1977, Pages 250-274; "Ch apter XII Th e Title Assurance and Conveyance Industries"of Re al Estate Closing Costs, RES PA , Section 14a, V olume II S ettlement Perform ance Evaluation prepared by Peat,Marwick, Mitchell and Co. for the Department of Housing and Urban Development, October 1980; State ofCalifornia Department of Insurance Bulletin 80-12, December 24, 1980, Subject: Insurance Code Section 12404 -Unlawful Rebates; Title Insurance Advisory Committee Final Report to the State Board of Insurance, September1986; Nelson Lipshutz, The Regulatory Economics of Title Insurance, Praeger Press, Westport, CT, 1994, page 5;Oh io Rev. Code 3953.26.


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Page 3 of 12Letter to Comm issioner David H. StevensSeptember 1, 2010Speed has been prioritized over safety. Short term profits and controlled market shares havebeen em ph asized over long term sustainability and the ove rall h ealth of th e title industry.In the same period that referral source infiltration has blossomed, claims have dramaticallyincreased. Likewise, historic standards of title abstracting have been degraded by the nationaltitle insurance underwriters in order to accommodate the hastened approach to real estateclosings preferred by these referral sources. Current-owner searches on purchase transactions,title insurance with out title searches and risky offshore title search plants have been em braced tothe equal detriment of homeowners and insureds. Not surprisingly, these changes have helpedincrease the claims-loss ratios of every single title insurance underwriter wh o permitted th em.

a. Controlled business arrangem ents and "one-stop" shops.The referral sources that oppose changes to the "required use" definition of section 8 of RESPAseek the ultimate transformation of the title insurance industry by promoting two relatedconcepts -- controlled business arrangements 3 (CBAs) or affiliated business arrangements(AfBAs) and "one-stop" shopping or bundled services. The idea is that title insurance and theother bundled services that accommodate the referral source's business are simply means to anend, rather than important independent services in their own right."One-stop" shopping is a concept closely aligned with C BAs and a term of art that describes theprocess that referral sources wish to employ upon the title insurance industry and othersettlement services. "One-stop" shopping is designed to bundle all real estate settlement services(i.e. mortgage lending, title insurance, appraisal, survey and real estate brokerage) under oneentity in order to provide purported cost savings to consumers and to hasten the process ofsettlement. Unfortunately for homeowners and borrowers, the supposed advantages of "one-stop" shopping are largely unknown and speculative.4 Meanwhile, the conflicts that are createdin the quest for expediency h elp to undermine th e traditional barriers to access that h ave kept titleinsurance h istorically separate from its incentivized partners.

b. The "One-Stop" Shop Convenience Myth.The results of "one-stop" shopping have had no demonstrated positive impact on Americanconsumers. This fact is even true to the proponents of the concept who refer to the benefits of"one stop" shops as being nothing more than "potential." 5 However, closing costs are not trulylower with "one-stop" shops compared to independent settlement providers and fastersettlements have not lowered title insurance claims or real estate-related litigation. 6 Recentstudies paid for by the referral sources who oppose a stronger "required use" definition haveconcluded that 70% or more of homeowners and borrowers are completely unaware of what a

3 24 CFR 3500.15(a).4 http://www.realtor.org/diversified re firms/20080501 one stop shopping5 http://banking.senate.gov/02 05h rg/052302/hanna.htm (visited August 2, 2010)6 http://caare.org/main/wp-content/uploads/2008/12/executivesummaryattorneysurvey122008.pdf


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Page 4 of 12Letter to Comm issioner David H. StevensSeptember 1, 2010"one stop" shop actually provides. 7 Further, the data suggests that only one respondent in five(22% ) preferred a settlement service provider that w as affiliated with th eir real estate firm.8Com plicating th e trustworth iness of th e surveys conducted by th ose in favor of "one stop" shopsis the fact that the studies have no statistical margin for error. 9 Consequently, their value is ofquestionable merit. Respondents to the cited studies were new home buyers and future homebuyers who were willing to participate in the study and were online visitors prompted by themembers of NAR to complete the survey. 1 0 The information gained from the study hasnumerous b uilt-in biases and control errors. To h ighlight these deficiencies, the survey questionsused by the pollster were apparently skewed to arrive at a result favorable to the use of "one-stop" sh ops, despite no empirically supported need to do so.For instance, respondents to the Harris Interactive Poll commissioned by the NationalAssociation of Realtors (NAR) in 2008 w ere asked th e following question:

"If you could purchase all or most of the necessary services or products forbuying a home from one company, in your opinion, how much easier would thatmake buying a h ome?"11

Clearly, the survey question presupposes that, in fact, "one stop" shops are easier for buyers touse. There is no data to support this presupposition. However, the "loaded" nature of the surveyquestion does not end th ere. The surve y the n lists the following required selections:"(1) A great deal amount easier; (2) A fair amount easier; (3) Somewhat easier;and, (4) N ot at all easier."

Three of the four required responses fed the desired narrative of the survey data (i.e., that "one-stop" shops are "easier" for consumers). Not surprisingly, 96% of respondents to this questionanswered it with one of the three presupposed positive responses. The biased nature of thequestioning did not end th ere.

"For each of the following items please indicate if you think one-stop shopping (gettingall services from one firm) is an advantage or disadvantage when purchasing all of thenecessary services or products for buying a hom e."12

The responses to this question were: (a) advantage; (b) neither; or (c) disadvantage. The sub-questions to apply th e above responses to were as follows:

Ittp://www.realtor.org/wps/wcm/connect/26edd6804a7ad6f3a68abf72b4e3ecdd/NAR+Survey+2008.pdf7MOD=AJPERES&CAC HEID=26edd6804a7ad6f3a68abf72b4e3ecdd ( visited July 30, 2010)8 http://www.realtor.org/diversified refirms/20080501 one stop shopping at p. 8 (visited August 30, 2010).9Id.at5.1 Id. at 5.1 1 1d. at 49.1 2 Id. at 55.


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Page 6 of 12Letter to Comm issioner David H. StevensSeptember 1, 2010c. The Law of Unintended Consequences: Revising "Required Use"

Without Revising the Fundamentals of CBAs Will Only ExacerbateProblems W ithin RESPA Section 8.It cannot be overstated. Referral source participation in the business of title insurance presentshomeowners and borrowers the ultimate consumers of the title insurance product with aninexorable conflict of interest between the settlement service providers who close the loan andtheir consumers. Thus, creating exceptions to the anti-kickback provisions of RESPA Section 8serve only to exacerbate the conflict. The only way to truly address the conflict is to eithermandate th at all CB As are illegal and against public policy a legislative step beyond th e powerof HUD , but certainly supported by OAITA or revise the CB A disclosure into a conflict waiverin such a w ay as to require informed co nsent of the conflict.Current CB A disclosures are ineffective to provide consumers with the ability to understand theconflict and knowingly waive it. Current CBA disclosures allow referral sources (i.e. banks,mortgage companies, real estate firms, homebuilders and developers) to merely disclose thefinancial interest without explaining how that financial interest contributes to the potentialconflict. In any other profession, this type of disclosure would not be enough. It is time for realestate settlement services, including title insurance, to join the ranks of professionals who eitherrefuse to entertain the conflict or who provide their customers with information concerning theconflict sufficient to provide informed consent.

II .he OAITA Settlement Preferences Survey:In the fall of 2009, OA ITA conducted the first ph ase of a statewide settlement preference surveyin which member-agencies provided a short, eight-question survey to homeowners andborrowers who closed residential real estate transactions involving federally-related mortgageloans. The results of the survey were a definitive counter to the suggestion that CBAs and "one-stop" shops are universally good for consumers. Here are som e of th e findings:

Only 11% of respondents were com fortable receiving title insurance from an agencyselected by a bank, real estate firm, mortgage company, etc., when they discoveredtha t the referral source possessed a financial interest in th e title insurance agency.

87% of respondents said it was important for their title agent to be a neutral thirdparty when determining what matters may affect their title. Only 5% of respondents prefer a title insurance agent that shares ownership with areal estate firm, mortgage compan y, attorney, h omebuilder and/or a bank. 55% of responde nts believe it is a conflict of interest for a real estate firm, m ortgage

company and/or a bank to receive a share of profits from selling title insurance orproviding escrow services.


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Page 7 of 12Letter to Comm issioner David H. StevensSeptember 1, 2010 54% of respondents believe it is a conflict of interest for a real estate firm, mortgage

company and/or a bank to provide incentives or other compensation to theiremp loyees for the ir referring th e real estate transaction to their preferred title agent ifth ey receive a financial benefit from th e referral.Th e survey is currently in a second ph ase of data collection with completion of the second p h asescheduled for Decem ber, 2010. There were nearly three h undred responses to the first phase andan equal amount projected to be received prior to the deadline. OAITA is unaware of any otherdata that is being collected by land title associations on the direct subject at issue in this ANPR.Thus, OAITA is likely the only title organization currently surveying the general public forresponses to the issues present in th e AN PR. Th e first phase of data paints a stark contrast to thedata compiled in th e NAR -funded studies of 2002 and 200 8. To the extent th at the data confirmsthat consumers see no benefit to "one-stop" shops, the OAITA survey and the NAR-sponsoredsurvey are alike.

III.he "Required Use" D efinition:The purpose of the ANPR is to "strengthen and clarify" the regulatory definition of "requireduse" in RESPA section 8. However, fixing the present definition is akin to repairing a leakyfaucet with a depressed finger. The fix does not provide a permanent cure to the problem andcan only be seen as a temporary solution. The real estate settlement industries dependent uponHUD for guidance, oversigh t and support require meaningful and consistent enforcement."Required use" is currently defined in RESPA to m ean:

"A situation in which a person must use a particular provider of a settlementservice in order to have access to som e distinct service or property, and the p ersonwill pay for the settlement service of the particular provider or will pay a chargeattributable, in whole or in part, to the settlement service." 15

On its face, th e "required use" definition suggests th at there are situations where a h ome owner orborrower is "forced" to use a particular service provider in order to receive some other benefit orservice connected with the service. For instance, a homeowner may be "required" to use abank's controlled title insurance company in order to receive a mortgage loan from thatinstitution or discounts offered in connection with that bank's loan thought to be a clearRESPA violation. HUD's AN PR, suggesting a preference to study the impacts as they pertain tohomebuilder discounts and forward commitments only, would apply equally to any referralsource-controlled title insurance agency since the same tactics are used by those parties to steerh omeow ners and borrowers to a referral source's controlled entities.Th e "required use" definition currently spelled out by RESPA continues:

"However, the offering of a package or (combination of settlement services) orthe offering of discounts or rebates to consumers for the purchase of multiple

1 5 Fed. Reg. 31336, Vol. 75, No. 106, Th ursday, June 3, 2010.


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Page 8 of 12Letter to Comm issioner David H. StevensSeptember 1, 2010settlement services does not constitute a required use. Any package or discountmust be optional to the purchaser. Th e discount must be a true discount below th eprices that are otherwise generally available, and must not be made up by highercosts elsewhere in th e settlement process."16

Th e current definition suggests th at discounts may be "offered" so long as th ey are: (1) optional;and (2) not "bait-and-switch" type discounts. The definition permits choice. In reality, referralsources provide th ese types of discounts in such a way th at the h omeowne rs and borrowers oftentimes feel "strong-armed" and lack adequate sophistication to compare the value of the discountversus the true cost of the service. In oth er words, discounts give consumers th e ch oice between"apples" and "oranges." The net result is more confusion, not less.The main reason for this confusion is the fact that title insurance and other independent realestate settlement services are often times marketed to homeowners and borrowers by personsother than the party providing the service. In essence, this is the failure of a reverse competitionsystem. It allows the party who receives the kickback the ability to market the product to theh omeow ner or borrower. Not only is the reverse com petition system irreparably confusing to th ehomeowner or borrower, it is also founded in conflict which makes the net result of therelationship problematic for the ultimate consumers who are never presented with the option towaive the conflict -- and those involved in the arrangement who must part with half of theirprofits in order to maintain the refe rral source's business.Th us, changing th e definition of "required use" without addressing the bargaining and m arketinginequities that exist in the construction of CBAs and the reverse competition system that hasch oked off the title insurance industry is not likely to change th e problem.

IV. The ANPR's Six Questions: Viewing a Problem Through a Pigeon-HoleIn the A NPR, HU D seeks answ ers and information to six specific question areas as follows:

1. Can tailoring "required use" to reach abusive incentive schemes, but notbeneficial discounts or packages work?2. Wh at about forward loan commitments?

3. Other issues on homebuilder "required use"?

4. W h at has be en th e state and local regulatory experience on "required use" issues?

5. How will the proposed rule impact "one-stop" shopping?

1 6 24 CFR 3500.2


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Page 9 of 12Letter to Comm issioner David H. StevensSeptember 1, 20106. What is the relationship between incentives to use an affiliated settlement serviceprovider versus disincentives or penalties to do the sam e?

OAITA h as previously stated that the focus of the A NPR is too narrow to address th e plethora ofproblems caused by CBAs, referral source infiltration into the title insurance industry and thegrowth of "one-stop" shops. In order to reexamine the big picture, it would be necessary toremove the pigeon-hole analysis that has been used and look at the entire settlement serviceindustry as a whole. To do so would be to embark on the sort of comprehensive analysis that isrequired to return the real estate settlement industry to the place it held prior to the subprimebuildup of th e late 1990's, the subsequent mortgage meltdown and th e Great Recession of 2008.The simplest way to achieve this goal is to permanently prohibit CBAs and recognize whatorganizations like the American Land Title Association believed thirty years ago when it saidthe following:

"[C]ontrolled business arrangements are as harmful as the payment of outrightkickbacks prohibited by Congress under Section 8 of RESPA. The AmericanLand Title Association clearly and unequivocally oppose[s] controlled businessarrangeme nts, and HUD sh ould issue regulations to eliminate the problem ."

The current scheme of regulation takes up the impossible task of permitting some kickbacksversus others and puts regulators in the difficult position of continually providing policyguidance as kickback schemes continuously evolve. Prohibiting CBAs outright eliminates thisproblem. If a settlement service provider is proh ibited from p roviding kickbacks in exchange forsettlement service business, any discount it provides would be tied to its product or service, notits referral source. Regulators could easily track payments made to referral sources the way thelaw was originally intended instead of h aving to differentiate between legal and illegal kickbacksin the endless search to find wh at is and is not proh ibited.OAITA's position on each of th e questions posed is as follows:

1. Can tailoring "required use" to reach abusive incentive schemes, but notbeneficial discounts or packages work?Simply put, the answer is no. Any discount provided to a consumer through a conflictedbusiness relationship always places the consumer in an inequitable bargaining position. Thus,the only real way to provide benefit to the consumer is to remove the conflict and allow choiceand competition to drive th e transaction. Again, this is the main problem w ith H UD's attempt torewrite "required use" and other RESPA-related provisions regarding CBAs. Once you startdifferentiating between legal and illegal kickbacks, there is no end to the variable and no truebenefit to the consumer.

2. Wh at about forward loan commitments?Forward loan commitments are often utilized by homebuilder-owned mortgage companies inorder to provide aggregate levels of home financing for homebuyers who purchase homes from


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Page 10 of 12Letter to Comm issioner David H, StevensSeptember 1, 2010these builders. In theory, forward loan commitments are a means to an end. They provideavailable financing in wh at h as been, at times, a narrow field.However, in practice, forward loan commitments are often used as the pretext to steerhomebuyers into the builders' closely held affiliates and are a prime example of the falsepanacea of one-stop shopping. Terms, rates and the true value of discounts provided as part ofthe loan commitments are often obscured from the consumer. In many cases, homebuildersmake the broad assertion that unless you use their mortgage affiliate through the commitment,you cannot close on the home. Giving forward loan commitments special treatment provides acarrot without proof of a real benefit.Through the process of the Great Recession of 2008, the idea of free-flowing credit has beenshown to have its limitations. Creating another preference for a closed-market system, such asthat present with forward loan commitments, would only promote the same errors that helpedmake too much credit available to too many consumers. Where the provider of the credit has astake in each phase of the settlement process, fraud and overreaching are always going to be anissue. Current disclosures do little to resolve th is issue.

3. Oth er issues on h omebuilder "required use"?Under subsection (f) of the ANPR, HUD asks whether there is data on the extent to which thecurrent affiliated business disclosure encourages consumers to comparison shop withnonaffiliated service providers before signing contracts and whether the disclosure can beimproved to inform consumers of the advantages and disadvantages of affiliated lendingpractices. This question is asked in such a way as to assume that the disclosure is first adequateand second that it can be improved. OAITA does not believe the CBA disclosure is adequateand that improvement can only be gained through revisiting the CBA question in total. Short ofth at, a disclosure sh ould be abandone d in favor of th e traditional waiver of conflicts of interest asapparent in the legal profession.The principles of loyalty and independent judgment are fundamental to the attorney-clientrelationship and mirror the conflict of interest issues present in the real estate settlement arena.HUD should adopt a process to inform consumers of conflicts of interest similar to that presentwith attorneys and their clients. Instead of merely disclosing CBAs, HUD should opt to requireCBAs to opt out of representing consumers if there is a substantial risk that the referral source'sability to consider, recommend or carry out an appropriate course of action for that consumerwill be materially limited by the referral source's , responsibilities to other consumers and thetransaction. HUD sh ould also create a conflict waiver that provides consumers with informationdetailing the known risks of using CBAs and allows each affected consumer to give informedconsent confirmed in writing to proceed with a p articular CB A.

4. W h at has be en th e state and local regulatory experience on "required use" issues?This question is posed directly to administrative and law enforcement officials. It has been theexperience of OAITA that state regulators and law enforcement officials lack clarity andknowledge of the conduct of real estate settlement procedures. Thus, whether on "required use"


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Page 11 of 12Letter to C ommissioner David H. StevensSeptember 1, 2010issues or other enforcement issues the GAO opinion that more needs to be done is likely theanswer.

5. How will the proposed rule impact "one-stop" shopping?Th is correspondence outlines OAITA' s direct response to this question within the ANPR. Th ereis no reliable data with th e exception of that prepared b y our organization on the subject of "one-stop" shops. To say that "one-stop" shops provide any benefit to consumers is to assumesomething that lacks proof. When consumers are informed about the risks of "one-stop" shopsand th e apparent conflicts of interest present in these business entities, the m ajority of consumershave indicated a preference to avoid them. Since current HUD disclosures merely disclose theCBA relationship and do not allow for informed consent to the potential harms of said businessentities, it is impossible to truly gauge whether consumers have been impacted by "one stop"sh ops. The p roposed rule change does noth ing to alter this analysis.

6. W h at is the relationship between incentives to use an affiliated settlement serviceprovider versus disincentives or penalties to do the sam e?In the ANPR, HUD seeks information concerning cases where an incentive to use a certainprovider would not have the same effect as a disincentive for failure to use another provider.Incentives to use an affiliated provider are no different than disincentives for failing to use anaffiliated provider. The question itself illustrates the confusing nature of trying to distinguishbetween legal and illegal kickbacks in the real estate settlement industry. Incentives to use anaffiliated settlement service provider without an opt-out or informed consent waiver merelysugarcoats the reality that most consumers are typically steered to their settlement provider bysomeone other than the provider themselves. To incentivize this conduct is to compound theconflict of interest. To patronize or sanction th is conduct is even worse.When a provider punishes a consumer for failing to use their affiliated partner, the providerpunishes the consumer for failing to participate in th e kickback sch eme. Incentives to participatein the same arrangement are no be tter. Again, a lack of informed consent concerning the conflictof interest that exists between providers in a CBA will not abate unless comprehensive changeoccurs with in the system.Subtle changes to the "required use" definition to single out homebuilder conduct to theexclusion of that conducted by banks, mortgage companies and real estate firms is too arbitraryto be meaningful. OAITA supports compreh ensive change.


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Page 12 of 12Letter to Comm issioner David H. StevensSeptember 1, 2010If you have any questions concerning our comments or suggestions and the underlying datasupporting them, please feel free to contact me. I look forward to working with HUD as itdevelops th is important step in helping to repair the real estate settleme nt industry.

Yours truly,

Douglas A. King, Esq.PresidentOh io Association of Independent Title Agentswww.oaita.org

DAIC/rbhCc: OAITA BoardOAITA Members

OAITA Public Response to HUD's ANPR on RESPA Section 8

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