Affiliated Business Arrangements – more insight
What is an AfBA? It is nothing but one of the biggest real estate consumer rip-offs of the century. For those of you who don’t know the lingo, an Affiliated Business Arrangement (AfBA) is an arrangement in which a person who is in a position to refer business in connection with a real estate transaction has an ownership or other beneficial interest in a provider of settlement services and such person refers or influences the selection of that provider. The culprit also goes by many other names: One Stop Shopping, Ancillary Services, Bundled Services and Core Enterprise Services are just a few. The terms all mean the same thing – steering real estate consumers into overpriced ancillary services for secret profits.
Let’s just call it what it is: A controlled business arrangement.
Take note, that by law the referring party must give an AfBA disclosure notice form to the consumer at or prior to the time of referral. The disclosure must describe the business arrangement that exists between the two providers and give the borrower an estimate of the second provider’s charges. However, no where does it say the split of revenue that is given to each party.
To further understand the basis of an AfBA is to have insight into the under-the-table games that are being played. There are several forms of affiliated business arrangements. One might work like this: a mortgage company, a builder or a real estate agent form a Limited Liability Company (LLC) partnership with a title company to somehow provide title and settlement services. On paper they appear to be an actual company. The partners, invest practically nothing and receive profits based on their individual shares. In reality, however, it might be little more than a “shell” company designed to funnel a steady stream of clients to their favorite title agency in return for a split of the profits.
What better way to lock-in business, destroy competition and raise prices without consequences,than to incentivize fiduciaries to manipulate their clients about choosing a title company?
Take for example, a recent investigation done by MONEY Magazine (March, 2006 “Snow Job”) concluded that the widespread existence of controlled business relationships in the Minneapolis/St. Paul metropolitan area was the main reason they now have the highest closing costs in the nation. Columbus is not far behind. We estimate that controlled business is involved in over 90% of all residential real estate transactions in Central Ohio.
This “steering” of business does not in any way create “market competition” or provide value which ultimately benefits both home buyers and sellers. These sham entities are set up as just another way to pay referral fees, incentives and “kick backs” to mortgage lenders, builders and real estate agents at the expense of the consumer and in some cases circumvention of the provisions of RESPA. This is just too much. If you don’t believe me, just take a peek at some of the RESPA Settlement Agreements that have been reached over the past few years to see just a glimpse of the problems with the affiliated business arrangement.
By Ohio law, lenders and real estate agents owe fiduciary obligations and duties to their clients. What then is a fiduciary? Let me define it in simple terms: A fiduciary is someone who acts in constraint of his own self interest to act at all times for the sole benefit and interests of another. It’s a responsibility. It’s a duty and privilege to serve another without secretly profiting from your position.
According to Douglas R. Miller of the Consumer Advocates in American Real Estate (CAARE):
“Because real estate fiduciaries have a great deal of control over the decisions made by their clients, giving fiduciaries control to steer clients into Affiliated Business Arrangements results in over-priced ancillary services.
Self-dealing is probably the worst breach of fiduciary duty. To exploit a client’s vulnerabilities or alter the advice given to a client in exchange for some thing of value is considered such an abominable thing that most states construe it as a crime. It is a form of fraud, theft, commercial bribery and a terrible violation of trust.
Instead of shopping and comparing these services on behalf of their clients and then using that information to advise their clients, fiduciaries are using manipulative methods to “capture” their clients’ business.”
Where is the fiduciary duty? This fiduciary infidelity is spun to the public by the best malarkey, marketing money can buy. For example, one such national organization is the Real Estate Services Providers Counsel (RESPRO) . The following is taken directly from their website:
“The Real Estate Services Providers Council (RESPRO®) is a national non-profit trade association that unites providers from across the home buying and financing industry towards one common goal: a business and regulatory environment that better enables all of our members to efficiently offer affiliated services through subsidiaries, joint ventures, and strategy partnerships.”
You think I’m kidding you, right? Consumers are subjected to these business arrangement for no other reason than the “legalized” kick back itself. The list of atrocities of overcharging, the padding of fees, the extra “Junk” fees, the bait-and-switch games, the removal of the “checks and balances” and more importantly the issues of “conflicts of interest” goes on and on.
However, if it sounds like we are anti-Realtor®, we are NOT. There are just as many real estate agents out there who deal with us and feel the same way that we do! They also believe that the current situation is wrong and needs to be fixed desperately. These things makes all of us in the real estate industry look bad and that is not right.
How can it save you money?
It can’t. It won’t. It wasn’t designed too! For over the last four decades (1967) the Ohio legislature prohibited affiliated business arrangements and joint ownership’s, related party’s and ventures of this kind, simply due to the responsibilities of a fiduciary and more importantly potential “conflicts of interests”, however, after many years of pressure from million dollar funded lobbyist groups (here, here and here), they finally caved in under pressure and changed the law in 03-02-1999 under the House Bill 214 that amended Ohio Revised Code section 3953.21 and 3953.26. This was truly a travesty. Now, this has opened up a whole new can of worms and only means bad news for the consumer, as you may read some of the other articles at the end of this page.
You may also ask, “Who is controlling all of this? The U.S. Department of Housing and Urban Development (HUD) and more specifically a federal statute Section 8(a) of the Real Estate Settlement Procedures Act (RESPA) are in charge of policing and enforcing these new convoluted affiliated business arrangements using laws that were written in 1974. RESPA provides an absolute prohibition against the payment of referral fees to obtain real estate settlement services business. It couldn’t be clearer.
Despite the fact that RESPA prohibits the payment of any money or any “thing of value” for the referral of business, it has become a very profitable enterprise for some to devise ways to bypass this prohibition.
The RESPA statute governs the real estate settlement process by mandating all parties fully inform borrowers about all closing costs, lender servicing and escrow account practices, business relationships between closing service providers and other parties to the transaction. The statute also covers mortgage loans on one-to-four family residential properties which include most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit. Minor revisions were again made in 1976, 1983 and 1992.
These shell (or sham) affiliated business arrangements are prohibited by HUD Statement of Policy 1996-2.
As an aside to this, since Ohio title insurance premium fees have recently increased substantially and are regulated by the Ohio Department of Insurance, a question could certainly be asked, “Is the consumer possibly being overcharged?”. Unlike the old days, when the profits of a title agency would be reinvested back into it’s employees, quality control, training, future growth, technology and expansion. Instead, profits are being squandered to partners that are merely there to get a check. This self-righteous behavior has been disguised with a sickening sanctimonious smile. These people have no idea the fiduciary infidelity that they are causing the consumer.
Someone please tell me how consumers stand a chance?
This was discussed in the report done for the General Accounting Office (GAO) – Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers:
“Certain factors raise questions about the extent of competition and the reasonableness of prices that consumers pay for title insurance,” said GAO. “Consumers find it difficult to comparison-shop for title insurance, because it is an unfamiliar and small part of a larger transaction that most consumers do not want to disrupt or delay for comparatively small potential savings.”
GAO also cited recent investigations by HUD and state insurance regulators that have identified instances of alleged illegal activities within the title industry that appeared to take advantage of consumers’ vulnerability by compensating Realtors®, builders and others for consumer referrals.
“Combined, these factors raise questions about whether consumers are overpaying for title insurance,” stated the GAO report.
The good, the bad, the ugly!
Given the astonishing number of controlled business relationships that currently exist between real estate companies, lenders and builders, many real estate professionals are profiting unfairly from the consumers’ lack of knowledge of how much their closing should really cost.
According to Douglas R. Miller of the Consumer Advocates in American Real Estate (CAARE):
“The title and real estate industry know that most consumers don’t actively comparison shop for a title company based upon price and service. In fact, the controlled business models acknowledge that their success is based upon the consumer’s ignorance and their reliance upon real estate professionals to make a recommendation to them.”
The long and the short of it. How can I as a consumer make sure that I don’t fall into this trap? Easy. Ask the people you deal with if they are operating under an affiliated business arrangement. If they are, they will make it sound like it is only a small ownership percentage and not a big deal, but it can amount to big dollars to them. Which is OK, but it’s your money! They will also say that they provide a “one-stop-shop” for convenience and to provide better value to the consumer. Read between the lines, this is hogwash.
This “talking” out the side of their mouths is a walking contradiction and it would appear that if these AfBA’s have all this extra money to share, why can’t the title insurance premium dollars and closing costs be lower for the consumer?
These same people are going to raise your closing costs by hundreds of dollars - and they have the audacity to hope you don't mind.
Even if we at Eagle were interested in setting up controlled business arrangements, we don’t charge enough to be successful at it! We would definitely have to raise our fees because in order to be successful with a controlled business arrangement, you must charge a lot to make it attractive for the “investors.” A lot more!
It is one thing to have legitimate business relationships versus those based on “conflicts of interests”. The bottom line is that your business does matter here. There’s far too much conflict of interest in allowing real estate agents, banks and brokers to act as agents for title insurance companies. It removes the “checks and balances” in the transaction.
Federal law guarantees you the consumer the right to choose your title insurance settlement provider. If you don’t wish to deal with Eagle Land Title, we will miss you, but that is fine. However, don’t let another party steamroller you into padding their pockets. As stated before, we have nothing to offer but excellent customer service, the greatest standards of professionalism, integrity, and a pledge to handle every transaction with the attention that you deserve! The bottom line is that we are different because we want to be.