AfBAs And MSAs Are Bad For Consumers
Written by: Tyler J. Turner, Executive Director of the Utah Association of Title Professionals
In a case of legislative railroading spurred on by national real estate brokerages, Utah lawmakers cast aside a longstanding consumer protection in passing 2019 Senate Bill 121. The sole purpose of SB 121 is to allow real estate brokers and home builders to own and receive hidden profits from local title companies to whom they will steer their captive clients.
These arrangements, referred to in the industry as Affiliated (Controlled) Business Arrangements (AfBAs), are legal in several other states – yet they are notorious for increasing consumers’ closing costs and creating unnecessary conflicts of interest. While SB 121 proponents used the buzzwords “free market competition” and “deregulation” to justify their positions, an honest analysis shows that SB 121 is simply a money grab by large national real estate brokerages and builders.
Utah title companies are employed in real estate transactions to serve as impartial referees or judges in the closing process. They provide important research and information to buyers, sellers and lenders; and make critical closing decisions based on that information. A person who is a party to the transaction should not be the owner of these vital and impartial safeguards, yet this is exactly what SB 121 allows. These important decisions should not be made by a broker who has a large sales commission riding on the deal closing or the builder who is the seller of the property. A title company is much like a real estate appraiser whose independent assessment of property is necessary so all parties to the transaction have the objective information needed to make well-informed decisions. Otherwise, the potential for fraud is greatly increased.
The concept behind escrow closings is that parties to a transaction are self-interested which can create a lack of trust between them. Therefore, a neutral title company is engaged as escrow agent to assure that all parties’ interests are fairly considered. A neutral title company is relied upon to provide transparency and integrity in the closing process. With the passage of SB 121, it will be difficult, if not impossible, for title companies to maintain impartiality and neutrality. If the title company in a transaction is owned and controlled by one of the parties, how can the title company be neutral and what is the point of the escrow?
Example 1 (Preferred scenario)
Buyer contracts to buy a newly-constructed home from Builder. Buyer deposits funds for the purchase with a neutral third-party title company, who holds funds in escrow. Title company releases funds to Builder only after construction is complete, title insurance is in place, and the deed transferring title to Buyer has been properly recorded with the county.
EXAMPLE 2 (AfBA scenario after passage of SB 121)
Buyer contracts to buy a home from Builder. Builder requires Buyer to deposit funds for the purchase with a Title Company that is owned and controlled by Builder. Builder makes a hidden profit from the escrow arrangement through his ownership interest in the Title company and yet the essential point of the escrow is absent: the Title company in this scenario is not a neutral third party. Does the Buyer understand this and is he/she really OK with it? If so, the Buyer might as well deliver funds directly to the Builder, avoid paying any title/escrow fees at all, and assume whatever risks may result from such an ill-advised approach.
To guard against AfBA conflicts of interest, in 1985 Utah outlawed AfBAs by enacting Utah’s Controlled Business in Title Insurance Law (“Utah’s CBTI Law”). Now, SB 121 repeals this law for no purpose other than to permit brokers and builders to own local title companies. SB 121 was railroaded through Utah’s Legislature in a way that precluded honest debate. A more methodical approach should have been employed considering SB 121’s impact on Utahns.
In Colorado, when a similar law change was considered, interested parties deliberated for over one year. Here in Utah, SB 121 promotors gave no advance-warning to the title, mortgage or legal industries prior to its introduction in the legislative session. They then pushed SB 121 through the process at an accelerated pace without allowing for alternative viewpoints to be seriously considered. To dissuade any legislative debate, SB 121 promoters misled legislators to believe SB 121 was a “consensus” bill supported by the title industry at the rate of 80 to 90% of practitioners. The truth is most, if not all, Utah title insurance practitioners are opposed to SB 121 and so are most mortgage professionals.
In attempt to make it appear as if their intentions were not self-serving, real estate brokers promoting SB 121 used a handful of flimsy arguments, all of which are either meritless or false.
SB 121 promotors claim that Utah’s CBTI Law should be repealed because it is out of date and because federal law — the Real Estate Settlement Procedures Act (RESPA) — is enough to protect consumers. The reality is Utah’s CBTI Law is a consumer protection law and is more relevant than ever. Congress enacted RESPA in 1974 and Utah’s CBTI Law was enacted in 1985 to give additional consumer protections that RESPA doesn’t provide. Nothing has changed since then. RESPA alone is still not enough to protect Utahns from being exploited by higher costs and hidden information.
SB 121 promotors claim that AfBAs offer consumers a more convenient and cost effective “one-stop-shopping” alternative. The reality is the idea of one-stop shopping is a myth and a meaningless phrase employed for decades by real estate lobbyists to mislead lawmakers throughout the nation. AfBAs offer no benefit to consumers and, notwithstanding the passage of SB 121, there will literally still be no such thing as one-stop shopping in the real estate settlement process in Utah because SB 121 itself and also other title insurance laws not repealed by SB 121 prohibit it.
SB 121 promotors claim that Utah’s CBTI Law restricts competition and should be repealed in the name of “business deregulation” and “free market competition” and to undue supposed title company “monopolies.” The reality is SB 121 allows for controlled title business. “Freedom” and “control” are diametrically opposed. AfBAs hide information and stifle competition. Additionally, SB 121 imposes significant new regulatory burdens on Utah businesses, not to mention the burden that our court system will surely endure to test the new law. Furthermore, the fact is there is no monopoly in Utah’s local title industry. There are over 200 Utah title companies. And, Utah’s CBTI Law did not prohibit brokers or builders from owning title companies so long as the prevailing reason for such ownership is not to derive financial benefits from referring their clients to those companies. However, real estate brokers/builders promoting SB 121 only want to own title companies if they are also permitted to steer their captive customers to that company.
The truth is AfBAs are anti-competitive alliances formed by builders/brokers and title companies. In states where AfBAs are allowed, they have proven to eliminate meaningful consumer choice and drive up closing costs. AfBAs are simply a mechanism for brokers and builders to receive hidden kickbacks from title companies for the referral of title business by allowing otherwise illegal kickbacks to be disguised as a profit share. An honest examination of the true nature of AfBAs reveals that not only do they offer no benefit, they are costly and harmful to consumers.