I recently attended the inaugural meeting of the Ohio Association of Independent Title Agents ("OAITA") and the seminar on Affiliated Business Arrangements ("AfBA") that followed. The meeting was one of the most novel and informative gatherings I have been to.  A good portion of the time was spent laying the foundation for the association - reviewing the bylaws, discussing membership issues, making committee assignments, etc.  The remainder was devoted to the goals of the association.  Though there is more to his group than just taking on AfBAs, that was the focal point of the meeting.

What exactly does "taking on the AfBAs" mean?  It means going head-to-head with the department of insurance and the organizations that lobby for rules that allow AfBAs to flourish.  Theses guys are talking about taking on the National Association of Realtors ("NAR"), the Real Estate Services Providers Council ("RESPRO"), the Ohio Banker's Association, the National Association of Mortgage Brokers, and to some degree even our other land title associations and the "Big Five" underwriters.

This is an Ohio association.  However, it appears that the group already has interest from agents in other states and a national movement is afoot.  No matter what state you are in, you have probably seen the effects of AfBAs - you should be paying attention to the OAITA. 

So, what is wrong with AfBAs anyway?  Most of the opponents agree that there is an inherent conflict of interest.  For example, when a lender "owns" an interest in the title company that is issuing its loan policies, some would argue that pressure from the lender to get the transaction closed may influence underwriting practices. (Un-) Fortunately, I can give you a specific example from my own experiences.

The title company was in Texas and the property, of course, was in Ohio. Title was vested in Jane Doe, as to one-half interest, and her husband's estate, as to the other half. There was no probate case filed. All of this was perfectly indicated on our search. Yet, when we received the filing, Jane Doe had signed the mortgage and on her late husband's signature line they simply typed in "deceased."

I called the lender from whom we picked up the mortgage. I explained to them that their mortgage only covered a one-half interest. After a long period on hold, the manager told me that they didn't care because the title company was insuring the mortgage, and, if there was a loss it was their problem, not the lender's

This particular lender owned the title company in this case.  We refused to file the mortgage and we returned it to the title company.  However, they mailed it in to the county recorder and got it on record anyway.

When this happened, I remember specifically thinking that if I tried something like that, my underwriters would cancel me before the ink dried on the policy.  Yet, somehow this title company remained in business; of course, we never worked with them again. 

"Probate!?  That could take months - just issue a policy so we can close."

Some would argue, as one person did at the meeting this week, that ALL title agents want to close loans for their customers.  After all, we don't get paid if the deal doesn't close, right?  Well, that may be true, but most independent agents have lines that they won't cross.  I think there is substantially more pressure with AfBAs.  Independent agents have other clients and their license is more important than any one of them.  However, AfBAs, for the most part, don't have other clients... if the referring partner pulls out, the AfBA closes. 

The OAITA also discussed a new rule recently proposed by the Ohio Department of Insurance ("ODI"), 3901-7-06, Inducements to Title Insurance.  The stated purpose of the rule is "to identify inducements and compensation arrangements which violate section 3953.26 of the Ohio Revised Code," which prohibits payments to induce title insurance business. 

Of course, the problem with this rule is that it really only affects independent agents because AfBAs don't have to do any marketing... they have a "partner" that is going to send them business for a "percentage of the profits."  Attorney Rob Holman, who is quickly becoming one of my favorite bloggers, explained this rather well on the OAITA Blog.

As for the land title associations, I'm not optimistic that they would push the Ohio Department of Insurance for strict enforcement of anti-kickback rules, either. How do I know? Take the new proposed rule 3901-7-06 for example. Can the ODI or the land title association actually say with a straight face that this rule actually helps to manage the epidemic problem of kickbacks and referral schemes in Ohio? If so, I want my money back. No, really. I'm serious. I want it back.

First off, the only thing the new inducements rule does is target independent title insurance agents. Why? Because affiliated business arrangements don't have marketing departments. They don't function in a competitive environment. The only ones who will be affected by the new rule are independent title agents. Wake me up when they nab an AfBA who bought a PSL at Cleveland Browns Stadium for a realtor. I think my sleep is safe. It isn't going to happen. Why would it? AfBAs have already locked that realtor into a "do-nothing, make money for same" business plan. All with the support and confidence of the land title associations, underwriters and ODI.

The regulators are constantly making it more difficult for independent agents to compete, while carving out "nice" exceptions for AfBAs.  Of course, Ohio has rules that must be followed followed to make this "profit sharing" legal.  These rules are really only "factors" that may be considered to determine whether a controlled business arrangement is a sham, and they are very similar to HUD's guidelines.

(1) Does the new entity have sufficient initial capital and net worth, typical of the industry, to conduct the title insurance business for which it was created or is it undercapitalized to do the work it purports to provide?

(2) Is the new entity staffed with its own employees to perform the services it provides or does the new entity have “loaned” employees of one of the parents?

(3) Does the new entity manage its own business affairs or is the new entity being run by one of the parents?

(4) Does the new entity have a office for business which is separate from any of the parents? If the new entity is located at the same business address as one of the parents, does the new entity pay fair market value rent for the facilities actually furnished?

(5) Is the new entity providing substantial services, i.e., the essential functions of the real estate settlement service, for which it receives a fee?

(6) Does the new entity perform all of the substantial services itself or does it contract out part of the work? If so, how much work is contracted out?

(7) If the new entity contracts out some of its essential functions does it contract services from an independent third party or from a parent or affiliate of a parent? If the new entity contracts out work to a parent or to an affiliate of a parent, does the new entity provide any functions that are of value to the settlement process?

(8) If the new entity contracts out work to another party, is the party performing any contracted services receiving a payment for the services or facilities that bears a reasonable relationship to the value of the goods or services received?

(9) Is the new entity actively competing in the marketplace for business or does it provide services solely for one or more of the parents?

There are two major problems with these guidelines.  First, none of the rules are determinative; they are only factors to weigh which may indicate that a particular AfBA is more like a shame than not.  This is all rather subjective and would require substantial analysis on a case by case basis.  Second, who is going to enforce the rules?  There are several AfBAs in my part of the state and I don't think any of them could survive scrutiny under these factors.  But that doesn't mean anything if nobody takes the time to investigate.  Neither the ODI nor HUD are properly staffed to weed out all of the sham AfBAs. 

But you really have to wonder how the ODI comes up with this stuff.  You don't think they took it upon themselves to revise these rules, do you?  Of course not.  All of those organizations who are getting a "share of the profits" from the AfBAs are driving this train - with the help of the "Big Five" and the land title associations, of course.   

Again, I refer you to the OAITA Blog.

Sure, rules get made, but it isn't the ODI that is solely responsible for the recent garbage that has trickled from Columbus. Nope, you can thank our title leaders for that. In fact, I recently received an e-mail from my land title association saying they (and the national underwriters they so adeptly represent) were "actively involved with the ODI in helping to draft the new rule."
. . .

I am told that meetings are currently being held between the ODI and the land title association to come up with the changes to the inducements rule. It is also my understanding that the NAR and RESPRO provided comments and changes to the inducements rule. To which I respond, WONDERFUL!

Can someone tell me why it is appropriate for the ODI to entertain comments from Realtors and a carpetbag group of AfBA nut-jobs like RESPRO when trying to "allegedly" curtail the use of kickbacks and illegal referral schemes in the title industry. Since when does the Devil have RSVP privileges at the ODI? I mean, seriously. We need Realtors to solve our inducement problem? You are joking, ODI, right? We know you didn't take advice on inducements from Realtors and RESPRO, right?

The NAR is quite possibly the most powerful lobby-force in the universe. The NAR's Political Action Committee had total receipts of over $11 million dollars and they have given over $2.2 million to federal candidates in the 2008 election cycle.  What do you feed a 600 pound gorilla?  Anything he wants!  Seriously, if the NAR wanted free ice cream served at all real estate closings, we would all be out buying Good Humor trucks and investing what money we had left in Ben & Jerry's!

Add that to the other groups that could potentially benefit from these AfBA relationships (lenders, mortgage brokers, builders, etc.), and you can see what an impact it has on the industry. 

Where is our lobby?  I think most people have figured out by now that the "Big Five" pretty much run all of the land title associations.  The national underwriters don't exactly have the same interest in this issue as the independent agents.

Think about it this way.... an independent agent gets whatever profits are left after he pays his expenses and 20% of the premiums to his underwriter.  If that agent sets up an AfBA he only gets half of the profits, but the underwriter still gets its 20%. The underwriter isn't making any sacrifices.  The underwriter is actually in a better position when its agents create AfBAs.  The agent captures a larger market share by getting more of the affiliates' business, this means more total premiums for the underwriter.

The only reason an agent would consider an AfBA is to capture a larger portion of the affiliates' referrals - most of the time around here it is nearly all of the affiliates' business.  In return the agent pays nearly half of its profits to the "affiliated partner."  How is that really any different from "buying business?"

In my opinion, there is no practical difference between an AfBA "sharing profits" and an "illegal inducement."  Except, of course... the powerful lobby groups have convinced our regulators that the former should be exempt from those inconvenient laws that the rest of us must abide by.

Finally, the independent agents have united to form their own association that isn't controlled by the underwriters, or influenced by the NAR and other beneficiaries of AfBAs.  What is the OAITA doing for independent title agents?

We are actively involved in helping to shape policy regarding title insurance in Ohio. We are participating in private policy change by pursuing litigation to help reinforce existing Ohio law regarding title insurance. We are also participating in public policy change by contacting state and local representatives to gain their support for favorable initiatives relative to the independent title insurance movement in Ohio.

I guess you could call this the beginning of a revolution on behalf of independent title agents.  It may have started here in Ohio, but the idea seems to be spreading quickly. The OAITA has announced that they are preparing to mobilize a national effort.

Since OAITA went "live" we have received many comments from other title insurance agents and real estate professionals outside of Ohio. The comments have ranged from "bravo!" to "when can we start one in (insert state name here)." Seizing upon this opportunity, we have held informal discussions with representatives from several states who believe, like we do, that it is time for independent title agents and independent real estate professionals to create a national independent organization and begin taking the policy fight to each of our respective states. So far, we've heard from representatives from AK, MN, CO, IN, PA, NJ, MD & DC. We hope that more folks (with equal issues at stake) will join the group.

A national meeting is planned for October 6, 2008.  Keep an eye out for details; and, if you are an independent agent, you can email info@oaita.org or rholman@hfm-law.com for more information.

If the OAITA can pick up some momentum, they will surely meet strong resistance from the NAR, RESPRO, and the other organizations that have fought so hard to make AfBAs "legal." What will be really interesting, is to see what the land title associations will do; which side will they support?  When they are soliciting members, they claim to represent "title agents."  But when they are faced with an issue that divides their largest members and the independent agents, who will they choose to get behind?  For the first time, the land title associations may be forced to declare a definitive position on AfBAs.  I don't think they will be able to sit on the sidelines, or take a middle-of-the-road position this time - that would be as good as a slap in the face to the independent agents.

Next week, I'll post a follow-up to discuss some specific issues raised at the meeting.  The formational discussions of the OAITA bylaws were interesting, as well.  As a new association, I think there will be some growing pains.  The meeting reminded me very much of the inaugural NALTEA meeting in 2004 where there were some heated debates over who should be allowed to join.  But, in any association, these issues are secondary to achieving the primary goals and objectives of representing the interests of the membership. 

Robert A. Franco
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