ALTA argued that controlled businesses would interfere with natural and positive forms of competition inherent in a fair and competitive marketplace that would tend to cause real estate professionals to choose the best title insurance providers:
[R]eliance on the advice of a knowledgeable real estate professional can have substantial positive benefits for the consumer, since these real estate professionals are far more knowledgeable than the consumer about the quality of services and the reasonableness of the prices offered by various providers of title insurance services in the community. Title insurance entities, in seeking the favorable recommendations of these knowledgeable professionals in a market in which competition has not been foreclosed, have an incentive to compete for those recommendations by bringing the merits of their services and prices to the attention of these professionals. But these consumer and competitive benefits will not be realized if the recommendation of the real estate professional is based on considerations that serve his personal financial interests rather than the consumer's interests.
ALTA argued that controlled businesses had replaced kickbacks as the preferred method of steering title insurance business in an anti-competitive manner for personal benefit:
In Section 8 of [RESPA], Congress has determined that kickbacks or referral fees paid by title insurance service providers for the referral of business should be proscribed because of their clear anti-consumer and anti-competitive consequences. Such payments were outlawed not only because they tend to inflate unnecessarily the cost of title insurance to the consumer and prejudice the kind of disinterested advice regarding a selection of a provider of title insurance services that the consumer deserves, but because of Congress' belief that it was deleterious to the healthy functioning of competition for title insurance providers to compete for business by offering kickbacks and referral fees to real estate professionals who are in a positions to recommend or refer business...
But the receipt of direct kickbacks and referral fees constitutes only one type of financial benefit that may prejudice the recommendations of a real estate professional. Since the enactment of RESPA in 1974-- perhaps in substantial measure because of the uncertainties that surround the scope of Section 8 of RESPA-- a wide variety of arrangements have developed whereby real estate brokers, mortgage lenders, builders, and attorneys have become title insurance agents or have established, acquired, or purchased stock in title insurance agencies to which they steer the title insurance business of their customers or clients. While such arrangements existed to a limited extent prior to the enactment of RESPA-- particularly in smaller communities where, of necessity, title insurance agencies may have been owned by or affiliated with local real estate brokers, lenders, or attorneys-- the proliferation of these arrangements in major market areas has taken place primarily since the mid-1970s.
ALTA implied that the motive to steer business for personal benefit was now far greater in a controlled business situation than it was when outright kickbacks were paid:
The financial benefits from such arrangements-- whether in the form of dividends from the controlled entity, or in the form of capital appreciation of the stock of a controlled entity that reflects retained profits-- in many cases far exceed the benefits that might be obtained from kickbacks and referral fees.
ALTA argued that the effects of controlled businesses were worse than kickbacks-- and more widespread as well:
In terms of the impact on consumers and the impact on other providers of title insurance services who do not offer such financial inducements but who seek to obtain business on the competitive merits of their products and services, these controlled business arrangements are the functional and economic equivalent of kickbacks... [B]ecause such controlled business arrangements have become more widespread than the payment of kickbacks ever was, controlled business arrangements will have a greater adverse impact on competition than kickbacks ever had.
ALTA laid out the various reasons why controlled business arrangements should be banned. These simple statements are still as true today as they were in 1981.
When real estate professionals have a financial interest in the selection of a provider of title insurance services, they invariably steer their clients or customers to that provider, irrespective of the competitive merits of the services and rates offered by other title insurance providers in that market.
Because a controlled title insurance agency does not have to compete in the marketplace for its business-- since it obtains its business by virtue of the ability of its owners to control the referrals of consumers-- such an agency is subject to little or no competitive pressure to maintain the quality of its services or the reasonableness of its charges.
Title insurance companies or title insurance agencies that have not provided stock or other financial interests to real estate professionals who are in a position to make referrals or recommendations of the consumer's business are placed at a serious competitive disadvantage-- a disadvantage that cannot be overcome by offering the public better service or lower prices. Indeed, the very survival of these companies may be threatened.
Permitting such professionals to have financial or ownership interests in providers of title insurance services to which they refer business inevitably channels competition in a direction whereby title insurance entities seek to offer such professionals ever-increasing financial benefits; while this form of competition may serve the interests of real estate professionals, it clearly does not serve the interests of consumers.
The existence of controlled business arrangements in a particular market acts as a major deterrent to the entry of new title insurance companies or title insurance agencies into that market, since such potential entrants realize that they cannot expect to obtain business on the basis of the merits of their products and services, and cannot obtain business at all unless they are willing to offer controllers of business greater financial benefits than they are currently receiving.
A title insurance agency composed of or owned by real estate professionals is subject to serious conflicts of interest between the interests of its owners (e.g. a real estate broker in seeing the transaction consummated so as to earn a real estate brokerage fee), the interest of the consumer in being informed of all potential title problems that might threaten the use or enjoyment of the property he is purchasing, and the interest of the title insurance underwriter in insuring against prudent title risks only.
In today's political environment, advocates seem to too often focus on the interests of the consumer, and the consumer only-- which ignores the fact that small business is a primary engine for creating prosperous consumers. Small but profitable independent title insurance businesses had provided a very good standard of living for many people. Controlled businesses were, and are, a grave threat to the healthy, competitive marketplace that made that possible. ALTA in 1981 was not afraid to speak for its members in front of Congress-- highlighting the detrimental effect of controlled businesses on the independent title insurance business that make up the bedrock of the title industry. ALTA did not falsely pretend that it was only advocating for the consumer, but honestly and forthrightly advocated for its member businesses-- telling Congress that controlled business arrangements were killing its independent members:
While the views expressed by the Department of Justice and Public Citizen reflect their concern over the impact of controlled business on consumers, I can assure you that the impact of such arrangements on independent title insurance service providers is even more immediate and adverse. I am certain that those members of the Subcommittee with experience in the business world can appreciate the sense of frustration and outrage of independent title agencies when they find that, after years of building a successful business, their competitive opportunities are threatened by companies who obtain business not by legitimate competitive means, but by offering stock or other financial inducements to those real estate professionals who are in a position to control the referral of the consumer's business.
It's no surprise, then, that ALTA advocated that controlled business arrangements be banned. But ALTA recognized that enforcement was a problem, and had a common sense solution-- instead of more RESPA cops, why not allow businesses that had been damaged by anti-competitive and illegal controlled business arrangements to directly sue for damages and to put a stop to the practices, rather than to have to appeal to regulators and hope that their complaints caught someone's notice?
...ALTA believes that further clarifying legislation is needed to prohibit the type of controlled business arrangements that have become so widespread in recent years... [S]uch clarifying legislation need not entail any major federal regulatory regime. If clear rules are adopted in such legislation, various means of enforcement could be provided, such as private rights of action by competitors (similar to private rights of action available under the antitrust laws), that would obviate the need for federal enforcement or further regulation in the area.
Enforcement is still very much an issue today-- while there are likely hundreds if not thousands of sham controlled business arrangements in operation that don't satisfy HUD's minimal standards for legitimacy, barely any Federal RESPA Section 8 enforcement actions have taken place in the past few years.
Finally, ALTA told Congress that outlawing controlled businesses was "essential" for the interests of both consumers and the title insurance marketplace.
In conclusion, Mr. Chairman, I would like to reiterate the position of the American Land Title Association on the controlled business issue in the clearest terms possible. Under our private enterprise system, consumers are best served when competitors are required to compete on the merits of their prices and services for the consumer's patronage and when all competitors have a fair and equal opportunity to compete for that patronage. Because of the strategic role played by the real estate professional in assisting the consumer in selecting a provider of title insurance services, it is essential, if a competitive market for title insurance services is to be preserved and the interests of consumers are to be served, for all providers to have a fair and equal opportunity to compete on the merits of their products and services for the favorable recommendation of these real estate professionals. This opportunity is effectively foreclosed when the real estate professional is permitted to receive a kickback or otherwise to benefit personally from his recommendation to the consumer, as he does when he has a financial or ownership interest in the provider of title insurance services to which he refers business. If such financial interests are permitted, fair and effective competition on the merits will be lost, and the ultimate loser will be the consumer.
Accordingly, I urge this Subcommittee to introduce and act favorably upon legislation that would clearly and comprehensively prohibit real estate professionals who are in a position to influence the consumer's selection of a provider of title insurance services from benefiting financially, whether in the form of a kickback, referral fee, commission, stock ownership, dividend, or otherwise, from that selection.
The obvious question is this: why is ALTA no longer advocating for something that was, in their own words, "essential" for the consumer and the title insurance marketplace?
Maybe something has changed, perhaps? Maybe they looked at the evidence and changed their minds? Maybe controlled business haven't damaged the industry as much as ALTA expected? Maybe the competitive environment wasn't hurt as much as they thought? Maybe the consumer's interest weren't damaged as much as they believed?
It's hard obviously to attribute particular changes in the title industry today to a particular cause, such as the emergence of controlled businesses. But let's look at the health of the industry today, and at how well the consumer is being served.
How about the wave of consolidation over the past few decades that has concentrated the vast majority of title insurance underwriting into the hands of only four companies. Is this a sign of health in the industry? Is it a sign of health when there is no significant new competition emerging, and there hasn't been for many years?
How about the dozens of title related businesses in which the owners have seen the need to resort to outright criminal activity in the past few years-- dipping into escrow accounts, failing to pay off mortgages and using the money for personal and business expenses. Many of these newly minted title felons appear to have tried to make a go of it legitimately before they went astray. Does that reflect a healthy business environment where an entrepreneur can make a good living through legitimate means in a competitive marketplace? Is it a good thing for the industry when people open up their papers and see that another crooked title agent is headed off to jail?
How about the fact that, despite significant technological advances that should have improved quality, efficiency, and reliability of title clearing, title claims rates are generally higher now than they were 30 years ago? Is the consumer served by this degraded performance of the title industry in performing its core function? Is the higher claims rate a sign of a healthy industry?
How about the power and influence of the industry? We had a recent indication of that during the fallout from the robo-signing scandal. ALTA made an attempt to protect the members of the title industry by requiring banks to indemnify title insurers from claims and legal expenses caused by their sloppy and fraudulent signing practices. But the banks, despite being in a very weak position from a PR standpoint, stiff-armed the title insurers, and they obediently caved. Is it a sign of a healthy industry when the title insurance industry asks for a simple concession from its clients-- a concession that was due to the clients' misbehavior, and by all accounts would have had little actual financial effect-- and cannot get it?
Speaking of that, how about the state of land title in general? When a person buys a house today, can they be more confident of the integrity of the title of their home than they were 30 years ago? Or should they be more concerned?
By all appearances, the adverse effects to consumers and title business that ALTA predicted have materialized. To be sure, controlled businesses are almost certainly not the only cause of these problems. But the fact is that the title industry as represented by ALTA is in a weak and withered form compared to what it once was. The title industry, thanks likely in part to controlled business, is now little more than an adjunct to lenders and other more powerful, better positioned forces in the real estate industry which now exert undue power over the title industry. To add insult to injury, the title industry has often had to pay these outside forces for the privilege of its loss of independence and power.
By failing to steadfastly stand up for its independent members when they were being run over by other interests, ALTA has failed to maintain its own independent voice. Instead, ALTA has chosen a path of appeasement towards referrers of title business, with disastrous consequences that go to the core of its own industry. The "go along to get along" attitude has for instance given us "innovations" such as MERS and "lien protection insurance" aka no search title insurance-- innovations that may benefit other industries, but certainly don't benefit the title industry, and have dubious benefit to consumers.
With all the problems in the housing market, and with all the scandal in recent months and years surrounding housing, it seems to me that some of the conflicts of interest that exist in the title industry but which aren't mentioned so much by the industry's leading professional association are ripe to be revisited.