Affiliated Business Arrangements - extended
explanation
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.
However, 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 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 AfBAs 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."
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 recently 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.
Below is a few of the articles that have recently been floating
around regarding the AfBA problem. For more articles look
under our Consumer News section
of the web site:
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