In This Issue
FROM THE EDITOR-IN-CHIEF Gerald K. Carlisle, Esq.
Issue
WHY CHOOSE AN INDEPENDENT TITLE AGENT? By Robert B. Holman, Esq.
04
WHY TAKE THE RISK? By J. Michael Brainard
IN MY OPINION By Peter A. Sackett, Esq.
September, 2010
FROM THE EDITOR‐IN‐CHIEF Welcome to our newsletter. We
hope you find it informative.
The articles appearing to the
right speak to problems arising
from ABA title / closing agents.
These customers and colleagues
tell the dire story better then I
can.
We have experienced thousands
of horror stories regarding ABA
title / closing agents and have
lost significant business to the
ABA’s – some of it, our own
choosing. Some parties refuse
to permit full disclosure.
Some was lost where an ABA
agent kicked back shareholder
dividends – often half the
premium to a broker or builder
affiliate. They stuck the buyer
and/or lender with title and/or
closing problems AND later
denied liability on claims.
HUD and many State Attorney
Generals have closed down
thousands of these ABA’s, but
not in Ohio. There are hundreds
doing their dirty work in both
residential and commercial.
For your protection, deal solely
with a title / closing agent
displaying membership in the
OAITA.
Gerald K. Carlisle
Independent Minds need Independent Agents
WHY CHOOSE AN INDEPENDENT TITLE AGENT?
By Robert B. Holman, Esq. Founder of Ohio Association of Independent Title Agents Secretary of National Association of Independent Land Title Agents When a politician receives money or a special gift for favoring one constituent over another, that politician, by accepting the money or gift in exchange for the favor, commits a crime. There is little sympathy for this situation. Bribes and kickbacks are the unfortunate understory to our political establishment. Nevertheless, bribes and kickbacks are still illegal. See INDEPENDENT Page 3 IN MY OPINION
WHY TAKE THE RISK?
By Mike Brainard Market Executive Champaign Bank Although the recent boom feels like a distant memory to many of us in the business of providing financing for the real estate industry, there are many lessons to be learned in the aftermath. Over the course of the industry’s expansion, it became common for real estate agents, lenders, title companies, and others involved in the process to form affiliated business arrangements (ABA) in order to share in the profits from each step in the purchasing and lending cycle. The See RISK Page 2 By Peter A. Sackett Attorney at Law In a perfect world the integration of business relationships is beneficial to the parties at hand as well as those wishing to engage the players. In an imperfect world, the players engage in a series of manipulated and over‐managed transactions to complete the assigned project. We live in a world where perfection is the common goal. However, we operate in a world of manipulated imperfection. See OPINION Page 2 [email protected] Page |1
Ohio Title Corp | 7085 Pearl Road | Middleburg Heights, Ohio 44130‐4940 | P (440) 886‐6141 | F (440) 886‐7160 28601 Chagrin Blvd., Suite 200 | Woodmere Village, Ohio 44122‐4531 | P (216) 360‐9099 | F (216) 360‐0530 OPINION
From Page 1 For those who play an active role in the business of title clearance, property valuation, and the effectuation of the day‐to‐day business of real estate transfer, we must all aim for the strongly preferred concept of non‐aligned partnerships. We must strive to perform our tasks while maintaining close, but non‐
integrated parallel, but not de‐
centralized, dealings with all the players in the managed process of real estate closings. Thus, my years of experience representing the buyers and sellers of real estate has led me to conclude that formal business affiliations and/or relationships hamper the relevant process to the detriment of my clients. I insist on providing my clients with an open window of observation and access – therefore, each and every party to the process must operate independently. Ohio Title, my business partners throughout my years of practicing law (starting in 1981), remain the epicenter of integrity. I urge all of you to WAKE UP to the challenges presented by the recent integration of the closing process. We cannot ignore the in‐house appraisal services or the lending ‘arms’ of the real estate behemoths. Don’t sit idly and affirm your intentions to let the holding companies handle the title work on a transaction entered in to by the listing subsidiary of the same company. Inquiry is the bedrock of title work – the line‐by‐line examination of the seller’s ability to sell. Financing the loan for the purchaser must be based upon an independent evaluation of means and ends. Anything short and you have let someone down for the benefit of the deal. The click of the time machine at the recorder’s office is always a time of celebration. The exhilaration can be hazardous if the process was poisoned by errors in judgment. The first priority must be the enhancement of the escrow process to a level of certainty – where all the players know that when the purchasers leaves to pick up the keys, she has a worthwhile Warranty Deed in her hands. Anything else is a cop‐out and a fraud upon the system.
For all these reasons, I urge you to maintain your position and campaign for the continued independence of the parties joined together by a contract for the sale of real estate. Integrity is easy to maintain in the world of professional alliances in the escrow business. Inappropriate business relationships provide opportunities to act contrary to the best interests of those whom we are paid to serve. Thus, the concept of integrity is subject to question. For we must never forget that our customers and clients come first. Contact Peter A. Sackett, Esq. (216) 781‐7095 [email protected] www.PeterSackettLaw.com RISK
From page 1 thriving market provided the opportunity for many of these ABA’s to profit. A number did so by forging unholy alliances between lenders, appraisers, and title companies who ignored their role as disinterested third parties. Based on recent investigations and industry reporting, it is estimated that as much as 80 percent of all reported mortgage fraud losses involve collaboration or collusion by third‐
party service providers. While most of these ABA’s operate on the proper side of the law, it is nearly impossible for the average consumer to know the difference between the good and the bad. From my perspective as the lender, why take the risk? As a commercial real estate lender, many of the deals I get involved with can become very complex. The increased complexity places an increased importance on the quality of the services provided by third‐parties. The independence Continued on page 3 Page |2
Ohio Title Corp | 7085 Pearl Road | Middleburg Heights, Ohio 44130‐4940 | P (440) 886‐6141 | F (440) 886‐7160 28601 Chagrin Blvd., Suite 200 | Woodmere Village, Ohio 44122‐4531 | P (216) 360‐9099 | F (216) 360‐0530 INDEPENDENT
RISK continued from page 2 of each provider protects my clients, the institution I represent, and me personally. By working with unaffiliated providers, I insulate myself and my clients from any claims of inappropriate relationships. It creates a true arms‐
length transaction that limits the ability of anyone attempting to promote their self‐interest ahead of the best interests of the client. To make an informed underwriting decision, I rely on an appraiser to provide a true analysis of the subject property. Equally important, I rely on a title company to report on the sellers’ ability to deliver the property to the buyer. Often, I also rely on outside counsel to protect my clients interest and my own by properly documenting the transaction. Working with a provider who has misaligned priorities is potentially devastating. A breakdown by any link in the chain could have consequences that cost my employer or my client millions of dollars. This leads me again to ask – why take the risk? Contact Mike Brainard (330) 576‐1064 [email protected] From page 1 Considering the above scenario, it is not surprising to know that bribes and kickbacks are illegal and unethical in nearly every other professional industry, as well. Lawyers and judges may not accept nor provide kickbacks in their employment. Doctors are not different. If a doctor were to prefer a particular course of treatment for a patient on the sole basis of the fact that he was being paid by a drug company to do so, all of us would be shocked at the outrageous nature of that conduct. After all, impairing the independent judgment of our professionals, whether as politicians, doctors or lawyers, is considered to be unethical and, in most cases, illegal. As a society, we want our professionals to be free from improper influences that may contribute to conflicts of interest. We establish licensing standards and ethical rules to highlight the barriers between proper and improper conduct. Those standards and rules are there for a reason ‐‐ to prevent conflicts of interest and to preserve the impartiality of the professional’s judgment. Title insurance agents are professionals, too. They are required to become licensed in order to issue title insurance policies and have various ethical codes that profess impartiality, but often times deliver something much less desirable. The failure to provide enforceable ethical standards to the title insurance industry is a subject for another article. The current construction of hodge‐podge ethical standards within the title insurance industry and the fact that there is no real force behind those standards makes the terms “ethical title agent” an unfortunate oxymoron. For the purpose of this discussion, suffice it to say that title insurance agents and the title insurance industry overall, have woefully failed in their pursuit of the ethical “high ground.” Why is that? Well, quite simply, you cannot commit to real impartiality unless you effectively remove or otherwise control the source of your conflict. Unfortunately for the title insurance industry, the source of our conflict is the same source that pays the bills. Thus, the industry has been faced with what it perceives to be its eternal conundrum: clean up the business and reduce your revenues OR leave the business to its own devices and reduce your profits. Rather than draw the line at reducing the conflict, the title insurance industry has drawn the line at reducing impartiality for the sake of business. The choice to reduce impartiality has come at an extreme cost to the industry and to consumers alike. Lacking impartiality, more real estate transactions close with title defects than ever before. With more conflict, there has been more real estate related litigation, not less. With the growth of referral source participation in the title insurance industry, there have been more claims, not less. The underlying purposes of title insurance have begun to disappear from the landscape as the industry searches for its identity. Where did we go wrong? Well, I can think of two places. First, title agents failed to recognize the importance of their ability to control the real estate transaction through the value of title insurance. Banks need us in order to Continued on page 4 Page |3
Ohio Title Corp | 7085 Pearl Road | Middleburg Heights, Ohio 44130‐4940 | P (440) 886‐6141 | F (440) 886‐7160 28601 Chagrin Blvd., Suite 200 | Woodmere Village, Ohio 44122‐4531 | P (216) 360‐9099 | F (216) 360‐0530 INDEPENDENT
continued From page 3 function. Real estate firms rely upon our expertise to dictate the ground rules for closing a real estate transaction. Mortgage companies rely upon our ability to insure higher risk loans on account of our underwriting savvy. Title agents are necessary cogs in the wheel. Remove the impartiality element from these business relationships and there is no longer an impediment to these referral sources doing the work for themselves ‐‐ with disastrous consequences for all. Second, the title insurance industry became the province of the weak and the ill‐informed. There are too many referral sources in our industry that see title insurance as a means to an end. Those folks want to make a profit quickly and pass the risk to someone other than themselves. The lesson is eerily similar to the causes of the Great Recession of 2008. Referral sources and short‐term profiteers now control much of the title insurance industry from top to bottom. Compounding matters is the fact that there is little variation at the top of the title insurance food chain that would impede referral source participation in our business. The title insurance industry is dominated by four publicly traded national underwriters who control over 90% of the national market share for title insurance business. The same four publicly‐held national underwriters control nearly all of the leadership positions within the land title associations and title advocacy groups, thereby positioning themselves to have direct access to public policymakers at the local, state and national levels. The agenda that is pushed across the country is underwriter‐centered, not agent‐
centered. The underwriters have direct operations, referral source partnerships and interested shareholders to protect. Remaining impartial to the title insurance process is no longer central to their agenda. Creating sustainable control through market domination is. There once was a real opportunity to preserve the future of the title insurance industry, but much has been lost in the last thirty years to greed, undue influence and consolidation in the title insurance industry. That “trifecta” has quite simply overwhelmed title agents of all stripes. There is no greater example of the conflict of interest problem that plagues the title insurance industry other than controlled business arrangements (CBAs) or affiliated business arrangements (AfBAs). Controlled business arrangements are entities that consist of ownership by banks, mortgage companies, real estate firms, homebuilders and developers in the business of title insurance. In 1980, the American Land Title Association® published the following quote: “[C]ontrolled business arrangements are as harmful as the payment of outright kickbacks prohibited by Congress under Section 8 of RESPA. The American Land Title Association® clearly and unequivocally oppose[s] controlled business arrangements, and HUD should issue regulations to eliminate the problem.” Referral sources are permitted under RESPA to own financial interests in real estate settlement service providers, such as title insurance agencies, without the requirement of becoming licensed to do so. In other words, while these referral sources cannot be licensed as banks or real estate companies to issue title insurance, they can own a financial interest in the title insurance agency and receive monthly stock dividends ‐‐ derived from the title insurance commissions ‐‐ as though they are “passive” investors in these entities. The purported “passive” nature of these investments is just that ‐‐ purported. Referral sources that participate in CBAs ostensibly control every element of the settlement service provider through which they share ownership. Every detail is designed to maximize profit for the participating referral source and to reduce the title agent’s ability to control the work. Thus, the biggest casualty of the CBA is impartiality. Moreover, the legal landscape which analyzes whether stock dividends are not impermissible “things of value” under RESPA is changing. A recent Ohio federal court held that stock dividends may be impermissible “things of value” under federal law. The Ohio Association of Independent Title Agents (OAITA) has also filed a declaratory judgment action against the Ohio Department of Insurance (ODI) to invalidate what it perceives as improperly promulgated rules which permit CBAs in contravention of Ohio statutes that suggest the opposite. Another Ohio federal court recently held that HUD’s 1996‐2 Policy Statement concerning sham CBAs is unconstitutionally vague thereby challenging the very premise of the ODI’s position on CBAs. Continued on page 5 Page |4
Ohio Title Corp | 7085 Pearl Road | Middleburg Heights, Ohio 44130‐4940 | P (440) 886‐6141 | F (440) 886‐7160 28601 Chagrin Blvd., Suite 200 | Woodmere Village, Ohio 44122‐4531 | P (216) 360‐9099 | F (216) 360‐0530 INDEPENDENT
continued from page 4 Simply put, change is in the offing on these issues which, in turn, begs the question asked in the title to this piece. Why should you choose an independent title agent or why should you remain one? No matter what criticism is lodged on behalf of whatever organization, corporation or person within the real estate settlement community, none of the problems expressed herein are irreversible. In Ohio, the CBA question may be answered with the legal pen. Nationally, it might take more than that. Nevertheless, it starts with the simple notion that you cannot be impartial to the title insurance process if you are controlled by a referral source. Thus, when a title insurance agent ‐‐ whose primary source of revenue is derived from title insurance commissions ‐‐ splits a stock dividend with a referral source partner, they lose the impartiality commonly found in our business. Call it “passive ownership” or “silent investment” or whatever fancy term you wish, the fact remains that CBAs create an appearance of impropriety. In a world where perception is reality and professionals are thought to exercise professional discretion and judgment, there is no other way around the problem. You either accept the responsibilities of your profession or you place yourself at its judgment. When you give someone money in return for them sending you their business, you are inexorably conflicted ‐‐ whether you do a good job at it or not. According to the National Association of Independent Land Title Agents® (NAILTA), an independent title agent is defined as follows: “Any individual or entity authorized and licensed to issue title insurance policies and/or to conduct real estate closings and is not controlled by, whether directly or indirectly, a title insurance company/underwriter, bank, mortgage company, mortgage broker, real estate firm (including agents and brokers), builders, developers, appraisers, surveyors, any subsidiaries thereof, or by any other referral source and/or does not share, split, give or receive stock dividends and/or distributions of profits with a title insurance company/underwriter, bank, mortgage company, mortgage broker, real estate firm (including agents and brokers), builders, developers, appraisers, surveyors, any subsidiaries thereof , or by any other referral source.”
By definition, an independent title agent is one who is free from the referral source conflict of interest. In essence, they are impartial. As a professional, this is fundamental. In the absence of an administrative body to enforce ethical violations of the industry or to enforce rules against the impermissible practice of illegal business conduct, there is only you and your own ethos. If being impartial matters in this under‐regulated environment, it must start with every individual title insurance agent on their own. Why remain independent? This is simple and unfortunately a stark reality. The further away from impartiality a title agent gets, the less likely it is that title insurance agents will remain separate from their referral source masters. In truth, the conflict question does not end at the settlement table. It threatens to permeate throughout the industry at every level. Thus, it is important that title insurance agents remember that what they sell is important to not only the consumer, but also to the referral source. Without you, they would have the unfortunate condition of having to do it themselves. Considering the liability, this is not an attractive option. Be proud of your independence and be protective of your product. With no one else on the wall watching out for us, it comes down to you and each one of your referral sources you keep at arms length. For more information about the independent title agent or associations solely designed to help independent title agents and agencies, please contact me at (800) 344‐7445 or [email protected]. To read more about NAILTA, visit our website at www.nailta.org. To read more about OAITA, visit our website at www.oaita.org. The views and opinions expressed in the articles contained in this
newsletter are those of the author alone. They do not necessarily
represent Ohio Title Corp.’s views or opinions or the views and
opinions of Ohio Title Corp.’s owners, associates, or staff.
Page |5
Ohio Title Corp | 7085 Pearl Road | Middleburg Heights, Ohio 44130‐4940 | P (440) 886‐6141 | F (440) 886‐7160 28601 Chagrin Blvd., Suite 200 | Woodmere Village, Ohio 44122‐4531 | P (216) 360‐9099 | F (216) 360‐0530