Title insurance and other title-related settlement services don’t cost more when they are provided by companies with ties to real estate brokers, lenders and builders, an industry-sponsored study maintains.
Congress and many state legislatures have passed laws regulating affiliated business arrangements because of fears that they may stifle competition at the expense of consumers, and serve as a conduit for illegal kickbacks and referral fees.
The study, bankrolled by an industry association, found that while affiliated businesses are taking a growing share of the market for title settlement services, they do not charge more than nonaffiliated businesses.
The results are being touted by the study’s sponsor, the Real Estate Service Providers Council, as an argument against any new state regulations that go beyond the federal Real Estate Settlement Procedures Act, or RESPA.
The study “blows the lid off any theory that affiliated businesses provide inadequate service or overcharge consumers,” said RESPRO chairman Brian Levy in a statement.
The study analyzed 2,236 property transactions in 2003 and 2005, in nine of the 19 states that have no binding restrictions on affiliated businesses: Alabama, Illinois, Maryland, Michigan, Minnesota, North Carolina, Ohio, South Carolina and Virginia.
Using a technique called multiple regression analysis to screen out other factors affecting price — such as competition within a specific county, or a particular company’s business practices — the study found that whether a company was affiliated or not had no statistically significant effect on costs.
“This means that the estimated difference in title premiums between affiliated and nonaffiliated providers is $0,” the study concluded. “The data, therefore, provide no empirical support for the notion that affiliated business arrangements increase title premiums paid by consumers.”
Affiliated businesses increased their share of the market for title-related settlement services to 26.3 percent by 2005, up from 22.3 percent in 2003.
Critics of affiliated business arrangements say that most consumers have little experience buying title insurance or other settlement services, and are unlikely to shop around for the best deal. Real estate agents and brokers, lenders and home builders are in a position to steer their clients to companies they have an interest in, where they will be charged more, critics say.
Under the provisions of RESPA, anyone making a referral to an affiliated business must disclose any financial interest they have in the company, not insist that their client use the affiliated business, and not receive any referral fees or benefits other than a return on their investment in the business.
The Department of Housing and Urban Development has also issued guidelines under RESPA intended to prevent the creation of “sham” affiliated businesses created solely for the purpose of funneling illegal kickbacks. The guidelines say affiliated businesses must be able to demonstrate they have their own employees, separate offices, phones and capital.
States have also passed laws targeting sham affiliated businesses — RESPRO says 19 states have “highly restrictive” laws and another 12 states have passed legislation with lesser restrictions. Many states have taken an approach that was considered and rejected by federal lawmakers — limiting the stake real estate-related companies can hold in affiliated businesses.
State-imposed caps limit real estate firms’ ownership to no more than 10 percent to 50 percent of an affiliated business, depending on the state.
After hearing objections from RESPRO, Ohio regulators recently pulled back from a proposal to reduce the state’s ownership cap from 50 percent to 10 percent.
The study said limits as low as 20 percent would “likely deter or prevent the formation of or continue operation of affiliated business arrangements. However, even a 50 percent limitation would be unnecessary if ABAs do not result in higher prices and are already regulated adequately under federal law.”
The RESPRO-commissioned study was one of three conducted in the last 15 years to claim that affiliated businesses do not charge more for title-related settlement services than their nonaffiliated competitors. A 1992 study of the title insurance industry in Minnesota by Anton Financial Economic Inc. found price quotes for affiliated businesses were somewhat lower, and that prices in a county in Kansas increased after restrictions
A 1995 study by Lexecon looked at 1,000 property transactions in seven states, concluding that the price of title-related settlement services was the same whether provided by affiliated or nonaffiliated firms.
The latest study, conducted by the Washington, D.C.-based economic consulting firm CapAnalysis Group LLC, claims to be the most comprehensive and sophisticated to date.
Economist Birny Birnbaum disagreed, calling the study “bad economics and bad analysis, bordering on absurd.”
Birnbaum, the author of a recent study that California regulators say demonstrates a lack of competition in the state’s title insurance and escrow industry, took issue with the report’s use of home prices and competition at the county level in its regressions. Using home prices as a predictor of settlement costs artificially raised the value of a number that’s used to judge the statistical validity of the study’s findings, he said. And the study presented no information to back up its assumption that some counties were more or less competitive than others, Birnbaum said.
“In general, it is clear that the authors had a conclusion in mind when they performed their analysis,” Birnbaum said, responding to an Inman News query via e-mail. “The report’s conclusions about the alleged benefits of affiliated business arrangements simply do not follow from their analysis and the analysis seems structured in a manner to produce their desired result.”
Birnbaum said an analogy in the report comparing affiliated business arrangements to a vertically integrated operation such as a coal-fired plant that owns a coal mine, “spectacularly wrong.”
“With vertical integration, the consumer still buys only the end product, not the products of the vertically integrated producers,” Birnbaum said. A better analogy, Birnbaum said, would be if an auto dealer bought an auto insurer and repair shop, and required consumers to purchase their car, car insurance and repairs from the dealer.
Birnbaum’s analysis of competition in California’s title insurance and escrow industry is available online from the California Department of Insurance.
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