ALERT: UTAH STATE SENATE BILL 121 WILL ALLOW AfBAs in UTAH

Utah’s Controlled Business in Title Insurance Law (Utah’s CBTI Law) is a 35-year-old law that has protected Utah consumers by safeguarding the ability of title insurance agencies to operate as independent, impartial fiduciaries in the real estate settlement process. Utah’s CBTI Law works together with other laws to create protective separations between title insurance agencies, mortgage lenders, builders, and real estate brokerages, for the purpose of avoiding unnecessary conflicts of interest. Presently, national real estate brokerages are promoting in Utah's Legislature Senate Bill 121 (SB 121) which seeks to change Utah’s CBTI Law to allow real estate brokers and builders to own and control the title insurance agencies where they will direct (steer) their customers to close real estate transactions. SB 121 will reintroduce Affiliated Business Arrangements (AfBAs) (also known as Controlled Title Business) into the Utah real estate market. In the mid-1980s the Utah legislature purposely outlawed AfBAs by enacting Utah’s CBTI Law to protect against consumer abuses, and now proponents of SB 121 seek to dismantle this important consumer protection law. In other states where AfBAs are allowed, they have proven to be a threat to consumer welfare by eliminating meaningful consumer choice and driving up closing costs. The real estate brokerages and builders who profit from AfBAs do so at the expense of the consumer by getting paid what would otherwise be considered illegal kick-backs or inducements for the referral of title business. SB 121 will legalize such kick-backs, allow for monopoly in the real estate settlement process, and create strong financial incentives for real estate service providers to exploit, manipulate, and abuse their captive customers, often without the customers even realizing this is happening. A careful and critical examination of the true nature and history of AfBAs gives ample evidence that not only do they offer no benefit, they are costly and harmful to consumers of real estate settlement services.

Proponents of SB 121 would have you believe that the proposed legislation represents an agreed upon compromise between the real estate and title insurance industries. This is NOT TRUE. Any "compromise" bill can only result in this: COMPROMISED CONSUMER PROTECTION.

The Utah Association of Title Professionals is a non-profit organization whose members consist of licensed Utah title insurance professionals. We are experts in the real estate settlement process and are committed to maintaining the highest professional standards in this industry, including the protection of the impartial role of the settlement agent, and the protection of the public consumer of real estate settlement services in Utah.

Title Insurance Agencies in Utah play a vital role in the real estate settlement process. Title Insurance Agencies issue policies of title insurance to real estate buyers and real estate lenders. Title Insurance Agencies also serve the crucial role of escrow agent/settlement agent in almost all real estate transactions. As settlement agents they receive and hold funds and documents in trust (in escrow) and exchange these funds and documents among the parties to the transaction when all closing conditions are completed. In this role they are a fiduciary to all parties to the transaction, and act as a trusted neutral third party. This is a role that should never be compromised or dismissed as unimportant or unnecessary. In keeping with our commitment to high professional and principled standards, WE ARE OPPOSED TO SENTATE BILL 121 as introduced in Utah's 2019 legislative session.

The following discussion is representative of various points in opposition to SB121 and/or the alteration, reformation, or replacement of Utah's CBTI Law:

The Truth about SB121, UCA 31A-23a-503 (CBTI), and CONSUMER PROTECTION:

SB 121 seeks to replace Utah Code Section 31A-23a-503 – Utah's Controlled Business in Title Insurance Law ("Utah's CBTI Law"). Utah's CBTI Law was enacted in the mid-1980s to curb abuses in Utah's real estate industry resulting from title insurance agencies that were controlled and owned by home builders or real estate brokerages. The CBTI law resolves conflicts of interest that threaten basic consumer protections by placing limits on the ownership of title insurance agencies by real estate brokers and home builders in situations where the primary purpose of the ownership is to reap profits from controlling and directing business to their own title insurance agencies. To protect consumers, the majority of states in the nation have rules, laws, or other restrictions similar to Utah's CBTI law that limit or prohibit real estate brokers and home builders from controlling title agencies. Some states do allow home builders and real estate brokers to own and control title agencies, but that does not mean it is a good thing for consumers in other states or in Utah. This site includes links to examples of the detrimental effects of controlled business and AfBAs.

Utah's CBTI Law is not well understood and is being misrepresented as ‘anti-consumer' and ‘anti-competition'. Nothing could be further from the truth. The current law is first and foremost a consumer protection law. The free-market argument is being turned on its head and legislators are being misdirected and led to believe a deceptive spin.

In 1974, Congress enacted the Real Estate Settlement Practices Act (RESPA) to protect consumers from having to pay the above-market-rate settlement costs resulting from kick-backs paid among settlement service providers. In 1985, Utah enacted the CBTI law that SB121 seeks to discard because RESPA simply was not enough to prevent consumer abuses. Nothing has changed since 1985 – RESPA is still not enough. The repeal of Utah's CBTI Law would undermine an integral component of Utah's broader statutory and regulatory scheme; a legal framework that the real estate settlement industry in Utah has successfully operated under for 35 years.SB 121 will allow real estate brokerages and home builders to impose ownership demands on title insurance agencies in exchange for ‘referred business.' Instead of an illegal kick-back, the inducement money paid to real estate brokerages and home builders for the referral of business will be disguised as a profit share. But "profit share" is only a euphemism. The exploitative nature of the payment and relationship is the same in what essentially amounts to a form of legalized bribery that will compromise the title agency's financial viability and ability to perform its necessary functions as an impartial fiduciary. As a result, the consumer protection provided by such a fiduciary role is undermined.

Proponents of SB 121 claim that Utah's CBTI Law is protectionist and does not allow for free market competition. They claim that good business owners who happen to be real estate brokers or home builders should also be allowed to own title agencies in Utah. This is a red herring. Utah's CBTI Law does not prohibit real estate brokers and home builders from owning title agencies in Utah, so long as the prevailing reason for their ownership is not to derive financial benefit from transactions that they control and refer to their own title agency. Utah's CBTI Law just seeks to regulate the inherent conflicts of interest and potential for abuse that exists in a situation where a title company and builder or real estate broker are all owned by the same person or persons. But, if a real estate broker wants to simply invest in or own a title company in Utah, that person is free to do so under Utah's CBTI Law. However, that is not what those promoting S.B 121 appear to be seeking. Ostensibly, they are only interested in owning a title agency if they are also legally able to constructively force their captive customers to close there. They are not interested in engaging in the title insurance business on a level playing field or contributing anything to it. They are only interested in the title business if they can control and pull profits from the business. They will simply steer their buyers to the title agency that they own and control, and as a result their customers will not have an escrow settlement agent acting impartially for the benefit of the customer.

SB 121 was brought to the table in a truncated and secretive way with no lead time to the industry most affected by the bill. Those in the title insurance industry and the mortgage industry had no idea that this was in the works until the 2019 session had already started. The proponents of the bill are a high-powered real estate lobby whose arguments are comprised of anecdotal conjecture about some public benefit that simply does not exist, rather than real data. In reality, SB 121 is a money grab by the already rich and powerful looking to become more rich and powerful. Those persons are the only beneficiaries of SB 121. No one else.

The CBTI statute is not an isolated provision able to be extinguished without upsetting and obfuscating a larger statutory structure and objective. Here is a sample of laws whose purposes would be frustrated, contradicted, or rendered ineffectual by the repeal of the prohibition on CBTI:

• UCA §§ 61-2c,2f; 58-55; 31A-23a-204; 31A-2-4: Independent licensing requirements for Real Estate Broker/Agents; Loan Brokers/Officers; Builders/Contractors; Title Agents and Agencies, Title licensing and fiduciary duties; restrictions on dual licensing
• UCA §31A-23a-402; Administrative Rule 592: Illegal/unfair inducements, unfair marketing practices
• Section 8 of the federal Real Estate Settlement Practices Act (RESPA) – prohibitions on kick-back referral payments, payment of unearned fees.

The compromise or replacement of Utah's CBTI Law is a radical change to the regulatory framework of Utah's title industry and seems to reflect some level of negligence from a legislative standpoint. Although Utah's CBTI Law may deserve clarification or amendment, to change it as SB 121 seeks to do will rob it of its ability to provide fundamental consumer protections and creates a void that will surely be filled by abuses within the industry. Other states have spent many months, if not years formulating controlled business laws that have proven to be ineffective and problematic. Utah should take the time needed to properly construct an AfBA statute, if it is done at all.

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The Need for an Impartial Settlement Agent:

To fulfill its crucial role as an impartial fiduciary in the real estate settlement process, a title insurance agency must be owned and operated independently of other parties to the transaction. Utah's CBTI Law works in conjunction with other laws to give the title insurance industry the autonomy and independence it requires to perform its vital and impartial role in the real estate settlement process. Both common and statutory laws have charged the title industry/settlement agent with fiduciary duties of care and impartiality that cannot afford to be compromised by the inherent and obvious conflicts of interest that become prevalent if home builders and real estate brokers are allowed to own title agencies. The independent and impartial role of the title agency is relied upon by buyers, sellers, lenders, real estate agents, and others to provide objectivity, transparency, and integrity in the closing settlement process. Buying and selling real estate is likely the most expensive and important transaction in which most people will ever engage. Title agency autonomy and independence must be maintained if the title agency is to perform its mandated functions. Title agency autonomy and independence cannot be maintained if Utah's CBTI Law is compromised or replaced. If SB 121 passes, the result will be that one of the parties to real estate transaction will very likely also own the title agency, and the result is that the settlement/title agent will not be a truly impartial third-party fiduciary. The concept behind escrow and escrow settlement closings is that parties to a transaction are self-interested which can create a lack of trust between them. A disinterested and impartial escrow settlement agent is used to assure that all parties' interests are equally considered and represented. If the escrow settlement agent/agency is owned and controlled by one of the parties, what is the point of the escrow?

EXAMPLE 1 (Preferred Scenario, that exists under Utah's current law): ): Buyer contracts to buy a newly constructed home from Home Builder. Buyer deposits funds for the purchase with an independent neutral third-party title agency, who holds funds in escrow. Title Agency releases funds to Home Builder when the home is complete, title insurance is in place, and the deed transferring title has been recorded with the County.

EXAMPLE 2 (Scenario that will exist if SB 121 is passed): Buyer contracts to buy a newly constructed home from Home Builder. Home Builder requires Buyer to deposit funds for the purchase with a Title Agency that is owned by Home Builder. Home Builder makes a profit from the escrow arrangement through its ownership interest in the Title Agency, yet the essential point of the escrow is absent: The Title Agency, by definition, is not a neutral third party. Does the Buyer truly understand the situation and is he/she okay with it? If so, the Buyer might as well deposit funds directly with the Home Builder, avoid paying any title/settlement fees at all, and assume whatever risks may result from such an ill-advised approach.

Despite its critical role in the real estate settlement process, a title insurance agency is in a weak position relative to real estate brokerages and home builders because it relies almost exclusively on business coming from those real estate businesses rather than from the end consumer. Consumers typically rely on recommendations for a title agency from their real-estate agent or builder. This makes the title agency vulnerable to pressures from real estate brokerages and home builders to pay compulsory inducements or kick-backs to secure a consistent flow of business. Historical attempts to disguise these inducements as some form of ‘referral-fee' or other legitimate payment or compensation have given rise to the need for numerous laws prohibiting referral-fee kick-backs, including the federal law called the Real Estate Settlement Practice Act (RESPA) which was passed by Congress in 1974. These laws protect the financial viability and business integrity of title agencies and seek to avoid the negative affects resulting from conflicts of interest in the real estate industry. After RESPA become law in the mid-1970s, real estate brokerages and home builders found that an easy way to circumvent the spirit of the law and continue to receive kick-backs was to become an owner of a title agency. This practice became prevalent in the late 1970s and early 1980s. To stop this abusive practice in Utah, and to avoid conflicts of interest that occur when it does, Utah's legislature enacted Utah's CBTI Law to prevent abusive and costly control of the title agency working on their transactions. Why would we want to get rid of a law that is needed as much in 2019 as it was in 1985?

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Conflicts of Interest:

Conflicts of interest in real estate transactions are very real and lead to real problems. It was only about ten years ago that we had a global economic crisis. A leading cause of the crisis and ensuing recession was the collapse of real estate markets, which was precipitated by conflicts of interest and the corruption resulting therefrom. One thing Utah's legislature did in response was to pass laws making significant changes to the real estate appraisal process. These laws created a framework to keep appraisers from being controlled or unduly influenced by realtors, home builders and mortgage brokers so that they could render impartial and unbiased appraisals. Those promoting SB 121 are hoping Utah's legislature has already forgotten the lessons learned just ten years ago when we were dealing with the real estate market collapse here in Utah. In a real estate transaction, the role of a title insurance agency is similar to that of an appraiser. The title insurance agency is a gatekeeper. They must remain impartial. When conflicts of interest exist, even otherwise ethical persons sometimes succumb to temptations and take advantage of the situation. It is best to avoid these conflicts, rather than encourage them. There was a reason Utah's CBTI Law was enacted in the mid-1980s, and it wasn't because the Utah legislature was opposed to free-market capitalism. It was because they knew it was important to protect markets and consumers from abuse, not unlike the justifications for the appraisal-related reforms of ten years ago.

In anticipation of the passage of SB 121, we have already heard the plans of several real estate brokerage owners who are intent on owning title agencies in Utah. They intend to be absentee owners and to push business to their title company(ies) by offering monetary benefits and incentives to their real estate agents if those agents are able to steer/refer their clients to close their transactions at the commonly owned title company. This presents three obvious problems, among others:

1. Money generated by the title agency operation will be used to pay benefits and compensation to real estate agents in addition to the sales commissions they are already being paid for the transaction. This compromises the ability of the title agency operation to function properly in many respects and jeopardizes its financial viability.
2. This creates a conflict of interest because real estate agents are being incentivized to put their own personal financial interests ahead of their client's best interests, which is a breach of their fiduciary agency duties.
3. This is no different than any other kick-back prohibited by RESPA – such an arrangement would appear to be a clear violation of federal law that can easily go undetected in this situation.

SB 121 does nothing to benefit the public interest – it results in less competition, less consumer choice, higher consumer costs, and conflicts of interest between the public and the real estate agents who are supposed to be representing their interests; and a higher likelihood of the very kick-backs and illegal inducements that state and federal laws are trying to eliminate from the settlement equation.

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Economic Considerations:

SB 121 is being promoted as though it provides some benefit to the public/end consumer, but we've yet to hear a valid argument as to how that is true. SB 121 is being promoted by politically powerful real estate interests with no basis in sound economic principles. Their position is not legitimate or compelling. The few promotors of SB 121 are the ones who stand to benefit. You will never find a consumer advocate or consumer protection organization in favor of allowing for controlled business or an AfBA. Such business arrangements never work in favor of the consumer. There is no reason for this change, except to financially benefit a few, already privileged persons.

The repeal of Utah's CBTI Law will allow for a ‘controlled business' environment where consumer choice is constructively eliminated, and the self-regulating benefits of open and fair market competition are absent. Utah's CBTI Law is an anti-controlled business, anti-market-manipulation regulation which promotes free-market competition. It offers similar consumer protections and espouses the same fundamental economic values and principles as other state and federal anti-trust, anti-collusion, and anti-corruption laws and restraints on monopoly. Like Utah's CBTI Law, these laws are designed to protect and foster the sound free-market economic principles of free trade, fair dealing, transactional transparency, and marketplace competition that ultimately benefit the consumer in the form of lower prices and higher-quality products and services, and by drastically reducing the potential for fraud and exploitation. A compromise of Utah's current CBTI Law is a drastic and misguided step in the wrong direction that will controvert the very principals upon which our economy relies to promote a competitive marketplace and maximize the welfare of consumers.

There is no public consensus for the repeal of Utah's CBTI Law. Utah's real estate industry is functioning well and is healthy. Title insurance rates and settlement fees have remained relatively low and stable in the years since the enactment of the CBTI law. There are nearly 200 title agencies in Utah. Utah's title industry is competitive. There is no public purpose or reason to repeal Utah's CBTI Law.

The broader implications of obscuring the fundamental economic and consumer protections afforded by Utah's current CBTI Law should be considered. While replacing this law may appear somewhat innocuous on its face, the compromise of its foundational consumer protection measures will have profound negative consequences to consumers of title insurance and real estate settlement services in this state (individuals buying, selling, and refinancing real estate in Utah). Diminishing the protections of the CBTI statute will induce a significant and radical change to the title insurance and real estate settlement industry; one that will financially benefit a small special interest group at the expense of the greater home-owning public consumer.

The revenues generated by title insurance agencies in Utah have already been pushed toward an equilibrium by the market forces at play. The title insurance premiums and other settlement fees that are charged for a real estate settlement/closing have adjusted to be competitive and yet still meet the financial demands of operating the title insurance agency. There is not a lot of money left over to pay absentee ownership, let alone pay kick-backs to real estate clients in order to secure their business. One of the prevailing purposes of the RESPA anti-kick-back rules is to protect the financial solvency and viability of the title/escrow agency. Another purpose is to ensure that consumers are being directed to independent title agencies who provide competitive pricing and quality services. If kick-backs are paid (either illegally or through a controlled business arrangement as allowed by SB 121) the fees and premiums charged to the consumer will almost certainly go up to cover the additional expense. Alternatively, to produce higher profits, the title agency that is controlled by a real estate broker or home builder will start cutting corners within the title agency operation which can have a myriad of undesirable consequences, many of which end up resulting in costly problems and higher costs to the consumer in the long run. This has proven to be the case in states that have made that same allowances that SB 121 seeks to enact in Utah.

The numbers for allowing controlled business just don't work. Some states do allow for controlled business under what are call Affilated Business Arrangements (AfBAs), but an analysis of different AfBA scenarios shows that they are discriminatory, they circumvent the very purposes of anti-kick-back legislation, and they are economically unsound.

Here are some examples based on theoretical models:

1. A market allowing for an AfBA with a 20% ownership interest: This means that 20% of an AfBA title company's business can be controlled business, which necessarily means that 80% of its business must come from non-controlled sources. On a market-wide basis, this means that only 20% of producers of title business can enter into an AfBA. Once 20% of the market is controlled and subject to AfBAs, the other 80% is constructively precluded if the 20% is going to be legally compliant. This means that only the most powerful real estate businesses will be able to benefit making a few powerful rich guys even more powerful and rich. A 20% law would be discriminatory against the other 80% of the market. Also, policing and enforcing a 20% threshold will present an almost impossible task for industry regulators, especially if the penalties for violations of the percentages are nominal as they tend to be. Abuse and violation of such an AfBA arrangement is a near certainty.
2. As the AfBA ownership percentage increases toward 50%, the competition among AfBAs for the available non-controlled business in the market that is necessary to remain compliant becomes increasingly rancorous. This competition increases the likelihood that illegal inducements will be paid to the sources of "non-controlled" business in order to secure that business to meet the necessary controlled vs. non-controlled ratios. Title agencies are already under enormous pressure to pay illegal inducements to secure business, and this situation only exacerbates that problem. An AfBA law allowing for 50% controlled business means that once AfBAs control 50% of the market, they also need the other 50% of non-controlled business in the market to remain legally compliant, meaning that only AfBAs could theoretically be operating within the market.
3. Above the 50% threshold, you may as well allow for 100% controlled business by an AfBA since at 50% you have already allowed for an AfBA dominated market. For a market allowing 100% controlled business for AfBAs, there is little to no incentive for a non-real estate business/entrepreneur to enter the title insurance market because most if not all of the market is being artificially induced to close at the commonly owned AfBA title companies. This type of market serves to eliminate competition among title insurance agencies since all of their business is already captive and the chances of gaining other captive business is negligible. This absence of competition can only have negative results for the end consumer. I don't believe it is necessary to go into the particulars of pricing and other consumer abuses that become prevalent when there is no competition.

At lower ownership percentages, the law would be discriminatory because only a select few real estate businesses would have the opportunity to participate in an AfBA to the exclusion of the rest of the market. As percentages increase there are increasing incentives to capture the non-controlled business by offering inducements that violate state and federal laws. At higher percentages competition among title companies is eliminated and only real estate businesses have incentive to own a title company resulting in no consumer choice, increased costs, and a poor level of service.

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