Small title agents should be paying attention to the abstractors' experiences with volume discounts... because HUD is about to throw them under the same bus that ran over the abstractors.  To briefly summarize the impact of volume discounts on abstractors - many large companies set up vendor management companies (VMC) to work with their abstractors.  As these large companies grew and began to control more work, they demanded that abstractors give them a volume discount.  But, when things slowed down and the volume wasn't there anymore, do you suppose the abstractors were able to get their previous fees reinstated? No - the VMCs notified their abstractors that because work had slowed down and they needed to reduce costs, the abstractors would have to take further fee reductions!  (see The Evolution Of The VMC).

RESPA has always protected title agents from similar pressures from their clients by prohibiting "a person from giving or accepting any thing of value for referrals of settlement service business." It has always been interpreted that "discounts" are "things of value" for purposes of Section 8 of RESPA.  But, the newly proposed rules seek to change that by changing the definition of "thing of value" to clarify that "it is permissible for settlement service providers to negotiate discounts in the prices for settlement services, so long as the borrower is not charged more than the discounted price."

Thus.... here comes the bus.

To figure out who will benefit under the proposed changes you only have to ask one question - who is lobbying for them?  Big companies - lenders, Realtors, builders and title companies - who have the resources to set up Affiliated Business Arrangements (AfBA) to take advantage of their ability to steer a large volume of business have the most to gain. Consider the following scenario:

John Doe goes to Mega Mortgage Company to inquire about a loan.  Mega has an AfBA with Big Title Company and has negotiated a volume discount for title services for their customers.  John gets his Good Faith Estimate (GFE) and wants to shop around before he decides.

John then goes to Tiny Town Mortgage Broker who usually works with your title company, Tiny Town Title Agency.  The broker, who needs to get this deal, reviews John's GFE and sees that the title fees are a few hundred dollars less than you normally charge.  He tells you that he really wants to provide a competitive GFE and asks you if you can match the fees of Big Title Company.

Even if you could afford to reduce your fees on this one job - you are not permitted to do so.  The broker is unable to compete with Mega and you are unable to compete with Big Title.  If you could, the result to the consumer would be same - lower settlement costs.  But, as things stand with the proposed rule, the only way the consumer can benefit is by choosing the loan with Mega and closing at the AfBA with Big Title.  It doesn't matter who can provide the best service - only the big companies can offer reduced fees.

The only way the small agents will be able to compete in the marketplace will be to reduce their fees across the board for all of their customers to the lower fees that the big companies only have to offer to their big volume customers.  Those big companies are still free to charge more when they close loans for smaller brokers and Realtors (your customers). So, while big title companies can still charge more when they work with your customers, you cannot charge less when working with theirs.

Of course, small agents cannot afford to reduce their fees for all of their transactions and they are not in a position to set up the AfBAs to be able to offer "volume" discounts.  Small agents are already getting squeezed out by larger competitors who are setting up AfBAs with the largest lenders and Realtors in town.  These AfBAs allow them to capture a large percentage of business by offering 49% of the profits generated from the referrals to the referring companies.  This proposed change to the rule would make it even worse by creating lower prices only available to consumers who choose the referring company for their loan - thereby the referring company is able to attract even more business to refer to the AfBA.

State insurance laws provide the last bit of protection for small agents, but the use of AfBAs has cut its effectiveness.  In Ohio, ORC Section 3953.26, Payment to induce title insurance business; prohibition, states in relevant part:

No title insurance company and no title insurance agent shall pay or give [to] any applicant for insurance, or to any person, firm, or corporation who is acting as agent, representative, attorney, or employee of the owner, lessee, mortgagee, or of the prospective owner, lessee, or mortgagee of the real property or any interest therein, either directly or indirectly, any commission or any part of its fees or charges, or any other consideration or valuable thing, as an inducement for, or as compensation for, any title insurance business.

This has been interpreted to include discounts, as well.  The effect of this has been to prevent title agents from offering discounts to one customer that are not available to all.  However, because the AfBAs are set up as separate companies, they can reduce their fees for all of their transactions, the vast majority of which are for the referring company that provides the "volume" of business, and escape the consequences of the law.

In the end, the proposed rules create a hugely uneven playing field among title companies and agencies.  The big title companies can set up AfBAs with all of their largest customers and offer different pricing, that may include volume discounts, for all of them.  Small agents, are stuck with one price for all of their customers which cannot be competitive with the AfBAs' prices.  By not allowing the small agents to offer discounts on a selective basis, the proposed rules do not benefit consumers - they merely limit the consumers' options to the big companies.  At the same time, they drastically harm the small agents ability to remain in business to serve their local consumers.

They lobbying efforts of the big companies are paying off - they have successfully gotten exemptions from Section 8 of RESPA for AfBAs.  Now, they are about to get another exemption that will allow them to offer special pricing that small agents cannot.  Even ALTA, whom I often criticize for failing to address the concerns of the small agents, has recognized this problem (Kudos to ALTA!).

The ALTA List of Concerns - Proposed RESPA Rule states:

V. NEGOTIATED (VOLUME) DISCOUNTS

A. Effect on Small Businesses - Small title agents will be disadvantaged as compared to large title insurance companies, who have the resources to discount their own services. Even if small companies could offer some discount, small title companies are not able to offer the same substantial discounts that a large company can offer consumers to attract business. As a result, small businesses will be unable to compete with the prices offered by large companies, which effectively decreases a consumer’s options when shopping for title services.

B. Lender Packages of Providers at Discount Will Discourage Shopping – This issue is related to the tolerances imposed on lender settlement charges. There is concern that large, nationwide mortgage lenders, when faced with the tolerances, will stifle competition by creating teams (or packages) of providers that can offer discounted prices to the lenders’ borrowers.

1. If a small title insurance agency cannot compete with a large provider’s prices, small agencies would be shut out of these teams.

2. If large lenders create teams of affiliate providers, even the large title providers may find it difficult to compete with an affiliate’s discounted prices.

C. Conflict With State Law – Certain state laws prohibit the discount of title rates and other related costs or require the title company to file any deviations they plan to make to their filed rates. Title companies are placed at a disadvantage in these circumstances when they cannot offer volume discounts to their customers.

If you have not yet been affected by competition from AfBAs, you soon will be. This new proposed rule will create bigger incentives for large companies to set up more of them. As if sharing in the profits was not motive enough, allowing "volume" discounts for consumers that will help referring partners attract more business may make it a necessary step for them to remain competitive.

So look out... here comes the bus! 

Robert A. Franco
SOURCE OF TITLE