Back in 1981, ALTA’s president testified under oath to Congress that controlled business arrangements were “the functional and economic equivalent of kickbacks” and that “controlled business arrangements will have a greater adverse impact on competition than kickbacks ever had.”
Now, ALTA is officially calling controlled business arrangements “procompetitive” in its amicus brief in the Supreme Court case Edwards v. First American.
Obviously, controlled business arrangements cannot possibly be both adverse to competition and procompetitive. So it is fair to ask ALTA: were you wrong then, or are you wrong now?
ALTA said in 1981:
In terms of the impact on consumers and the impact on other providers of title insurance services who do not offer such financial inducements but who seek to obtain business on the competitive merits of their products and services, these controlled business arrangements are the functional and economic equivalent of kickbacks… [B]ecause such controlled business arrangements have become more widespread than the payment of kickbacks ever was, controlled business arrangements will have a greater adverse impact on competition than kickbacks ever had.
ALTA then expanded on the negative consequences of the proliferation of controlled businesses:
When real estate professionals have a financial interest in the selection of a provider of title insurance services, they invariably steer their clients or customers to that provider, irrespective of the competitive merits of the services and rates offered by other title insurance providers in that market.
Because a controlled title insurance agency does not have to compete in the marketplace for its business– since it obtains its business by virtue of the ability of its owners to control the referrals of consumers– such an agency is subject to little or no competitive pressure to maintain the quality of its services or the reasonableness of its charges.
Title insurance companies or title insurance agencies that have not provided stock or other financial interests to real estate professionals who are in a position to make referrals or recommendations of the consumer’s business are placed at a serious competitive disadvantage– a disadvantage that cannot be overcome by offering the public better service or lower prices. Indeed, the very survival of these companies may be threatened.
Permitting such professionals to have financial or ownership interests in providers of title insurance services to which they refer business inevitably channels competition in a direction whereby title insurance entities seek to offer such professionals ever-increasing financial benefits; while this form of competition may serve the interests of real estate professionals, it clearly does not serve the interests of consumers.
The existence of controlled business arrangements in a particular market acts as a major deterrent to the entry of new title insurance companies or title insurance agencies into that market, since such potential entrants realize that they cannot expect to obtain business on the basis of the merits of their products and services, and cannot obtain business at all unless they are willing to offer controllers of business greater financial benefits than they are currently receiving.
A title insurance agency composed of or owned by real estate professionals is subject to serious conflicts of interest between the interests of its owners (e.g. a real estate broker in seeing the transaction consummated so as to earn a real estate brokerage fee), the interest of the consumer in being informed of all potential title problems that might threaten the use or enjoyment of the property he is purchasing, and the interest of the title insurance underwriter in insuring against prudent title risks only.
ALTA now says precisely the opposite:
Although in some instances all of the service
providers with whom a homebuyer interacts will be
independent businesses, in others those providers
may be related. For example, one service provider
such as a title insurer may have an ownership interest,
whole or partial, in another service provider such
as a closing company or real estate brokerage. Such
procompetitive arrangements are known in economics
and in antitrust law as “vertical integration” such
as when an auto company buys a parts company,
when a drug company buys a distributor, or when an
oil refiner runs its own service stations. These relationships
sometimes constitute “controlled” or “affiliated”
ALTA has totally changed its opinion of controlled business arrangements at some point and certainly appears to believe now that the views it expressed in 1981 were wrong. What was warned to be a harmful, anti-competitive business practice is now considered to be a beneficial, pro-competitive business practice. One would hope that such a change of mind was based on observed evidence in the decades since the emergence of controlled business in the title industry.
Let’s be clear: there is nothing wrong with ALTA changing its position per se. When John Maynard Keynes was accused by a critic of changing his position, Keynes famously responded, “When the facts change, I change my mind. What do you do, sir?” If the facts about the title industry since the emergence of controlled business arrangements support a positive view of controlled business arrangements, then ALTA would be entirely correct to change its position.
Of course ALTA has never expressed any factual basis for its change in position. So we are left to guess: what evidence could ALTA possibly have observed that contradict its views in 1981?
–Perhaps they believe that quality has improved?
If controlled business arrangements were procompetitive, we would expect title businesses to be vigorously competing on quality, encouraging improved workmanship, driving up standards, and forcing poor performers from the marketplace.
But instead, the evidence seems to indicate that just the opposite has occurred. Search standards have decreased substantially. In fact, we’ve learned that title insurance has been written on many transactions without any search whatsoever! The only thing that may have curbed that practice somewhat was a huge lawsuit, not competition.
Perhaps even stronger evidence of a decrease in standards and quality is in title claims. Forty years ago, before the passage of RESPA and the emergence of controlled business in the mid 1970s, title insurers paid about 2.5% of their income out on claims. Even in recent good times, the baseline for the claims ratio for the industry has been around twice that. More recently, it has been much worse than that. In 2010, title insurers paid out nearly 12% of their income on claims— a more than fourfold increase in claims. If quality has improved, why are claims levels four to five times greater than they were before controlled business arrangements were widespread?
–Perhaps ALTA has access to data that indicates that controlled business arrangements produce better work than independents and that independent businesses contribute more to the high claims rates than controlled businesses?
It’s doubtful that ALTA has such data– if they do, I’ve never found it, and I have looked. But even if it were true that independent businesses were performing worse on quality than controlled businesses, it does not really contradict ALTA’s prediction in 1981. ALTA’s statements then express a belief that controlled business arrangements would disincentivize quality of work at both the controlled businesses themselves and at independent businesses as well.
The controlled business is less focused on quality because it doesn’t need to be; the independent is less focused on quality because his business does not benefit from having high standards.
–Finally, perhaps all this supposedly procompetitive controlled business has driven down prices?
In the early 70s, a buyer could expect to pay around $3.50 per $1000 on average for title insurance for both the lender and himself. Today, according to data from bankrate.com, the nationwide average is more like $8 per $1000. In jurisdictions where title insurers have to ask permission to change their rates, they have been asking for rate increases for the most part in recent years.
Maybe “vertical integration” is beneficial in the auto industry. Maybe cars are of better quality now than they were 40 years ago because automakers can buy their parts suppliers. But ALTA does not represent the auto industry; it represents the land title industry, or at least it claims to do so. In this industry, we have higher prices and lower quality in the era of “vertical integration”.
The bottom line is this: virtually every negative effect predicted by ALTA in 1981 is now manifesting itself.