Affiliated Business Blog

Affiliated Business Seminar a Success

On November 16, 2006 Integrity Title Records hosted another successful educational seminar regarding Affiliated Businesses (ABAs) in Houston, Texas. This is the fourth such seminar Integrity has hosted over the last 3 years.

Attendees included Real Estate Agents and Brokers, Mortgage Lenders, Homebuilders, Developers and Title professionals interested in managing ABAs. Some of those present were Fee Attorneys or Escrow Officers interested in forming their own title agencies.

Initially, the discussion centered upon the changing title industry in Texas. Previously only very large producers, such as a large homebuilders, could afford the $18,000+ cost (Harris County alone) for title plant access before Integrity entered the market. NOTE: In Texas, you must own or lease a "Title Plant" to be a licensed title agent. Also you must own or lease a plant in every county you have a physical location. Now, even a medium sized title agency can compete effectively in the market.

Most Real Estate Agents have embraced Affiliated Businesses by providing mortgages but have not formed their own title agencies. In many cases this is because they didn't realize they could do so or they have been told that they can not or should not be in the title business.

I can not tell you how many times we've heard, "I thought you had to be an attorney to in the title business?"

One question that came up, "Why are the major title companies not putting on this kind of seminar?" The simple answer is, "they don't want you in the business to compete against them."

Our company subscribes to an industry publication called "The Title Report" which is owned by October Research. In cooperation with October Research, Stewart Title and others have sponsored similar events geared toward Affiliated Businesses. This is great but it's interesting that all of these events have been held outside of Texas.

Why do the major underwriters want ABAs in others states and not in Texas? Two reasons, (1) market domination and (2) vertical integration. Underwriters in Texas earn 15% of the Premium and Title Agents earn 85% of the Premium. If you are both the Underwriter and the Agent (aka Direct & Affiliate Operations) then you bring home 100% of the premium.

Over $1.5 Billion in title premiums were written in Texas last year (does not include Escrow Fees) and the five or six major Underwriter's Direct operations dominate the market particularly in the major metropolitan areas. Approximately 60% of all premiums in Texas were generated by Direct or Affiliate operations (Affiliates as defined by the Texas Department of Insurance are title operations owned at least 10% by Underwriters). That leaves 40% of the premiums to be distributed among hundreds of independent Title Agents in Texas.

If Texan want to keep more of the money generated in the title insurance business in Texas then it is important for independent title agents to succeed. Another way to keep the money made in the title business in this state is through the growth of Affiliated Businesses.

In addition to discussions about market conditions we talked about:

1. Who can own a Title Agency
2. Why "Producers" should consider owning an interest in a title agency
3. The benefits to consumers provided through Affiliated Businesses

Some may ask, "How does an ABA benefit a consumer?"

Consumers want convenience and prefer to deal with someone they know and trust. Therefore one-stop-shopping is important to consumers. If the consumer receives a high level of service from their real estate agent or builder then it is likely when given the choice to do business with the agent's mortgage or title company they will consider doing so, particularly if the fees are comparable for mortgages or title insurance. NOTE: In Texas, title premiums are regulated by the state and therefore agents must compete on service, but it is not always a level playing field because of illegal kickback and rebates in the industry.

The title industry by nature is a referral business. For that reason, there have been many abuses. Although it is a violation of RESPA and Texas Procedural Rule 53 (P-53), the kickbacks by title agents continues. The $10,000 fine per violation for both the giver and the receiver has not deterred some from continuing these practices. Kickbacks to real estate agents or builders may include exclusive trips to destinations like Aspen, Colorado, golf outings such as expense-paid trips to the Masters Golf Tournament, expensive luxury gifts, tickets to professional sporting events or the sponsoring of company parties.

In a typical real estate transaction, the real estate agent or mortgage company refers the business to a particular title agent without informing them that they, the consumer, has a choice of where to close the deal. In an ABA, Agents are required to (1) disclose they own an interest in the title agency to which they are referring the business; and, (2) inform the consumer that they have a choice to close elsewhere. RESPA requires this disclosure be given to the consumer at the time of the referral.

In general, the requirements placed on ABA owners are more stringent than non-owner agents and the penalties for non-compliance can be considerable. In a practical sense, you can not avoid Real Estate Agents referring business but the ABA does provide a means to avoid the kickbacks and other illegal activities associated with those referrals.

Robert Philo, Regional Counsel with Southern Title Insurance Corporation spoke about the Real Estate Settlement and Procedures Acts (RESPA) and the need for strict compliance by Affiliated Businesses.

Mr. Philo gave some historicial perspective of the Act and the practical applications of the rules. As I stated, many real estate agents and homebuilders already provide a mortgage product so the same rules apply for title dealing with (1) Disclosure (2) Choice (3) Distribution of Profits.

Mr. Philo is the former chief regulator for title insurance in the state of Texas and has served in every major office in the Texas Land Title Association including President.

After Mr. Philo spoke Mr. Phil Wells, Vice-President of Southern Title spoke briefly about the Real Estate Services Providers Council (RESPO). RESPRO looks out for the interests of Affiliated Businesses and Joint Ventures by providing educational opportunities and monitoring of both state and national legislation. As the recently-elected President of the Texas State Chapter of RESPRO, I encourage all Texas title agents to become members. Membership Applications were distributed and an information table about RESPRO was set up in the break-out area.

When we returned in the afternoon, Marian Cones, CFO of Integrity discussed the capitalization requirements of a new title agency. One of the first questions we hear from prospectives agents is "how much is this going to cost?" An Affiliated Business is a stand alone title agency with the same costs associated with forming any new title company. Those expenses include Errors and Omissions Insurance, Bonding, and Application Fees to the state.

The other question is "how much money am I going to make?" As Marian stated, "there are many factors that determine profitabilty including the number of transactions, the capture rate, the facility, and the number of locations you require to do business.

For those serious about forming their own title agency, Integrity has a step-by-step email with links to the appropriate forms from the Texas Department of Insurance and various service providers to the title industry.

Much of the challenge of forming a viable title agency deals with accounting functions. Marian has condensed these questions and answers into an informational email called "Accounting for New Title Agents." The information is limited to accounting for Texas title agents.

The final presentation of the day was a panel discussing on which Phil Wells of Southern Title who spoke on what he looks for in a new title agent and his experience with successful Affiliated Businesses. Mr. Wells is an expert on ABAs and has extensive personal knowlege of Affiliated Businesses that he shared with the attendees.

The panel also included three title professionals who are currently operating Affiliated Businesses, each with a slightly different business model. The panel included Robby Wilburn, President of Guardian Fidelity Title, Marc Steinburg, Principal with Innovative Title Company and Greg Nix, President of Exodus Title Company and Priority One Title.

The session was very informative and gave the audience and the panel a chance to discuss many of the fundamental questions related to forming and operating an Agency and an ABA.

Rather than trying to discuss the specifics of each of these presenters, I encourge you to contact them directly to discuss their programs.

Ten Vendors/Sponsors provided information about their services such as title software, 1031 Exchange Services and escrow accounting services.

For those unable to attend, we hope to have another seminar in the first quarter of next year but in the meantime, if you have any questions, feel free to contact myself or Marian directly.

posted by Paul Cones @ 7:28 AM