OPINION — Most Utahns are unaware of how they will be adversely affected by SB121, which will allow Affiliated (Controlled) Business Arrangements (AfBAs) to operate in Utah’s real estate markets.
Read more: Consumer advocate: Bill would increase costs of buying a home in Utah
The law being repealed/replaced by SB121 is a consumer protection law. Yet despite the potential adverse effects and costs to Utahns, the Utah public has largely been kept in the dark and did not have a seat at the negotiating table while SB121 was formulated by a narrow and self-serving segment of Utah’s real estate industry.
An AfBA provides a “legal” way to pay or receive otherwise illegal kick-backs for the referral of business among real estate service providers. This financial ‘incentive’ often leads to dishonest and deceptive practices that discourage competition, eliminate consumer choice, and drive up closing costs.
The result of SB 121 is that Utahns will pay more in closing costs when they buy and sell their homes. The AfBA business model has led to higher closing costs in every other real estate market where it is allowed to operate.
An AfBA means that there is common ownership (affiliations or partnerships) among the providers of real estate services. In Utah, SB 121 will mean that the title insurance agency where buyers and sellers close their transactions can now be owned by a builder or real estate brokerage.
Ideally, the title agency/closing agent is an independent and impartial player in the process so that buyers, sellers and lenders who deposit large amounts of money and high-value property into the escrow are all equally protected in the closing process. But SB121/AfBA will allow for the title closing agent to be owned by a builder or real estate brokerage, who is also an interested party in the closing process. This creates conflicts of interest. The closing agent will no longer be independent and impartial. At Utah Consumer Advocacy Network, we believe this is an unnecessary and unacceptable risk to buyers and sellers of real estate in Utah.
An AfBA measures success in terms of its “capture-rate.” In other words, how many of its real estate clients can be ‘captured’ or ‘controlled’ and convinced to close with the title insurance agency partner in the AfBA. The higher the capture-rate, the more successful the AfBA.
So by their very nature, AfBAs create financial incentives to manipulate customers by misleading them or withholding information from them to control their decision-making and capture their business. This unethical and anti-competitive strategy is exposed by the stated objective of AfBA: high capture-rate.
In an AfBA setting, buyers and sellers are steered to close with the partner affiliate title agency, not because the agency offers great service and pricing to the client, but because the referring affiliate will receive a financial benefit (a kick-back) for the referral. These types of kick-backs are illegal because of the inherent conflicts of interest they create and because they result in higher costs to consumers. But the AfBA business model offers a way for the kick-back to be disguised and recharacterized as a profit share.
Regardless of how the kick-back is paid or whether it is technically ‘legal’ or ‘illegal,’ it is still a kick-back, and the unnatural, anti-competitive effects of the payment are the same: Costs to the consumer will go up, and transactional risk goes up because of the absence of closing agent impartiality.
Steering real estate closing business in this manner leads to less consumer choice and less competition. Whenever factors combine to restrict competition in any marketplace there is upward pressure on pricing. And that is exactly what happens in real estate markets where AfBAs operate. Over time, the costs to buyers and sellers of real estate will go up.
SB 121 is not consumer friendly. AfBAs do not adhere to the principles of a free-market and open competition.
Free markets are built on principals of transactional transparency and the idea that all consumers have access to accurate, honest information so they can make informed decisions. SB 121 and the AfBA business model obscure the transparency that consumers should expect when buying and selling real estate. The AfBA model hides the true nature of how the consumer’s money is being spent, who receives it, and the corrupt incentives that exist within the business model. SB121 is a step backward for the people of Utah.
At UCAN, we believe that there is no good reason to make any allowance for the AfBA business model in Utah. SB 121 is not about business deregulation. It allows for consumer manipulation!
This is an urgent matter! If you feel that SB 121 and AfBAs are a threat to consumer welfare in Utah, please contact your legislative representatives as soon as possible and tell them to VOTE NO to SB121!
Written by JB Griffiths, executive director, Utah Consumer Advocacy Network.
• S P O N S O R E D C O N T E N T •
Read more: See all St. George News reports and opinions on Utah Legislature 2019 issues
Resources
- Read full text of bill: Utah 2019 Senate Bill 121 — Controlled Business in Title Insurance Repeal
- Contact legislators
- Bill sponsor: Sen. Daniel Hemmert | House sponsor: Rep. Mike Schultz
- Southern Utah Sens. Evan Vickers, Don Ipson, David Hinkins and Ralph Okerlund| Listing of all senators.
- Southern Utah Reps. Travis Seegmiller, Bradley Last, V. Lowry Snow, Walt Brooks, Rex Shipp, Merrill Nelson and Phil Lyman | Listing of all members of the House of Representatives.
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