The Honorable Ben S.

Bernanke Chairman

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue N.W. Washington, D.C. 20551

March 14,2011

Ms. Sandra F. Braunstein

Director, Consumer and Community Affairs Division

Board of Governors of the Federal Reserve System

1709 New York Avenue N.W. Room·S201

Washington, D.C. 20006

Re: Final Rule Regarding Loan Originator Compensation

3 Dickinson Drive, Suite 204· Chadds Ford, PA 19317 Phone: 610 • 361 • 2655 • Fax: 610 • 361 • 2656

Dear Chairman Bernanke and Director Braunstein:

On behalf of the hundreds of independent title insurance agents, supportive title insurance underwriters and interested title insurance industry stakeholders who are members of our organization, please allow me to formally introduce you to the National Association of Independent Land Title Agents (NAILTA) ( was formed in November, 200S by concerned independent title insurance agents and real estate settlement professionals from across the United States who are detenninedto foster transparency, promote education and preserve the value of land title records in the United States.

NAIL TA has been vocal in its stance against the proliferation of "affiliated business arrangements" or CBAs in the title insurance industry. NAILTA believes that CBAs unfairly restrict healthy competition in the title insurance industry, create inexorable conflicts of interest between referral sources, land title agencies and their consumers at the closing table, and impair the traditional barriers of access to the insurance process, all to the detriment of homeowners and borrowers, the ultimate consumer of these services.

March 14,2011 Page 2

Recently, NAIL T A became aware of comments that were filed by various real estate related trade associations I contesting the Federal Reserve Board of Governors' final rule regarding loan originator compensation practices' and, in particular, the definitions of the terms "affiliate" and "third party charges" therein. The trade associations argue that the Federal Reserve's interpretation of those important terms would cause "irreparable injury to the various members of [their] associations, to competition in the marketplace and to consumers if adopted. ,,3

Ironically, NAIL T A believes it is these same trade associations, through their business practices and affiliations, who have stifled competition in the real estate settlement marketplace, eliminated healthy competition and stymied consumer choice when it comes to the selection of a real estate settlement service provider. Since the 1980's, each of the trade associations who authored the February 28th correspondence have benefitted from a coordinated effort to consolidate and steer the services of all real estate settlement providers, including title insurance, to one source called a "one-stop shop" in a determined effort to dominate local, regional and national real estate service markets for their sole benefit.

As a byproduct of this process, real estate firms, mortgage companies and banks have stretched out into all areas of the real estate settlement service field in an attempt to consolidate such services as title insurance, surveying, mortgage origination, homeowner's insurance, and appraisals into their "one-stop shops." The trade associations now believe that the Board's new prohibitions concerning dual source compensation will prevent current and further consolidation efforts. They even argue that such a rule would harm consumers and competition alike.

NAILTA rejects the argument of these trade associations that the rule harms consumers or competition and advises the Board to do the same. Even by their own data, consumers lack an understanding of what "one-stop shops" are and an overwhelming majority of consumers do not believe there is any real benefit to such a practice." Further, NAILTA members can provide the Board with a plethora of national examples of actual anti-competitive market practices perpetrated by the trade associations and their members in real estate transactions across the United States. This includes the strong-arm steering of consumers to their affiliate "one-stop shops" or by referral sources unilaterally preventing independent real estate service providers from serving the best interest of the consumer.

I The Community Mortgage Banking Project, Consumer Mortgage Coalition, National Association of Homebuilders, National Association of Mortgage Brokers, National Association of Realtors, Real Estate Services Providers Council, Inc. and the Realty Alliance. See Letter to Bernanke & Braunstein, dated February 28, 2011.

2 Fed. Reg. 58509, Vo1.75, No. 185, Friday, September 24,2010.

3 See Letter to Bemanke & Braunstein, dated February 28, 2011. 4!wps/wcm/connectl26edd6804a7ad6f3a68abt72b4e3ecddINAR+Survey+2008.pdf?MOD=AJ PERES&CACHEID=26edd6804a7ad6f3a68abt72b4e3ecdd (visited July 30, 2010)

March 14,2011 Page 3

NAILTA supports the Board's definition of the term "affiliate" as a single person for the purposes of the loan originator compensation rule set forth in Regulation Z.5 Affiliated business arrangements, as found within the title insurance industry, which consist of co-ownership of a title insurance entity by a referral source (i.e. a bank, a mortgage company, a homebuilder, or a real estate finn) and a title insurance agency are by their own definition a single entity. After all, the corresponding trade associations refer to the "affiliate" as a "one-stop" shop. Treating them differently for purposes of the Board rule ignores their own intent, i.e., a single location for all real estate settlement services. To best understand these critical points and to contest the issues raised in the trade association correspondence, we will address the following three (3) key points.

I. The Conflict of Interest Problem is Inherent in Affiliate Relationships.

One particularly troubling aspect for the proponents of dual source compensation under the Board's Rule is the fact that inherent in such a relationship is the inexorable conflict of interest that exists between the referring party and the provider of the settlement service. In the basic affiliated business model, the referring party is compensated, directly or indirectly, for the referral of settlement service business. The compensation is normally tied to stock ownership or other distributions of profit under RESPA's Section 8 affiliated business arrangement exceptions. However, these payments never eliminate the inherent conflict of interest that exists regarding the basis for the referral. The Board's rule helps to eliminate the incentive for referrals based solely on what is best for the referror and instead focuses the referral upon the value of the service.

Obviously, under the Board's rule, referrals that are based upon pure profit motives will be discouraged and replaced with referrals based upon which settlement service provider can actually provide the best and most cost-efficient service. In any business environment, this is good for the industry and certainly good for the consumer who benefits from the competition in service related areas, not on the unknown competition that exists for the referral payment

Contrary to the trade association position, there is a justifiable reason to preclude the use of affiliated service providers under the Board's Rule. No matter what requirement of disclosure is placed upon the affiliate by RESPA6 or Dodd-Frank or HOEPAITILA7, there is currently no meaningful way for a consumer to properly waive or consent to the conflict of interest that exists between a referral source (i.e. a bank, mortgage company, homebuilder, or real estate finn) and the affiliated settlement service provider. Clearly, the Board is well within its discretion to limit conflicts of interest that occur within the settlement process, including that which occurs as a result ofloan originator compensation. As the Board can undoubtedly see, the conflict is well-

5 12 CFR Part 226.36(d). 6

Real Estate Settlement Procedures Act

7 Homeowners Equity Protection Act I Truth-in-Lending Act

March 14,2011 Page 4

entrenched within the referral source community. The trade associations are not arguing with the Board to protect the settlement services that they have consolidated, but rather the incomes that they have derived from them.

The conflict arises when a title problem or a mortgage underwriting issue threaten the transaction. Naturally, the tendency is to minimize or override the title or mortgage problem in order for the provider to collect a real estate commission, points on the mortgage and a title insurance premium. This, as we have seen in the recent years, does not benefit the consumer, the lender or the title insurance underwriter, only the practitioner of these dubious business practices. In this system all checks and balances between the various disciplines are nullified.

II. The Filed Rate Doctrine is Not Supportive of the Affiliated Trade Association Position.

Another argument put forth by the affiliated trade associations is the fact that some payments received by loan originators, such as title charges, are regulated by state law under the filed rate doctrines of the respective states. The affiliated trade associations argue that the Board's rule preferences independent title :fees over affiliated title fees for purposes of what is considered prohibited compensation without providing a logical rationale for the distinction. There are several inconsistencies with this argument.

First, filed rate statutes only set the acceptable title insurance premium amounts in their respective states. Other title insurance fees, such as title examination costs, search fees, recording fees, and settlement charges are generally not included with the title insurance premium and can vary widely from title agent to title agent and from state to state. Premiums are generally not synonymous with all title charges, thus the affiliated trade association position is weaker than it appears.

Second, when it comes to filed rates for title insurance premiums, not all title insurance agencies are created equal. The cost of title insurance as derived from the corresponding title insurance premium is designed to provide a pathway towards risk elimination, not risk assumption. According to the American Land Title Association (ALTA), a high proportion of the revenue generated by the one-time title insurance premium is used for risk identification (through the title search and examination), analysis (through the title examination and issuance of title insurance commitment component) and reduction of claims (through curative work, proper escrow controls in the closing and processing portion of the real estate settlement), rather than for the payment of claims. Thus it should not be surprising that a high proportion of the premium is paid to the agent for performing these functions with the balance going to the underwriter to cover claims.i

Testimony of Anne L. Anastasi, President-Elect of the American Land Title Association, "Title Insurance Rates and Practices" May 28, 2009; before the Pennsylvania Insurance Department (copy available online at

March 14,2011 Page 5

In most cases, affiliated settlement service providers do not share the same risks as independent settlement service providers performing work on the same transaction. In many cases, affiliated providers are ostensibly controlled and/or managed by their referral source master. Affiliated providers lack autonomy and separation of common interest necessary to support the belief that they are, in fact, separate and distinct from the referral source that created it. Consequently, the premium given to an affiliated service provider is less about the services performed to arrive at the product (i.e. title insurance) and more about providing a source from which the referral source can be compensated for simply referring the settlement business to it. Affiliated service providers whose fees and charges are derived from a conflicted business relationship by definition are not bona fide or reasonable. Again, the Board is well within its discretion to find these concerns as the appropriate rationale to limit affiliate relationships when it comes to loan originator compensation.

III. The Affiliated Trade Associations' Proposed Solutions Only Serve To Create More Conflict and More Opportunity for Harm in the Marketplace, Not Less.

Two of the Board's well-thought out purposes for the final rule were, (1) to prohibit any person other than the consumer from paying compensation to a loan originator and, (2) to prohibit loan originators from steering consumers to consummate a loan not in their interest based on the fact that the loan originator would receive greater compensation for such loan. In response, the affiliated trade associations urge the Board to include affiliates in the definition of "third party" so that the fees of third party title companies, and others may be exempted from loan originator compensation as long as they are bona fide and reasonable.

There are numerous problems with the "solution" offered by the trade associations. First, an "affiliate" is by definition not an extraneous third party. Instead, an "affiliate" is someone who is directly or indirectly related to the parent. A "third party," on the other hand, is a party not related, whether directly or indirectly, to the parent provider. To combine the term "affiliate" with the definition of the term "third party" would be to turn the ordinary plain meanings of these terms onto their heads.

Second, what is the benefit to consumers, title underwriters and lenders and to the overall competitive environment in the real estate marketplace that the affiliated trade associations casually refer to in their defense of this solution? The answer is there is no benefit. This is not a reason to modify the definition of the Board's Rule.

March 14,2011 Page 6

The affiliated trade associations also urge the Board to consider revising the definition of "affiliate" to include mortgage lending and mortgage brokering businesses but not non-mortgage providers in that definition. This is also a solution with no tangible benefit to the original purposes of the rule or to the consumer. What is the advantage to consumers and to the competitive real estate settlement provider marketplace if the definition is altered as desired by the affiliated trade associations? There is no data that supports the idea that consumers need onestop shops to choose providers. Further, there is no data that supports the idea that competition will be improved by allowing loan originators to enrich themselves for referring business to affiliated entities. The only argument that has truthfully been made is that the affiliated trade associations are concerned that their referral revenue stream is jeopardized by the Board's rule. That is not a proper basis to modify the rule. NAILTA supports the Board's current interpretation and definition of the terms "affiliate" and "third party charges".

NAIL T A appreciates your attention to this matter and would be pleased to provide further information or supportive testimony as you may require. We have not only experienced these issues in our day to day practice but have also thoroughly and comprehensively done our research in an informed and scholarly manner as well. Please feel free to contact me.

Charles W. Proctor, III, J.D., C.L.T.P. President

cc: NAILTA Board NAILTA Members

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