Utah homebuyers can expect to be paying higher title insurance costs soon, but the fees will be hidden by new ownership schemes, say critics of a bill passed by the Legislature this month.
In a typical home transaction, buyers usually deal with a home builder or real estate broker, plus title officers and mortgage lenders.
With passage of Senate Bill 121, a builder or brokerage now can own a title company, potentially controlling two legs of the transaction.
“So the (combined ownership) title companies will raise their prices to cover the costs of paying out of pocket to builder ‘x’ or real estate company ‘x,’” said Maddi Stagge, of Harrisville, an escrow officer for an independent Brigham City title company.
Sponsors say the deregulation bill supports free enterprise and will push down costs because jointly owned companies will be more efficient.
But the new ownership landscape will enrich the conglomerated companies and gouge consumers, argue Stagge and other critics of SB 121, which awaits Gov. Gary Herbert’s signature to become law.
Ownership regulation first came nationally in 1974 with the federal Real Estate Settlement Practices Act (RESPA) in 1974, followed a decade later by the state law which SB 121 cuts down.
“The purpose of these laws was to protect title insurance agencies from being cajoled, extorted, and induced to pay kickbacks/bribes for the referral of title business from their Realtor clients,” SB 121 opponent Brad Griffiths said in an email. “Ultimately, this provides consumer protection against higher prices, transactional secrecy, and limited consumer choice.”
He said title companies are charged to behave as impartial referees or judges in the property closing settlement.
“An otherwise interested party should not be the owner of these vital and impartial safeguards,” he said. “A title company is much like an appraiser whose independent assessment of property value is necessary to make sure that buyers, sellers, and lenders have the objective and truthful information they need to make well-informed buying, selling, and lending decisions. Otherwise, the potential for fraud is greatly increased.”
LOBBYISTS AND CAMPAIGN CASH
SB 121 is a case study of the Utah real estate lobby’s power, said Griffiths, a title company owner who led a futile fight against the bill during the 2019 legislative session.
“It’s probably the most powerful lobby that exists in Utah,” Griffiths said Tuesday. “Once this ball started rolling, they had not only their own lobbyists work full time, they had basically hired up a big contingent of additional lobbyists in anticipation of the fight.”
He said he asked another top lobbyist to work against the bill. The lobbyist told him to spend his money elsewhere because “you’re up against a giant.”
His assessment apparently is buttressed by a review of the professional ties and campaign finances of lawmakers who were key in the passage of SB 121.
Most members of the House and Senate committees that approved the bill after contentious hearings received hefty campaign contributions from the Utah Association of Realtors and the homebuilders lobby in the 2018 election cycle, according to Lieutenant Governor’s Office campaign financial disclosure data.
The bill’s House floor sponsor and its champion in the House Business and Labor Committee was Rep. Mike Schultz, R-Roy, president of Castle Creek Homes. He’s also the House majority whip.
Schultz’s campaign received $4,000 last year from the realtors association. He got $3,000 from the group in 2014 and $2,000 in 2016.
Rep. Calvin Musselman, R-West Haven, got $5,000 in 2018. He’s a real estate agent. Others included Rep. Michael McKell, R-Spanish Fork, a lawyer and a title and escrow officer, who pulled in $6,000; and Marc Roberts, R-Salt Lake City, a real estate investment company owner, $1,500.
Ten House committee members, including those five, voted for SB 121. The two no votes were cast by Salt Lake City Democrats: Minority Leader Brian King and Rep. Susan Duckworth. King got $1,000 from the Realtors last year and Duckworth, nothing.
House Speaker Brad Wilson, R-Kaysville, president and CEO of Destination Homes, and Senate President Stuart Adams, R-Layton, a developer, each received $4,000.
Overall, the real estate group funneled $241,000 to legislative candidates in 2018, compared to $149,000 two years earlier.
CONFLICTS OF INTEREST ALLEGED
During the House committee hearing March 7, Griffiths pointed out professional interests of legislators that may constitute conflicts of interest.
“I know some of you run businesses that will benefit from passage of this,” Griffiths said. “It removes certain historical boundaries.”
He said the bill signals it is “OK for there to be a little bit of collusion and a little monopoly arrangement, this little deal on the side” between real estate or homebuilder companies and title insurers that will have common ownership.
“Your company will have a monopoly-style controlled business relationship,” Griffiths said. “It will include a kickback paid back to the company (and) it will take advantage of the consumer. That’s the truth of how these things work.”
But Schultz and others bristled at testimony questioning their motives.
“I am in the real estate business. I purchase a lot of title policies,” Schultz said. “I have no intention to get into the title business. This bill gives more options for the consumer. Under the current law it restricts people out of the business. This will open up competition.”
When the bill came up for a final vote on the House floor March 12, Schultz described it as a “compromise bill” and there was no debate. The measure passed on a 39-32 vote.
Griffiths and Stagge were aghast that SB 121 was called a compromise, because significant opposition remained in the title industry.
Griffiths said in past years the Utah Land Title Association uniformly fought efforts to deregulate. But this year, the group went along after sponsors agreed to add provisions to prevent total deregulation.
‘KICKBACKS’ OR PROFIT SHARE?
“Somebody like Schultz would be able to buy into a title agency and really not do anything,” Griffiths said. “At the end of the year he is going to get a dividend and profit share paid out to him.”
He added, with SB 121 “there is no more protective separation, and the kickbacks and bribes are paid and disguised as profit share.”
“This position of dominance by Realtors over the title insurance industry in general ... created the need for consumer protection laws in this industry in the first place.”
The bill’s sponsors were frustrated by continuing efforts in the session’s final days to further amend the bill.
Sen. Daniel Hemmert, R-Orem, the Senate majority whip, said additions to the bill requested by the ULTA added safeguards. Those included provisions designating the federal RESPA law as the new enforcement mechanism.
The additions also require a minimum $100,000 capital investment to any new conglomerated arrangement and a requirement that at least 30 percent of a combined company’s title transactions be done involving non-affiliated companies.
“We met with the title industry for hours and hours,” Hemmert said. “We negotiated what I thought was a consensus bill.”
The Utah Department of Real Estate will enforce the regulations, he said.
“The laws can never protect against bad actors,” he said. “It can’t. It can provide an enforcement mechanism if someone is caught acting poorly. No piece of paper can stop someone from being a bad actor.”
Chris Kyler, of the Utah Association of Realtors, disputed talk of consumer victimization.
“The bill opens up the marketplace to more competition, which means prices will go down,” he said.
RELUCTANT TO OPPOSE
Stagge, in Harrisville, said title insurance people are reluctant to oppose real estate companies because they are reliant on them for business referrals.
But she questioned the system that allowed SB 121 to succeed.
“The hardest thing is the way it was passed,” she said. “I felt like, is this how things happen?”