Affliliated business arrangements = Bad business

In the vein of “Affiliated Business Arrangements = Bad Business,” I bring to you yet more evidence of the same. In an effort to maintain their government-sanctioned kickbacks, proponents (i.e., RESPRO, et. al.) of Affiliated Business Arrangements (ABAs) made a specious claim in a recent meeting with the Federal Reserve Board.

The proponents used two Harris Interactive consumer surveys (2002 and 2008) to claim that homebuyers were more satisfied with the ABA settlement service providers.

  • The 2008 study revealed that homebuyers who used “one-stop shopping” in their latest real estate transaction were more satisfied with their home buying experience compared to those who used services of multiple providers.

  • The 2002 study used by the proponents revealed that 64% of homebuyers who used “one-stop shopping” programs had a better overall experience with their home purchase transaction.

RESPRO cites Federal Title website

First, it’s dishonest to call the arrangements “one-stop shopping” since it only means that the real estate broker or mortgage lender will take care of ordering settlement services on behalf of the homebuyer - and, mostly unbeknownst to the homebuyer, receive a kickback from the settlement company for the referral.

Most homebuyers are completely unaware that they may shop for and select their own settlement company. The proponents of ABAs exploit this lack of consumer knowledge and their supposed fine-print “disclosures” do little to enlighten the homebuyer to this important and costly component to the transaction.

Naturally, without knowing that they could shop and save on settlement services, a homebuyer is going to be more satisfied with their trusted advisor taking care of the finer details of ordering settlement services on their behalf.

Along comes a recent survey from the Ohio Association of Independent Title Agents (OAITA). According to this survey, conducted from 2009 through 2010, when homebuyers are made fully aware of ABAs, they become uncomfortable and prefer a title company or title agent to be a third party (i.e., independent) to the transaction.

First, to the delight of our ABA proponents, 77% of respondents did not independently select their settlement company. When made fully aware of the ABA relationships, 50% of respondents said they prefer a title company that does not share profits with a referral source compared to 6% of respondents saying they prefer a title agent that shares profits with a referral source.

Further, 58% of respondents said they believe that ABAs are a conflict of interest. The OAITA stands in stark contrast to the Harris Interactive surveys used by ABA proponents only because homebuyers, as respondents, were clearly informed of the financial benefit gained by the referral source.

Consumers must be informed in order to make sound financial decisions. While ABAs are very profit-friendly to its participants, ABAs are simply not consumer-friendly. Let’s all hope that the Federal Reserve Board retreats from its complicity in bad business.

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