Section Eight

Section Eight
by Robert Franco

We all know Section 8 as the anti-kickback provision of RESPA. However, Section 8 is more commonly known as a military discharge for being mentally unfit for service. I think that is more than a little bit ironic, since Section 8 of RESPA is an absolutely insane provision after the exceptions for Affiliated Business Arrangements (AfBAs).
Section 8, in its current form, merely prohibits small agents from competing with AfBAs. If an AfBA can effectively share fees with a non-title partner, what sense does it make to prohibit an independent title agent from doing the same thing? Section 8 recognized that allowing such behavior to occur would cause the consumer to pay increased fees that would be used by the title agent to "buy business" from referrers. That danger seems even more likely when there is an AfBA.
When an affiliated business arrangement is created, they have to maintain a separate company which adds to the overhead of the operation. If a non-affiliated entity were allowed to effectively do the same thing, pay referral fees, they could do it without the added cost of maintaining a separate entity and, therefore, could do it without raising costs to the consumer - at least easier than could an AfBA.
If the argument is that competition keeps the fees in check for AfBAs, wouldn't the same theory prevent non-affiliated businesses from over-charging their consumers to pay referral fees? Competition is actually more likely to prevent the non-affiliated business from gouging their customers because the referrer is not tied to the non-affiliate. It would be easy for the referrer to go to another provider willing to pay the kick-back that would charge the consumer less. However, with the AfBA, the referrer has an investment in the new entity to protect. They have more control over the fees charged and they could just as easily increase the consumers fees to create a larger split of the profits. Because they are the main source of business for the AfBA, there is little threat of competition to protect the consumers from unnecessarily inflated fees.
Call it whatever you want... referral fees, fee-splitting, profit sharing... its all effectively the same thing - A BAD IDEA. It seems that the original drafters of RESPA realized this, which is why they included Section 8. I don't understand the logic that its okay to share fees if we make the referrer and the provider MORE beholden to each other by requiring them to enter a more official business partnership. In my opinion, that makes matters even worse.
Maybe I'm crazy (pun intended), but the AfBA exception to Section 8 creates an uneven playing field, deters real competition, and threatens the future of small agents. How can any of that be good for consumers? But then again, it wasn't the consumers that lobbied for the changes.
Banks, mortgage companies, and Realtors wanted to get their hands on some of the title fees generated from the orders that they were referring. Section 8 prevented that, so the answer was to create the AfBA and get HUD to except them from the anti-kickback provision. In their lobbying efforts, they convinced everyone that consumers were demanding "one-stop shopping" and that more companies (AfBAs) meant more competition. I just can't believe that anyone
bought into that line of bull*!#*. Perhaps I'm not the crazy one ofter all.

Robert A. Franco
SOURCE OF TITLErfranco@sourceoftitle.com