SHOPPING FOR TITLE INSURANCE
From The States
David Giusti

David Giusti is a Director for State Net's Financial Services Division (www.statenet.com), an online federal and state legislative research company located in Washington, DC.

MANY financial institutions today offer title insurance programs, and those that don’t offer this product often have relationships with agencies that do. With the recent rise in mortgage foreclosures, however, mortgage-lending practices—including title insurance programs—are expected to face increased scrutiny from lawmakers.

Title insurance guarantees an owner’s right to property. Such a policy provides legal documentation of home or auto ownership in the event of a dispute—for example, an undisclosed lien. Although we usually think of insurance as protecting the policyholder against future risk, title insurance is unique in that it provides protection for events that have already taken place.

Title insurance differs from traditional insurance products in several other respects. Unlike most other types of policies, premiums are only paid once. Claims are also uncommon when compared with other lines of insurance. The industry is also heavily concentrated; most states are dominated by a handful of insurers.

Perhaps the most interesting aspect of title insurance, however, is the manner in which it is sold. A typical home buyer will extensively research a real-estate listing before placing a bid. The home buyer will then exercise due diligence when considering a mortgage loan. However, many consumers don’t realize the necessity of title insurance until the closing draws near. The policy then becomes a by-product of the anticipated purchase.

Those consumers who understand the importance of title insurance may not realize their options. Moreover, since the price of the policy is minuscule compared to the overall cost of the home, there is less initiative to shop around. As a result, the consumer is often influenced by the real-estate broker or mortgage lender when selecting a policy.

Improper referrals?

Rising title insurance fees went unnoticed during the housing boom, but now consumer advocates are pointing toward home buyers who paid too much for a service they didn’t understand. Advocates maintain that current title insurance premiums far exceed the cost of providing coverage. Of greater concern is the influence exerted by third parties when a policy is purchased. Indeed, a title insurer that is referred by a real-estate agent or mortgage broker can carry added weight, resulting in a stronger title insurer/third-party relationship. Unfortunately, fraudulent behavior can also result from these relationships.

During 2007 state legislative sessions, 61 bills were introduced that concerned title insurance.

Although most state laws prohibit kickbacks and referral fees, some improper business arrangements have gone unnoticed. Last year, an investigation by former New York Attorney General Eliott Spitzer revealed that real-estate developers were receiving free or discounted title insurance in other states in exchange for referring business in New York. In Washington State, Insurance Commissioner Mike Kreidler has levied fines against several title insurance agencies for providing incentives exceeding $25 per year to third parties in a position to refer business.

This past spring, the Government Accountability Office (GAO) released a report that recommended improved oversight of the title insurance industry. The report documented the increase in affiliated business relationships, and suggested that price competition had been compromised as a result.

Specific recommendations were also made to help states detect illegal practices and improve consumers’ ability to shop for title insurance. During 2007 state legislative sessions, 61 bills were introduced concerning title insurance. Of the legislation considered, 12 were enacted. On the regulatory side, eight states have proposed rules that would impact agents who sell title insurance.

Regulating title insurance agencies

Although title insurance agents are subject to the Real Estate Settlement Procedures Act (RESPA), the regulation of title insurance is primarily driven by the state insurance agencies. However, some insurance agencies only have the regulatory authority to oversee title insurers, not title agencies.

Therefore, legislation is being proposed that would require all title insurance sales representatives to be licensed by the state’s department of insurance. Some states are refining existing licensing requirements to require pre-licensing criminal background checks and examinations. Rules are also being proposed to provide bonding requirements and continuing education for existing agents.

In spite of these efforts, it should be noted that insurance regulatory bodies have no jurisdiction over real-estate agents, mortgage brokers, and others who are indirectly involved with title insurance sales.

Additional efforts are also being pursued to combat fraud. Many state title insurance companies are required to pay additional fees to fund increased oversight. State legislators have also begun to introduce bills that would require additional disclosures and more transparency in the sales process.

Even though regulatory agencies are now paying closer attention to how title insurance is sold and by whom, it is worth noting that several states have suggested that deregulation is also needed. While most states do not regulate title insurance rates, Florida, New Mexico, and Texas still set premiums. New Mexico is currently evaluating deregulation and is considering allowing free-market competition in the pricing of title policies. If this change is made, the state is also likely to consider a proposal that would make real-estate agents or banks responsible for purchasing policies in order to keep premiums low.

In lieu of the GAO recommendations, lawmakers can be expected to continue investigating the practices of the real-estate title insurance industry in 2008, and make recommendations to improve consumer protection, education, and awareness. Business arrangements involving banks, insurers, and real-estate agents will likely be examined as part of this investigation.