Limited regulation, complicated business affiliations and an apparent lack of consumer protections have clouded title insurance industry operations, and regulators must step up oversight and enforcement to ensure cost competition and prevent illegal activities, a government report concludes.
“Given consumers’ weak position in the title insurance market, regulatory efforts to ensure reasonable prices and deter illegal marketing activities are critical. However, state regulators have not collected the type of data, primarily on title agents’ costs and operations, needed to analyze premium prices and underlying costs,” according to the report, released this month by the U.S. Government Accountability Office.
GAO officials recommend that the U.S. Department of Housing and Urban Development and state regulators “improve consumers’ ability to shop for title insurance based on price.” Title insurers tend to market to lenders and real estate brokers rather than to the consumers that ultimately are paying for their services, according to the report, and this has raised questions about the relationships among these industry participants.
HUD should improve its enforcement of federal real estate law related to illegal kickbacks, clarify regulations related to affiliated business arrangements and referral fees, and work better with state regulators, according to the report, and state regulators should work to improve oversight of title agents. HUD should have the authority to levy civil fines against title insurance companies, the report recommends, and provide more information to consumers.
“In the states we visited, we found that regulators did not assess title agents’ costs to determine whether they were in line with premium rates; had made only limited efforts to oversee title agents (including affiliated business associations involving insurers and agents); and, until recently, had taken few actions against alleged violations of anti-kickback laws,” the GAO report concludes. “In part, this situation has resulted from a lack of resources and limited coordination among different regulators within states.”
State and federal regulators are not asleep at the wheel — the report notes that insurance regulators in six states have conducted numerous investigations of title insurance industry practices that have led to about $90.6 million worth of fines or settlements from 2003-06.
About $63.2 million of that amount related to investigations of title insurance-related entities called captive reinsurance companies that allegedly facilitated kickback schemes, according to the report. Under these arrangements, a combination of builders, real estate brokers, lenders, title insurance companies could work in conjunction with title insurance companies to set up reinsurance entities, which investigators charged were used to funnel money back to the owners of the reinsurance entities.
HUD investigations have led to about $10.7 million in fines or settlements with title insurance companies during that period.
The report, “Title Insurance: Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers,” follows an April 2006 GAO report on title insurance that called for further review of industry practices. GAO investigators focused on the characteristics of title insurance markets and differences across states; prices and competition in the industry; and the regulatory environment and planned regulatory changes. The report is based on a review from February 2006 to March 2007 of industry practices in six states: California, Colorado, Illinois, Iowa, New York and Texas.
Greg Kosin, president of the American Land Title Association, a national title insurance industry trade association, said in a statement, “ALTA remains vigorously opposed to illegal or sham efforts that ultimately harm consumers and our industry. We look forward to working to address the concerns and questions raised by the GAO so that homeowners across the nation can be assured their interests and their homes are protected from contract to closing.”
“The report is what we expected. There aren’t any surprises in the report,” said Edward C. Miller, chief counsel and vice president of public policy for ALTA. Miller told Inman News that the group’s initial assessment of the GAO report is that the recommendations “are ones we can support.” An added authority for HUD to levy civil fines does not fix the need for more resources at HUD to enforce compliance, he said.
The report found that “some state regulators expressed frustration with HUD’s level of responsiveness to their requests for help with enforcement,” and that HUD “did not always follow up with them on forwarded cases, potentially limiting the success of investigative efforts.” While state regulators told investigators that they looked to HUD to enforce kickback provisions of federal real estate law, “HUD officials and state regulators told us that there was no formal plan for coordinating with states, and that cooperation, where it existed, relied on requests and informal relationships.”
HUD officials also told GAO investigators that poor communication may be the result of “state and federal jurisdiction issues, constrained resources, and complaint-driven enforcement that limited HUD’s scope,” the report states.
HUD officials did not respond to an Inman News request for comment, though Brian D. Montgomery, assistant secretary for housing at HUD, stated in written comments to the GAO, “HUD believes that the report accurately assesses issues that adversely impact consumers related to the title insurance industry.” Also, Montgomery stated that HUD’s inability to assess civil money penalties for illegal referrals “continues to present enforcement challenges.”
The ALTA trade group had suggested that title industry participants could police themselves by reporting the allegedly illegal actions of competitors, though the report only makes passing reference to this enforcement strategy.
And while the report calls for the need to collect more industry information from title insurance agents to determine whether pricing is competitive, Miller said that could be an expensive process for industry participants. “The great majority of our members are small business agents. It could be very expensive. The devil’s going to be in the details on this,” he said. “We have to make sure we don’t overly burden small businesses and that we’re not asking for confidential, proprietary information.”
Diane Cipa, a title agent and owner of The Closing Specialists who has been outspoken in calling for industry reform, said the GAO recommendations represent an important step and she believes it will lead to change.
“I think politicians and regulators are — in a way that they have not been before — really looking for answers and solutions and I think will really look at this for guidance,” she said. “We’ve been waiting for this report — we’ve been waiting with baited breath. I think this is big,” Cipa said.
Cipa said she is glad that the report addressed affiliated business arrangements involving title insurers. Such arrangements allow other industry professionals, including real estate agents and brokers, to have a stake in title insurance operations.
The potential conflict of interest posed by these affiliations, she said, may be enough to cause federal officials “to just rethink the entire system,” she said. “You just can’t define the lines (between affiliated businesses) in a way that will eliminate that conflict of interest. If you take away the wall that’s between consumers and the actual title insurance — the wall of the referral network — consumers will be talking directly to title insurers. Those title insurers will freely negotiate price.”
While Congress has been busy in considering the cause and effects of the crisis in subprime lending, Cipa said she views the problems in title insurance as interconnected. “I’m hoping that legislators see the connection. The smell of money brought a bunch of bad actors in,” which led to problems in predatory lending, the subprime market and within the title insurance industry, she added.
A representative for the National Association of Insurance Commissioners, a group for insurance regulators, could not be reached for comment about the GAO report.
Debbie E. Campagnola, CEO for the Association of Real Estate License Law Officials, a group for real estate regulators, said in a statement, “ARELLO members are committed to working with state and federal regulators in efforts to protect the public from excessive fees and improper kickbacks concerning the procurement of title insurance.”