New title insurer undercuts competitors
But rate discounts difficult in some states
By Jack Guttentag, Sunday, October 12, 2008.In the midst of the worst financial crisis since the 1930s, one that originated in and owes its severity to developments in the home mortgage market, it is nice to be able to report some good news about this market. The newly chartered EnTitle Insurance Co. is now offering title insurance directly to borrowers through its Web site, www.entitledirect.com. The premiums charged by EDI undercut those of existing insurers by about 35 percent.
In addition, EDI offers borrowers, as a free service, a method of avoiding what to many borrowers is the worst part of the mortgage experience -- "pile of paper shock," or POPS. POPS results from borrowers being presented with a pile of documents at closing, most of which they have not seen before, and which they are expected to sign while the other participants tap their fingers impatiently. EDI provides a tool called "Control Panel" that allows borrowers to control the flow of documents and information from start to closing.
I was a paid consultant to EDI during 2007 but not since, and I have no financial interest in the company.
Title insurance premiums have always been substantially higher than those that would exist in a well-functioning competitive market, largely because it was marketed to referral agents rather than to the borrowers who paid the premiums. The cost of marketing to referral agents is very high.
On purchase transactions, the Realtor is usually the referral agent, while on refinances it is usually the lender. Referral agents usually are more interested in using their referral power to feather their own nests than to negotiate lower prices for consumers. While direct payment of referral fees is illegal, there are many indirect ways to do it that are legal, including making the referral agent a part owner of the title agency. EDI will also have marketing costs, but it is betting that in the Internet age its costs will be substantially lower.
Cutting the price of title insurance can be a hassle. Title insurance is regulated by the states, and all but a few require that premium charges be posted with the state. In some states, individual insurers post their premiums, while in others it may be done either by an individual company or by a group of cooperating insurers. In Texas, New Mexico and Florida, premiums are set for all companies by the state itself.
EDI will begin in Pennsylvania and plans to offer insurance in 33 states by the end of 2008, and in most of the remaining states in 2009. It may find a way to discount prices in Florida, but will not be able to in Texas and New Mexico until those states change their restrictive laws. Iowa is also out of bounds because a state agency there offers title insurance at very low premiums.
The Control Panel service is available free to all borrowers, whether they purchase title policies from EDI or not. The core of this service is an online folder that contains all information relevant to the transaction, and which is continually updated as the loan moves toward closing. EDI assigns a closing specialist to each borrower who monitors the entire process, and will alert the borrower to any tasks that need to be completed before the closing. (The closing specialist is available to help, even if the borrower does not use the Control Panel). EDI provides a list of common tasks, and borrowers can add their own.
EDI also provides sample documents for early review, which will be replaced by the actuals as these become available. One of these is the new HUD-1 closing document proposed by HUD, which is shown side by side with the good faith estimate of settlement costs that is provided the borrower within three days of submitting a loan application. Through continuous updating of the HUD-1, borrowers will see any divergences in the original estimates of settlement costs as they occur, as opposed to being blindsided by them at closing.
The Control Panel device is a bold initiative, to my knowledge the first of its kind. Whether it works or not depends in good part on whether the third parties involved in the process -- Realtors, loan providers and perhaps attorneys -- participate. Borrowers will give them access to their folders, but whether the third parties use it as the principal mode of communication with borrowers and whether they download documents to the folder in timely fashion and keep them up to date remains to be seen.
My surmise is that the degree of third-party participation will depend very much on how borrowers approach them. If borrowers raise the issue of the Control Panel after selecting their Realtor and loan provider, many will be reluctant to change their customary routine. They don't have to comply because they already have the customer. To ensure their active participation, I would make it a written condition of my doing business with them.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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Submitted by Dave Wirsching on October 13, 2008 - 3:44am.
Thank you for enlightening article, but I do have to question the good professor’s disclaimer of “no conflict of interest.” Somehow he forgot to mention that in Pennsylvania the 35% discount is on the insurance premium only, and that Entitle Direct adds $425 in “other fees” (disclosed in smaller print at the bottom of the quote form) that virtually nullifies any advertised discount. Some have already called their advertising misleading.
Those other fees, while they may technically be allowable, are not typically charged by local, independent title agents. At the end of the transaction, Entitle customer could end up paying more, not less for their title insurance.
Prof Guttentag also fails to mention that Entitle’s model of centralized processing and apparent use of 3rd party signing agents are practices that are potentially fraught with service and security issues.
Being a booster for a former client under the guise of an impartial critic gives rise to the appearance of impropriety. As a former consultant myself, it is something I wouldn’t have even considered. It is disappointing the Proffessor Guttentag decided to cross that line.
Submitted by Lenn Harley on October 13, 2008 - 4:20am.
I'm curious to know just how referring a home buyer client to a convenient, efficient title company "feathers our own nest". With the exception of affiliated business entities, most agents select title company referrals on the basis of good service to our buyer clients. Most buyer's agents with any experience understand the nature of "arms length" referrals. We also understand RESPA.
My few experiences with on-line closing entities that rely on buyer management were not good examples of consumer friendly services. In most cases, the fees quoted were more than they buyer would have paid with a local title company and in one case, if the Realtor, me, had not had an opportunity to review the pro-forma HUD-1, the buyer would have paid more than $4,000 more than necessary. We are, in fact, the only entity with a duty of fiduciary, in some states, to our buyer clients.
Asking home buying consumers to manage an on-line closing is, in my opinion, risky and could easily result in more overcharges than with local title companies or title attorneys.
Lenn Harley
Broker
Homefinders.com
http://www.homefinders.com
Submitted by Jay Seville -- Arlington virginia condos on October 13, 2008 - 5:15am.
With the following comment your post does NOT PASS THE SMELL TEST:
Referral agents usually are more interested in using their referral power to feather their own nests than to negotiate lower prices for consumers.
What an ignorant and malicious statement by somebody not working and living within the industry. Any other conspiracies we ought to know about, prof? There is 1 reason a realtor refers somebody to a title co--reliability of the title co such as receiving HUDS early and ability of the title co. to solve problems that arise due to sloppy lenders, etc.
Give me a break! If you want to impugn the integrity or intentions of realtors--actually what is this guy doing posting for Inman? This kind of crap is exactly why I stay away from Inman. So many of their voices are conspiracy theorists, etc.
jay
JustNewListings.com
Submitted by Lane Barnett on October 13, 2008 - 8:13am.
Obviously the professor is deeply in bed with entitledirect.com despite his protestations.He blithly ignores the realities of service provider selection and the laser focus now on any hint of kickbacks to agents for referred business.
The road is littered with failed technology companies trying to substitute discounted help yourself process for trusted advisors providing personal caring service.
I guess this is an academic's view of the real world clouded by the bubble he lives in.
Submitted by Susan Ani on October 13, 2008 - 8:40am.
My jaw dropped when I read this segment of Mr. Guttentag's article: "Title insurance premiums have always been substantially higher than those that would exist in a well-functioning competitive market, largely because it was marketed to referral agents rather than to the borrowers who paid the premiums. The cost of marketing to referral agents is very high.
On purchase transactions, the Realtor is usually the referral agent, while on refinances it is usually the lender. Referral agents usually are more interested in using their referral power to feather their own nests than to negotiate lower prices for consumers. While direct payment of referral fees is illegal, there are many indirect ways to do it that are legal, including making the referral agent a part owner of the title agency."
As a Realtor and broker-associate in the State of Illinois, Cook County, I can expect to run for cover if my clients read these words, when in fact it is the seller's attorneys who fill the role that Mr. Guttentag describes. Realtors have NOTHING to do with title company selection, ownership or ultimate benefits in real estate closings in Illinois. Indeed, the attorneys in this State pursue and maintain relationships with title companies and receive a direct, legal payment from the title company every time they close a deal there. Unfortunately, our state laws do not require that payment to be disclosed to the clients who are paying for the title insurance, so they are not aware of this system. If the heretofore uninformed consumer in Illinois reads Mr. Guttentag's article and takes it at face value, we agents are going to be painted unfairly in an unflattering light.
Apparently Mr. Guttentag is describing a system of title insurance that he is familiar with, but it is an understatement for me to state that an article intended for public consumption should be careful to reflect the factual realities of the market where the readers of said article are residing. Ethical real estate agents have enough of a challenge as it is, dealing with lack of trust on the part of the public. Respectfully suggesting that we don't need this misinformation heaped on us as well.
Submitted by Kris Simpson on October 13, 2008 - 9:43am.
I agree with the previous posts and am astonished, but not surprised, by the comment posted by the realtor from Illinois. Lawyers actually can bill and get paid legally by a title company. WOW. That explains a lot when considering the Presidential elections right now and the financial mess this country is facing thanks to the mortgage company executives and politicians that wanted deregulation of lending practices.
As for the western states, it is illegal for any realtor to receive anything from a title company as inducement for business. They do offer ongoing education classes for us in Oregon to continue our required hours for licensing, most often paid for by the title company, sometimes a fee is involved depending upon the topic, the speaker, location, etc. But we all select a title company for our clients based on the experience and service that will be provided, not on any type of financial participation and I, too, am insulted by the author's mispresentation in this article.
Submitted by Matt Carter on October 16, 2008 - 12:36pm.
It's fair to debate the merits of this particular business and also whether affiliated business arrangements (AfBAs) are a good deal or a bad deal for consumers ("Study: Affiliated businesses don't charge more for title insurance").
But let's not pretend that that title insurers, real estate brokers and agents, builders, mortgage lenders, and attorneys don't routinely get caught up in allegations of paying and receiving kickbacks or violating rules governing AfBAs in marketing title insurance and other settlement services to consumers, or that this is not a major source of contention between the industry and state and federal regulators.
HUD: bankrupt Arizona lender violated RESPA
Payments to brokers, builders run afoul of anti-kickback rules
August 12, 2008
A bankrupt Arizona mortgage lender paid $856,000 in bonuses, marketing fees and "non competition" fees to mortgage brokers, builders and real estate brokerages that referred nearly $1 billion in business to the company, according to two audit reports by the Department of Housing and Urban Development.
California targeting real estate kickbacks
Proposed rules could drive some title insurers out of business
August 11, 2008
California regulators plan to tighten rules governing affiliated businesses and step up enforcement of anti-kickback provisions in existing law -- changes they estimate could cost the state's title insurers and underwritten title companies up to $732 million a year in profits.
Brokers, Property I.D. agree to $39 million settlement
Hazard disclosure reports subject to RESPA
August 7, 2008
Californians who bought natural hazard disclosure reports when they listed their homes with Coldwell Banker, Prudential California Realty, RE/MAX, Century 21 or ERA Real Estate could soon be entitled to full refunds as part of a proposed $39.3 million settlement of a class-action lawsuit.
The settlement agreement, which must still be approved by a federal district judge, stems from a lawsuit alleging that real estate brokers took kickbacks from the company that produced the reports, Property I.D. Corp., in exchange for referring business to the company. The kickbacks were allegedly paid through "sham" affiliated businesses, with brokers receiving about $25 for each report.
HUD, Virginia title agency settle RESPA charges
Sham businesses allegedly used to generate referrals
May 9, 2008
A Virginia title insurance agency has agreed to pay more than $30,000 to settle accusations that it formed 10 sham businesses to enrich attorneys, real estate brokers and agents, and mortgage lenders who provided business referrals.
RE/MAX sues First American
Title insurance marketing spat attracts regulators
April 22, 2008
A legal dispute between RE/MAX International Inc. and First American Residential Group Inc. over a $600,000-a-year marketing agreement has attracted the attention of Colorado regulators, who want to know more about how First American benefited from the deal and why it decided to pull the plug on the agreement last year.
According a lawsuit filed by RE/MAX in March, First American paid the real estate franchisor more than $2.4 million over four years for the exclusive right to market its title insurance and related services to RE/MAX franchises and agents.
LandAmerica pays $1.5 million fine to settle California rate charges
Consumers could get up to $2 million in refunds
January 17, 2008
LandAmerica Financial Group Inc. has agreed to pay up to $3.5 million in penalties and refunds to consumers to settle allegations by California regulators that three title insurers under the company umbrella overcharged -- or in some cases, undercharged -- consumers.
First American pays $5 million to settle Florida kickback charges
Regulators claim 87 title agencies were sham businesses
November 19, 2007
First American Title Insurance Co. has agreed to pay a $5 million fine and sever ties to 87 limited partnership title agencies in Florida to settle allegations the company paid kickbacks to builders, bankers, real estate agents and brokers in exchange for business referrals. Florida regulators and the U.S. Department of Housing and Urban Development accused First American of creating sham affiliated businesses that it owned jointly with companies that could refer home buyers in need of title insurance. The businesses existed only to funnel payments to the companies providing referrals, the settlement alleged, with First American providing "all regular title services required to effect title insurance."
HUD settles captive reinsurance claims for $1.4 million
Six home builders deny wrongdoing
October 29, 2007
Without admitting wrongdoing, six major home builders have agreed to pay nearly $1.4 million to settle charges that subsidiary companies they created to "reinsure" home buyers' title insurance policies violated the Real Estate Settlement Procedures Act (RESPA).
Washington state continues crackdown on title insurers
Four companies face fines over alleged incentives
September 20, 2007
Four title insurers in Washington state face nearly $300,000 in fines after being accused by the state's Insurance Commission of violating a rule that limits annual spending on gifts and other inducements to $25 per person. While many of the offenses involved small expenditures, Washington state regulators appear determined to enforce the letter of the law in their third action against title insurers since an investigation conducted in 2005 and 2006 found "widespread, pervasive and routine use of illegal spending to steer business to their companies."
Stewart Title settles captive reinsurance claims for $1 million California regulators had sought $41.6 million in penalties
August 29, 2007
Stewart Title Guaranty Co. has agreed to pay California regulators $1 million to settle allegations that it paid illegal kickbacks to builders, lenders and title agents in exchange for title insurance business. In its complaint against Stewart Title, the California Department of Insurance had sought $41.6 million in fines and penalties for allegedly paying out $500,000 in illegal rebates to affiliated businesses as part of a captive reinsurance scheme that generated 3,908 title insurance policies. Captive reinsurance companies created by home builders, lenders and title agents were paid up to 50 percent of the title insurance premiums from the policies, investigators said.
Stewart Title faces $1.95 million fine in Washington state
Insurance commissioner alleges 195 illegal incentives, inducements
August 28, 2007
Washington state officials are seeking $1.95 million in fines against Stewart Title Guaranty Co. for allegedly using illegal incentives and inducements to win business from real estate agents, brokers and agencies. Insurance Commissioner Mike Kreidler said an investigation of records at Stewart Title of Snohomish County Inc. uncovered 195 violations of a state law that prohibits title insurance companies from giving more than $25 a year to individuals as business inducements.
Title industry under scrutiny again
GAO calls for sharper oversight, improved consumer protections
April 19, 2007
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.
Minnesota agents accused of participating in sham businesses
First American Title settled allegations in February for $500,000
April 5, 2007
Minnesota officials are sending enforcement letters to real estate agents alleged to have participated in sham affiliated business arrangements with First American Title Insurance Co. The letters, which follow a $500,000 Feb. 28 settlement with First American, request that the agents admit to the allegations and pay a fine in the range of $1,000 to $2,000, according to an alert posted on the Minnesota Association of Realtors' Web site.
Minnesota fines First American $500,000 for alleged sham businesses
Title insurer denies allegations in consent order
March 7, 2007
First American Title Insurance Co. has agreed to pay a $500,000 civil penalty to Minnesota regulators to settle allegations that it created 35 sham businesses that generated referrals from partners including real estate agents and brokers, mortgage originators, building contractors and land developers.
First American Title pays $10M to settle illegal rebate charges
Company allegedly provided cash, gifts for referrals
January 24, 2007
First American Title Insurance Co. has quietly agreed to pay $10 million to settle allegations by California regulators that the company illegally drummed up business by making cash payments and other inducements to real estate professionals that included free software, tickets to rock concerts, chartered fishing trips, riverboat dinner cruises, and trips to racetracks and casinos.
Minnesota and HUD to crack down on affiliated title insurers
Mortgage lender agrees to pay $19,812 in restitution and fees
November 21, 2006
Minnesota and federal housing officials have launched a crackdown on affiliated business arrangements in which real estate brokerages, lenders or builders own a share of companies that provide title insurance.
HUD settles captive title reinsurance allegations for $1.95M
Home builders accused of RESPA violations
October 16, 2006
Three home builders -- Shea Homes Inc., William Lyon Homes and Fulton Homes -- have agreed to pay the Department of Housing and Urban Development $1.95 million to settle allegations they engaged in captive reinsurance.
Title insurers settle with New York attorney general
Fidelity, First American to pay $2 million each
May 25, 2006
Fidelity National Financial and First American will each pay a $2 million fine and cut their rates by 15 percent to settle a probe by New York's attorney general, the official said Tuesday. New York Attorney General Eliot L. Spitzer alleged that the two title insurers gave real estate developers free or discounted title insurance in other states in exchange for giving their New York business to Fidelity and First American. The companies have not acknowledged any wrongdoing.
Title insurance giants to refund $22.7M to consumers
Fidelity, First American settle kickback allegations with California Insurance Commission November 3, 2005
Two of the nation's largest title insurers agreed to pay a total of $22.7 million to consumers in final settlement agreements over alleged rebate activities with California's insurance commissioner, the Insurance Commission said late Wednesday. Fidelity National Financial and First American Title Insurance Co. were accused of setting up captive reinsurance companies to funnel illegal rebates to banks, builders and real estate agents who in turn would allegedly steer business back to the title companies.
First American settles kickback probe for $680,000
Title insurer accused of sham business partnerships
July 13, 2005
First American Title has agreed to pay $680,000 in a settlement with the Department of Housing and Urban Development over a probe of alleged kickbacks involving sham affiliated business partnerships, HUD said today. HUD claimed First American Title Insurance Co., doing business as Memphis Title Co., made payments through alleged sham affiliated businesses in the Memphis area in violation of anti-kickback and unearned fee provisions of the Real Estate Settlement Procedures Act, known as RESPA.