California Insurance Commissioner John Garamendi launched a media campaign Thursday to publicize proposed regulations on the title insurance industry he said would cut rates by 23 percent and save consumers $1 billion a year.
Garamendi claimed there is little to no competition in the state’s $4.5 billion title insurance industry, and that it is rife with illegal kickbacks and gratuities that are passed on to consumers
Title insurance and escrow companies dispute those assertions, some of which are based on a study released in December, and vow to fight the state’s proposed rate-setting regulations.
The regulations, which could go into effect in March, are the subject of an Aug. 30 hearing in San Francisco, Inman News reported last week. Garamendi held a noon press conference in Los Angeles today and planned to make himself available to reporters in Sacramento this afternoon.
By basing the price of title insurance on the cost of homes, the industry has created “a dysfunctional pricing system” that is “virtually unrelated to the cost of services provided,” Garamendi’s office said in a press release Thursday.
The Commissioner wants to require title insurers and the escrow companies they control to provide detailed annual reports disclosing their costs, which would be plugged into a complicated formula to set limits on rates.
But information on costs wouldn’t be collected until 2008. In the meantime, Garamendi proposes “interim maximum rates” based on each company’s rates in 2000, before a steep run-up in housing prices in California.
The Commissioner said the interim maximum rate would reduce the cost of title insurance for a home purchase by 23 percent, title insurance for refinancing by 16 percent, and cut the cost of escrow services provided by escrow companies controlled by title insurers by 27 percent.
A spokesman for title insurance companies said that competition and new products have already driven rates down in California, and that the industry had been working with the Insurance Commissioner to develop a Web site that would allow consumers to become better educated and shop for the best rates. The proposal for new regulations therefore came as a surprise to the industry, said Lawrence Green, executive vice president and counsel of the California Land Title Association.
A spokesman for the Insurance Commissioner’s office, Norman Williams, said that during “extensive talks with the industry,” title insurance companies offered “a placebo that would do nothing to help consumers.”
“While First American has been pretty eager to work with us, a number of other companies were reticent, and what they offered would not serve the best interests of consumers,” Williams said. “They would still have a problem shopping around for title insurance, and be paying the excessive prices charged today.”
Green said that plans for a CLTA-backed Web site with rate-shopping features had been moving forward. “All of the companies I’ve talked to are willing to go along,” he said.
The problem with the proposed regulations, Green said, is they don’t take into account that title insurance companies incur higher costsin a booming housing market, because they must handle a larger volume of businesses. In a decline, he said, companies may still have high fixed overhead costs.
“What Garamendi seems to fail to realize is it’s a cyclical industry,” Green said. “When it’s slowing down, it’s a totally different dynamic.”
Green suggested that Garamendi, who is the Democratic Party nominee for lieutenant governor in the November election, has political motives.
“Garamendi, he just seems to be out of control,” Green said. “It’s election-year driven.”
Although the Commissioner says existing law gives him the power to collect information from title insurance companies and veto rates found to be “excessive, inadequate or unfairly discriminatory,” Green said the CTLA will consider challenging the proposed regulations in court if they are adopted.
The Escrow Institute of California is also opposed to the proposed regulations, calling them an attempt to usurp the authority of the California Department of Corporations to oversee independent licensed escrow companies.
The New York State Insurance Department recently approved a 15 percent rate reduction after New York Attorney General Eliot Spitzer investigated illegal rebates and referral fees among top title insurers in the state.
A study of the title insurance industry in Florida released this week concluded that the industry is dominated by five firms and that the state’s residents pay more for comparable title insurance than consumers in other states.
“I don’t think you can draw conclusions (about competition in California) from what’s happening in other states,” Green said. “You have to look to each particular state.”
In California, Green said, a Bankrate.com study found California title insurance rates were below the national average, and substantially below rates in other major states.
The hearing on California’s proposed new regulations on the title insurance industry will take place at 10 a.m. Aug. 30 in the Department of Insurance Hearing Room, 45 Fremont St., San Francisco. The text of the proposed regulations are available here.