[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
TITLE INSURANCE:
COST AND COMPETITION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND COMMUNITY OPPORTUNITY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
----------
APRIL 26, 2006
----------
Printed for the use of the Committee on Financial Services
Serial No. 109-88
TITLE INSURANCE: COST AND COMPETITION
TITLE INSURANCE:
COST AND COMPETITION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND COMMUNITY OPPORTUNITY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
APRIL 26, 2006
__________
Printed for the use of the Committee on Financial Services
Serial No. 109-88
U.S. GOVERNMENT PRINTING OFFICE
30-539 WASHINGTON : 2006
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair DARLENE HOOLEY, Oregon
RON PAUL, Texas JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio BRAD SHERMAN, California
JIM RYUN, Kansas GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio BARBARA LEE, California
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut JOSEPH CROWLEY, New York
VITO FOSSELLA, New York WM. LACY CLAY, Missouri
GARY G. MILLER, California STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota JOE BACA, California
TOM FEENEY, Florida JIM MATHESON, Utah
JEB HENSARLING, Texas STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida AL GREEN, Texas
RICK RENZI, Arizona EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin,
TOM PRICE, Georgia
MICHAEL G. FITZPATRICK, BERNARD SANDERS, Vermont
Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
CAMPBELL, JOHN, California
Robert U. Foster, III, Staff Director
Subcommittee on Housing and Community Opportunity
ROBERT W. NEY, Ohio, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California
Chairman NYDIA M. VELAZQUEZ, New York
RICHARD H. BAKER, Louisiana JULIA CARSON, Indiana
WALTER B. JONES, Jr., North BARBARA LEE, California
Carolina MICHAEL E. CAPUANO, Massachusetts
CHRISTOPHER SHAYS, Connecticut BERNARD SANDERS, Vermont
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
GINNY BROWN-WAITE, Florida BRAD MILLER, North Carolina
KATHERINE HARRIS, Florida DAVID SCOTT, Georgia
RICK RENZI, Arizona ARTUR DAVIS, Alabama
STEVAN, PEARCE, New Mexico EMANUEL CLEAVER, Missouri
RANDY NEUGEBAUER, Texas AL GREEN, Texas
MICHAEL G. FITZPATRICK, BARNEY FRANK, Massachusetts
Pennsylvania
GEOFF DAVIS, Kentucky
CAMPBELL, JOHN, California
MICHAEL G. OXLEY, Ohio
C O N T E N T S
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Page
Hearing held on:
April 26, 2006............................................... 1
Appendix:
April 26, 2006............................................... 39
WITNESSES
Wednesday, April 26, 2006
Cunningham, Gary M., Deputy Assistant Secretary for Regulatory
Affairs and Manufactured Housing, U.S. Department of Housing
and Urban Development.......................................... 9
Hunter, J. Robert, Director of Insurance, Consumer Federation of
America........................................................ 28
Miller, Douglas R., President and CEO, Title One, Inc.,
Minneapolis, MN................................................ 30
Sterbcow, Arthur, President, Latter and Blum, Realtors, New
Orleans, LA, on behalf of the Real Estate Services Providers
Council, Inc................................................... 32
Stevens, Thomas M., President, National Association of Realtors.. 34
Toll, Erin, Deputy Commissioner of Insurance Compliance,
Colorado, and co-Chair of the National Association of Insurance
Commissioners' Title Insurance Issues Working Group............ 4
Williams, Orice M., Director, Financial Markets and Community
Investment, U.S. Government Accountability Office.............. 7
Yeager, Rande, President and CEO, Old Republic National Title
Insurance Co., Minneapolis, MN, on behalf of the American Land
Title Association.............................................. 36
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 40
Ney, Hon. Robert............................................. 42
Waters, Hon. Maxine.......................................... 43
Velazquez, Hon. Nydia M...................................... 45
Cunningham, Gary M........................................... 46
Hunter, J. Robert,........................................... 55
Miller, Douglas R............................................ 78
Sterbcow, Arthur............................................. 153
Stevens, Thomas M............................................ 171
Toll, Erin................................................... 180
Williams, Orice M............................................ 199
Yeager, Rande................................................ 212
Additional Material Submitted for the Record
Statement of the American Homeowners Grassroots Alliance..... 497
TITLE INSURANCE:
COST AND COMPETITION
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Wednesday, April 26, 2006
U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:55 p.m., in
room 2188, Rayburn House Office Building, Hon. Robert Ney
[chairman of the subcommittee] presiding.
Present: Representatives Ney, Miller of California, Tiberi,
Neugebauer, Campbell, Waters, Lee, Scott, Cleaver, and Green.
Ex officio: Chairman Oxley.
Chairman Ney. This afternoon, the Subcommittee on Housing
and Community Opportunity meets to discuss title insurance and
its role in the real estate transaction. I do look forward to
today's panel, and I want to thank you for coming and sharing
your views on title insurance, costs, and competition in the
marketplace.
Title insurance, of course, is designed to protect
homeowners and lenders from future claims to their property. It
helps protect against the risk that property may be encumbered
at the time of sale by unknown rights and claims that would be
asserted by others.
Title problems can limit the homeowner's future use of real
estate and threaten the security interests the mortgage lender
holds on that property.
Unlike most other types of insurance which focus on
potential future events and are renewed annually, such as
homeowners or automobile insurance, title insurance, of course,
protects against losses arising from past defects, and is only
paid at the purchase or refinancing of a home.
For the past several years, regulators, industry groups,
and others have suggested several changes to regulations that
would affect the way title insurance is sold. In 2002, HUD
proposed revisions of the Real Estate Settlement Procedures
Act--RESPA, as everybody knows--that were designed to increase
competition in the real estate settlement industry. The
proposed revisions included the development of guaranteed
mortgage packages and a more binding good faith estimate, both
of which would have affected the pricing and sale of title
insurance. Such revisions appear to be controversial, and HUD
was forced to withdraw the proposal in 2004.
However, HUD announced in June of 2005, that it was again
considering revisions to the regulations implementing RESPA,
and was seeking input from the industry and others. Given the
intense member interest in this issue during the previous
Congress, and the attention this issue has received in the
media, RESPA reform, I don't think, is going to be a simple
one. Rather, it's pretty complex. It's important that HUD take
a cautious and thorough approach, weighing all the
perspectives, of course, as it moves forward.
While title insurance differs from many other insurance
products in the marketplace, it's a valuable tool in protecting
homebuyers and lenders from problems that may arise in a real
estate transaction. However, buying a home has become pretty
complex. It has to be simplified, so there is more transparency
in the pricing of settlement services.
While we all may agree on that goal, there are differences
in how to achieve it. It's my hope that today's hearing will
focus on the importance of regulation that balances the need
for vigorous consumer protections with vibrant business
competition to provide a healthy insurance marketplace for
consumers. And with that, I will yield to the Chairman of the
Full Committee, Mr. Oxley.
The Chairman. Thank you, Mr. Chairman, for holding this
hearing, and for your continued leadership in making it easier
for consumers to buy homes. This subcommittee, under your
leadership, has led the way with the American Dream Downpayment
Act, the Zero Downpayment Act, and other initiatives to make
the dream of home ownership a reality for an impressive 69
percent of American families.
Congress could still do more, however, to reduce barriers
that limit competition in the real estate marketplace. Many
home buying services with relatively fixed costs, such as
realtor fees, title searches, and lending fees, have
skyrocketed, along with the value of the homes, even though the
amount of work involved has actually been reduced with improved
automation and computerization.
If a house has doubled in value, does it really cost the
realtor twice as much to sell it, and the title agent twice as
much to do the automated title search? Consumers are paying
home purchase costs that are artificially high, because of the
lack of competition in real estate services.
I am particularly concerned about the ongoing
investigations of title insurance fraud that have already
resulted in tens of millions of dollars in settlements. In
Colorado, Deputy Insurance Commissioner Toll, who is with us
today, has unraveled a web of illegal kick-back schemes using
captive re-insurance, and involving title insurance agents,
builders, realtors, and other real estate service providers.
These schemes have inflated the price for title insurance
for thousands of people. Few consumers will hold up their new
home purchase over a few thousand dollars in title insurance.
But what the consumer doesn't know is that, in many cases, a
large percentage of the consumer's title insurance payment is
kicked back to the real estate professional who set up the
closing in the first place.
Illegal kickbacks are already a violation of RESPA. But the
investigations by Colorado, Minnesota, California, and other
States make it clear that this is an endemic problem. That is
why I ask the GAO to investigate for Congress how title
insurance gets sold in the real estate marketplace.
GAO's interim report raises some very troubling questions
for members of this committee. According to GAO, in several
cases, title insurers, or agents, have created fraudulent
businesses and arrangements to provide potentially illegal
kickbacks to realtors, mortgage brokers, lenders, and
attorneys, in return for steering business their way.
GAO is finding that instead of focusing on consumers, title
agents normally market their business to these real estate
providers, creating a potential conflict of interest that
benefits the providers at the expense of the consumer.
I believe that most business professionals are beyond
reproach, and provide consumers with the best services that
they have available. Some of these individuals are here with us
today. Unfortunately, the majority of professionals find
themselves undercut by unscrupulous actors who are
circumventing RESPA's rules on illegal kickbacks. Given the
number of annual home purchases and refinancing, I don't
believe it's a lack of price competition in real estate
services, it's something we can just enforce our way out of.
HUD and State insurance departments simply do not have the
resources to monitor every property transaction. This is a
structural marketplace problem that, at some point, Congress
will have to address.
I want to thank our witnesses for joining us today to help
shed some light on this critical consumer issue. Ms. Toll has
been the leader in uncovering title insurance problems and
opening the path for others to follow in protecting consumers.
GAO and HUD have been very helpful in analyzing the marketplace
and initiating a discussion of potential next steps.
And the witnesses on our second panel will be enormously
helpful in providing us with the industry and consumer group
perspective to separate fact from fiction, and to underscore
why a vibrant title insurance marketplace is so important for
our consumers.
Mr. Chairman, I look forward to working with you, Ranking
Member Waters, and other members of the committee, as we begin
this discussion of the problem, and a search for solutions. And
I yield back.
Chairman Ney. Well, I thank the chairman for his
participation in this, and for his leadership on the committee.
And the gentlelady from California, Ms. Lee?
Ms. Lee. Thank you, Mr. Chairman. I do want to thank you
and our ranking member, Maxine Waters, for convening this very
important hearing on title insurance. And also, I want to thank
our witnesses for being here today.
The home ownership process, we all know, is filled with
confusion. Countless documents, fees that consumers must weed
through, trying to understand this whole process, is quite
overwhelming. Many in the real estate industry want to see a
consolidation of the paperwork, and make the process easier for
potential homeowners. We all agree that the process must be
consolidated.
And one of the ways to make the home ownership process
benefit consumers is to look at the fees and the competition,
or lack thereof, in shopping for a lender or a broker,
appraisers, and home inspectors, and title insurance. All of
these issues demonstrate why we must, quite frankly, reopen the
RESPA, and why it's so important that we are here today.
This hearing, I hope, will highlight some of the bad
actors--and there are some--in the title insurance industry,
and how we can correct the problems while maintaining a
competitive market for consumers to choose from.
Title companies really should have to compete, and
consumers should have choices. That's the bottom line. So I
hope that our witnesses will discuss the RESPA violations by
title companies, the kickbacks, the lenders, realtors,
brokers--these kickbacks, and that's what they are, they often
receive these kickbacks from business referrals, as well as--I
hope we talk about the price of insurance compared to the low
percentage of payouts.
So, I look forward to hearing from our witnesses, and
working on--with our chairman and ranking member on drafting
meaningful bipartisan RESPA legislation in the near future.
Thank you, and I yield the balance--
Chairman Ney. I thank the gentlelady. The gentleman from
Texas, do you have an opening statement? And with that, when
the ranking member comes, of course, we will have an opening
statement.
We will go to panel one. We have Erin Toll, who is the
deputy insurance commissioner of compliance and market
regulation for the State of Colorado. She also co-chairs the
National Association of Insurance Commissioners' Title
Insurance Working Group. Ms. Toll's investigations in the title
insurance arrangements in early 2005 led to multi-million
dollar settlements with title insurers.
Orice Williams is currently Director in GAO's Financial
Markets and Community Investment Team. Mr. Williams is
responsible for overseeing and producing reports on topics
affecting the insurance, banking, and securities industries.
Gary Cunningham has been the Deputy Assistant Secretary for
Regulatory Affairs and Manufactured Housing at HUD since April
of 2004. The office has responsibility for enforcement of the
Real Estate Settlement Procedures Act, RESPA, and the
Interstate Land Sales Act, and for the administration of HUD's
manufactured housing program.
With that, we will begin with Ms. Toll. Thank you.
STATEMENT OF ERIN TOLL, DEPUTY COMMISSIONER OF INSURANCE
COMPLIANCE, COLORADO, AND CO-CHAIR OF THE NATIONAL ASSOCIATION
OF INSURANCE COMMISSIONERS' TITLE INSURANCE ISSUES WORKING
GROUP
Ms. Toll. Thank you for the warm welcome. My name is Erin
Toll and I am deputy commissioner at the Colorado Division of
Insurance. I am also the co-chair of the title insurance
working group for the National Association of Insurance
Commissioners, and I am here today testifying on behalf of the
NAIC.
I would like to begin by thanking Chairman Ney,
Congresswoman Waters, and the members of the subcommittee for
inviting me here to testify. I would also like to thank
Chairman Oxley for his leadership and interest on these
important issues.
Today I would like to address three basic points. First,
what is title insurance and how is it regulated? Second, what
problems have we, as State regulators, found with title
insurance, and what are we doing about it? And third, what are
some possible solutions?
So, what is it? How is it regulated? Title insurance is a
necessary but unique product. It protects homeowners and
lenders in the event that a lien, or what's called a cloud, is
found on a title. Unlike other lines of insurance, which
protect against things that may happen in the future, title
insurance protects against something that already happened in
the past.
In addition, the competition is different. Consumers rely
on recommendations from their real estate professionals when
choosing a title insurance agency and a title insurer, unlike
in homeowners and auto insurance. Title insurance entities and
all the participants are regulated by a variety of State laws
and RESPA, the Real Estate Settlement Procedures Act.
Because State and Federal regulators understood the unique
way in which title insurers compete, they created laws that
said it's illegal to give or receive remuneration in any form
for the referral of business. This exchange of something of
value for the referral of business is defined in Federal law as
a ``kickback.''
As insurance regulators, our jurisdiction only extends to
those who are giving the kickbacks. So what are we seeing in
our investigations? What are the kickbacks, and what are States
doing about it?
Our investigations show that a black market has been
created in the residential real estate transaction world. The
good actors absolutely cannot compete with the bad actors,
because the playing field is not level. We have initiated
exhaustive investigations to try and level the playing field,
and ensure a free market.
Settlement service providers are demanding, and title
entities are giving, kickbacks. And the kickbacks usually take
two forms: you've got your unsophisticated direct kickbacks;
and there are sophisticated, indirect kickbacks. And the
sophisticated kickbacks include things like free spa trips, or
free just-listed, just-sold cards, or free farm packages. But
the sophisticated indirect kickbacks, those are the ones that
make my job interesting. Those are a lot harder to discover,
and they include sham affiliated business arrangements and
captive title reinsurance.
Affiliated business arrangements are nothing more than
ownership arrangements between and among settlement providers
and title insurance entities. And they are legal, unless they
are not real, and they are referred to as shams. Our
investigations in Colorado have determined that many of these
affiliated business arrangements are simply vehicles to provide
kickbacks. Where we have found these kickbacks, we have shut
them down, and we have imposed penalties.
Now, captive title reinsurance is a lot more complicated,
and so I have brought some flow charts, and I look forward to
your questions and answers on that. And I will put up the flow
charts. And it's also in your packet of materials.
But in Colorado, our investigations uncovered that these
reinsurance mechanisms are nothing more than vehicles that were
created to provide kickbacks to those who were referring
business to the title insurers.
To date, Colorado has negotiated multi-state settlements
that provide restitution directly into the pockets of
consumers. Settlements negotiated, I am proud to say, by all
States today equal almost $50 million. And we are not done.
Regardless of the form, these kick-back schemes distort the
marketplace, they inflate prices, and they harm consumers. So
what are some possible solutions? States are exploring various
ways to help with these problems. In Colorado, we are looking
at ways to regulate all the players in the transaction. We do
not regulate mortgage brokers yet in Colorado, but we have
three bills that are pending that look for some sort of
regulation.
Colorado's general assembly has just passed a bill that
actually goes beyond RESPA, and it tightens up enforcement for
us, penalties, and it provides directly for restitution. But
importantly, cooperation and information-sharing between and
among all the regulatory bodies that are involved is necessary
if we're going to stop this problem.
In conclusion, a black market exists regarding real estate
transactions. We, as State and Federal regulators, need to
aggressively enforce the laws that we have. Lawmakers need to
enact laws to regulate all the players and strengthen fines and
penalties. Thank you so much for inviting me to testify, and I
look forward to your questions.
[The prepared statement of Ms. Toll can be found on page
180 of the appendix.]
Chairman Ney. Thank you. And our ranking member has
arrived, so we will have an opening statement. I also wanted to
thank--our ranking member requested a hearing, and we had one,
in Los Angeles on CDBG. I want to thank Chairman Oxley and his
staff, and Mr. Frank's staff, and ours out there. It was a very
productive hearing, and we appreciated the comments that we
received in Los Angeles. Ranking Member Waters?
Ms. Waters. Thank you very much. Good afternoon, ladies and
gentlemen. I would like, too, to thank Mr. Oxley, Chairman of
the Financial Services Committee, for his interest in the title
insurance industry. And I would like to thank Chairman Ney, who
is the chairman of this subcommittee, and he certainly must be
commended for holding today's hearing. I would like to also
thank him for the hearing that was held in Los Angeles on CDBG.
We have already begun to get a lot of response from the elected
officials there.
This hearing on the title insurance industry is important
for a number of reasons. Primary among them is the varying
degree of opinions about the title insurance industry. There
are those who believe that the industry is in great shape, and
that the imposition of additional regulations is not warranted.
Of course, there are those who believe that the industry is
not operating competitively, because of fraud and abuse.
Indeed, there have been published reports of fraud and abuse in
the title insurance industry in the State of California.
However, whether you support one position or the other, I
believe that industry practices need to be examined closely, to
shed light on issues surrounding the industry. To that end, I
believe today's hearing represents an initial step in the right
direction.
Why are the abuses in the title insurance industry so
prevalent that we should consider legislation to reform the
industry? Can the industry police itself? Are there any
measures, short of legislation, that this subcommittee might
consider to ensure that the consumer is protected from any
competitive forces that could be at play in the marketplace?
We all know that the true cost of any alleged fraud and
abuse weighs most heavily on the consumer. Consumers cannot
avoid paying for title insurance, but they need not pay for
overpriced products because the market is not competitive.
Title insurance is a fact of life in most real estate
transactions, in every State in the Nation, although three
States do not require licensing of title insurance agents: New
York, Tennessee, and Georgia.
Why? The cost of title insurance varies from State to
State. Indeed, it is the lack of uniformity between the
different title insurance systems that makes this an important
issue.
In addition, approximately 90 percent of the title
insurance business is concentrated in the hands of a few large
title insurance companies. Higher mortgage loan amounts can
also result in higher title insurance premiums for the buyer.
Loans in the sub-prime market carry higher insurance premiums.
Does this benefit consumers?
While today's testimony has generated broad interest, I
could not find any agreement about why the industry is in its
current state. Therefore, of particular interest to me is the
GAO preliminary study, because it can provide a blueprint for
this committee to examine the underlying factors, economic and
non-economic, influencing the title insurance industry. Is it a
competitive industry? How are title insurance rates determined?
While it is too early to rely on the GAO report exclusively
for guidance on the appropriate legislative response to these
questions, the completed study will ultimately provide this
committee with instructive suggestions on what remedies to
entertain.
Accordingly, I would strongly urge the chairman of the GAO
to expedite the study of the title insurance industry before we
reach any final conclusions about what is the appropriate
response. I thank you, Mr. Chairman, and I yield back my time.
Chairman Ney. I thank the gentlelady.
Ms. Williams? Thank you.
STATEMENT OF ORICE M. WILLIAMS, DIRECTOR, FINANCIAL MARKETS AND
COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Ms. Williams. Chairman Ney, Chairman Oxley, Representative
Waters, and members of the subcommittee, I am pleased to be
here today to discuss our views and issues concerning the title
insurance industry.
As you are aware, title insurance is designed to ensure
clear ownership when a property is sold or refinanced, and is a
required part of most real estate purchases.
While title insurance costs may be small compared to
overall closing costs, title insurance costs can account for as
much as one-third of closing costs for buyers in certain parts
of the country. As Deputy Commissioner Toll has explained,
recent Federal and State investigations have raised questions
about certain practices and competition within the industry.
My comments today will focus on our preliminary report,
which identified issues that warrant further study, and raise a
number of questions as part of our ongoing work for Chairman
Oxley. Specifically, I would like to discuss issues involving
agent practices and competition.
Agents play a much more vital role in title insurance than
other lines of insurance. In fact, most of the title insurance
premium is paid to or retained by title agents, generally, to
pay for title search and examination costs and agent
commissions.
As shown in our graphic, in 2004, about 71 percent of total
title insurance premiums written were paid to or retained by
title agents. The remainder is broken out as follows: about 21
percent went to expenses paid by insurers for salaries, rent,
plant, and other costs; about 5 percent went to losses; and the
remaining 5 percent was the difference between total expenses,
including the 71 percent paid to agents, and total premiums.
What we don't know is how much of the 71 percent
represented the actual costs incurred by title agents to do the
title search and examination, and take corrective actions. In
fact, in certain parts of the country, agents can retain as
much as 90 percent of premiums paid.
Despite the key role agents play in the underwriting
process, the extent to which State insurers review their
operations is unclear.
In fact, we found few States regularly collect information
on title agents' operations, and three States do not license
title agents. Moreover, most States do not take all of the
various components of these agent costs into account during
premium rate reviews, because they aren't considered part of
the premium.
The last issue I would like to discuss is competition,
which appears to occur at various levels. That is, the
competition among insurers, as well as among agents for the
business of other real estate professionals, such as builders,
lenders, or real estate agents who refer clients.
Title insurance is largely a relationship-based business
driven by connections among real estate professionals. While
consumers have the right to select their insurer, most
consumers lack the knowledge necessary to shop around for title
insurance. Instead, they usually rely on real estate
professionals, knowingly or unknowingly, to make these
decisions. Given this type of ignorance-is-bliss environment,
it is unclear whether the competition that exists always works
to the consumer's benefit.
These issues are further complicated by the recent trend of
real estate brokers, lenders, and builders becoming full or
partial owners of title agencies in what are called affiliated
business arrangements. While these arrangements can be part of
a legitimate business model that may benefit consumers, they
also create potential conflicts of interests that may put
consumers' interests at odds with those of the real estate
professionals.
In closing, these are just a few of the issues we are
addressing as part of our ongoing work. All of these issues are
significant, because they affect virtually everyone who has
purchased, refinanced, or taken out a home equity loan, or
plans to do so in the future. In other words, almost 70 percent
of Americans.
Mr. Chairman, this concludes my oral statement, and I would
be happy to answer any questions that you may have. Thank you.
[The prepared statement of Ms. Williams can be found on
page 199 of the appendix.]
Chairman Ney. Thank you very much.
Mr. Cunningham?
STATEMENT OF GARY M. CUNNINGHAM, DEPUTY ASSISTANT SECRETARY FOR
REGULATORY AFFAIRS AND MANUFACTURED HOUSING, U.S. DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
Mr. Cunningham. Chairman Ney, Ranking Member Waters,
Chairman Oxley, and distinguished members of the subcommittee,
I appreciate the opportunity to be here today to discuss
important issues related to title insurance under the Real
Estate Settlement Procedures Act.
Enforcement of RESPA is a high priority of Secretary
Jackson and Brian Montgomery, the Assistant Secretary for
Housing and Federal Housing Commissioner. We view RESPA
enforcement as a very important part of HUD's mission to
increase home ownership.
Let me say also that while the hearing today is on title
insurance, RESPA enforcement is an industry-wide issue. We
recognize that most settlement service providers desire a level
playing field on which to compete, and take their obligations
under RESPA seriously.
RESPA was enacted in 1974, in response to Congressional
findings that consumers needed more timely information on the
cost of the settlement process, and that referral fees and
kickbacks were driving up the costs of buying a home. A study
of the title industry conducted for HUD as long ago as 1980
found that title insurers compete for referrals from settlement
service providers, rather than for consumers. Current market
case investigations indicates that this practice still exists
in the title insurance market.
HUD is actively investigating captive title reinsurance
arrangements, in cooperation with several States, and the
National Association of Insurance Commissioners. Our focus has
been on companies receiving reinsurance premium payments.
It is HUD's position that any captive title reinsurance
arrangement in which payments to the reinsurer are not bona
fide compensation, and exceed the value of the reinsurance,
violates section eight of RESPA. In HUD's view, there is almost
never any bona fide business purpose for reinsurance on a
single family residence. When there is a history of few or no
claims being paid, or the premium payments to the captive
reinsurer far exceed the risk borne by the reinsurer, there is
strong evidence that there is an arrangement constructed for
the purpose of the payment of referral fees.
I would like to mention briefly just a few recent
enforcement actions that the Department has taken for violation
of section eight that prohibits the payment of kickbacks and
referral fees. There are other examples in my written
testimony.
HUD investigated a reinsurance arrangement between a title
insurance underwriter and a home builder. The home builder
created a title reinsurance company, and referred title
insurance business to the insurer. The title insurer paid a
premium to the builder's affiliated reinsurance company that
far exceeded the risk assumed.
In Memphis, a title company established eight affiliated
title companies with various builders, real estate agents, and
mortgage brokers. The affiliated companies were paid for
certain title and settlement work that they did not perform,
and HUD determined were only created to make referral payments
to the providers who owned the affiliated companies.
In Detroit, a title company paid real estate brokers for
the use of conference rooms at rates that were substantially
higher than the fair market rent, in return for the referral of
business.
In Atlanta, a real estate broker ordered its sales agents--
offered its sales agents--incentives, including trips, Atlanta
Braves tickets, and higher commission splits, based on the
number and volume of referrals to the broker's affiliated title
company.
HUD has increasingly devoted more resources to RESPA
enforcement. It contracts with a private firm to provide
nationwide investigative services, and working with its Office
of Inspector General, the Department continues to coordinate
investigations and conduct joint enforcement actions with other
Federal agencies, and is developing increasingly close
relationships with State regulators and their associations.
The success of HUD's regulatory efforts to implement RESPA
for the benefit of both industry and consumers depends greatly
on RESPA enforcement. Certain statutory amendments may advance
the goals of RESPA. For example, RESPA does not currently
include authority for regulators to enforce violations of the
requirements relating to the good faith estimate, or the HUD-1
settlement statement.
The effectiveness of RESPA could be enhanced by ensuring
that creative business structures do not defeat the purposes of
RESPA, and by providing the Secretary and State regulators with
necessary tools to enforce the statute.
I appreciate the opportunity to discuss these important
issues regarding title insurance and the settlement services
industry, as they relate to RESPA.
[The prepared statement of Mr. Cunningham can be found on
page 46 of the appendix.]
Chairman Ney. Thank you. Chairman Oxley?
The Chairman. Thank you, Mr. Chairman, for yielding me your
time for questions. And Ms. Toll, in your testimony and in the
chart, it appears that 5 percent of total annual premiums
represent the losses in title insurance, which is a stark
contrast to property and casualty, which is 80, 90, sometimes
100 percent.
I practiced law for 9 years and I did my share of title
searches, which, by the way, were painful and boring. And I
probably still got some exposure, somewhere along the line,
with that. But I guess the bottom line is why on earth would
somebody who has a 5 percent loss ratio, something that the
property and casualty insurers would die for, what would be any
reasonable explanation for setting up a reinsurance program,
particularly one that is closely held?
Ms. Toll. Thank you, Congressman Ney. Before I get to what
title reinsurance is, captive reinsurance, I wanted to say that
I, too, searched titles from the old, dusty books with mildew
all over them, so I know your pain. I feel your pain.
The Chairman. There is a fraternity of that, I think.
Ms. Toll. I am a very visual person, so I created a diagram
to help you understand this. First, about loss ratios, I have
to explain that title insurance is unique--and, indeed, if they
were doing their job perfectly well, their loss ratio would be
at or near zero, because the risk exists on the day of the
closing, which gets to your second question about why you would
ever reinsure.
There is no financial necessity to reinsure in a
residential single family dwelling. There is absolutely none.
And that's why we in Colorado and other States who joined on to
the multi-settlement said that these are nothing more than
vehicles to provide kickbacks.
If you want to know more exact details about how it works,
I could also get into agent splits, and why that indicates that
this isn't real.
The Chairman. When you did your investigation, did you have
cooperation from the title insurance companies?
Ms. Toll. Oh, I would like to say that I had a lot of
cooperation. And I did, from two of the largest insurers. And
in fact, one of the title insurers afterward told me that they
really didn't want to be in the practice, but they had to,
because they were losing market share.
Unfortunately, the third company has refused to settle with
Colorado on a multi-state basis, and was saying some--I was
informed by another regulator--was saying some very personal
things to try and discredit me in front of other State
regulators and I don't know who else. And that was very
disconcerting and alarming, and I felt very nervous and
threatened by that.
The Chairman. What is the status of that now?
Ms. Toll. The status of that now is that I haven't had any
communication with them. I don't know. I honestly don't know.
We are trying hard, and we will keep pushing. We issued a bunch
of subpoenas against this particular insurer's customers late
last week, in an effort to reach some sort of settlement. But
the last words to me from the company were, ``We're not
settling with you on a multi-state basis.''
The Chairman. And do these companies have captive
reinsurance entities?
Ms. Toll. This is the company that began the practice 9
years ago. Now it's been 10 years. So they began the practice,
and--
The Chairman. They began the practice of reinsuring?
Ms. Toll. Of captive title reinsurance. And they were
allowed to continue, I guess--well, they continued doing this
practice for years and years, and then the two other big
companies jumped on the bandwagon when they saw that they were
losing market share, is how it was explained to me by the
companies.
The Chairman. And how would that fee, if at all, show up on
the closing statement?
Ms. Toll. You know, on that I do not know. I'm sorry, I
don't know. I can do my best to find out and get back to you,
but--
The Chairman. It would be my guess that it was hidden
somewhere in the closing statement, would be a--
Ms. Toll. I don't know how you would ever see that fee.
The Chairman. Let me ask--you testified that eliminating
kickbacks is the only way to ensure a level playing field. And
kickbacks are already illegal in Colorado and most States, and
actually in Federal law, as well. What would be the most
effective way to eliminate that kind of practice?
And secondly, what kind of penalties exist, for example, in
Colorado for illegal kickbacks, and are they regularly
enforced?
Ms. Toll. Well, I am proud to say that in Colorado, our
legislature just passed a bill that goes beyond RESPA, so it
really strengthens the penalties and that gets to the first
part of your question, which is--I mean, I agree with Mr.
Cunningham, that RESPA needs to be strengthened. There needs to
be more penalties and restitution available if we are ever
going to stop this practice.
On the State level, we are taking many, many steps to halt
the practices, including posting interactive rating guides, so
consumers can actually shop for title insurance in an effort to
show rate transparency, and try and get the prices down,
through operation of the free market.
The Chairman. Okay. Mr. Cunningham, how long have you been
at HUD?
Mr. Cunningham. Two years.
The Chairman. And so you were participating in the initial
RESPA--
Mr. Cunningham. Yes, I came in near the end of that
process, when the rule was withdrawn by Secretary Jackson. I
mean, what would have been the RESPA reform rule.
The Chairman. Do you recall the initial RESPA package that
was offered by Secretary Martinez? Refresh my memory. How did
the RESPA reform effort deal with this particular issue of
kickbacks and reinsurance?
Mr. Cunningham. The RESPA reform proposal--which is still
something that the Secretary is very much committed to--was
designed to increase the transparency, if you will, and to make
more certain the closing costs. The original proposal, which
was withdrawn, had a portion in it where packages of settlement
services could be developed and sold in the marketplace.
And the idea was that there could be direct competition
between packagers or others in the marketplace, with respect to
the settlement service package. I mean, that was one aspect of
it. The current process with the good faith estimate, and so
forth, would have continued to be available, but--
The Chairman. It would be price-based competition?
Mr. Cunningham. Yes. And frankly, that is still part of
HUD's goal, is to try to bring competition to the marketplace
for all settlement services.
The Chairman. Yes, I--the Secretary was here a week or so
ago, and I asked him that question, and I understand that is
still very much alive at HUD, the RESPA reform effort. And I
would urge you folks to keep moving in the right direction,
because a lot of these issues that continue to bubble to the
surface are directly related to the kind of RESPA reform that
is absolutely critical to the market. Ms. Toll, did you have a
comment?
Ms. Toll. No.
The Chairman. All right. I yield back, Mr. Chairman.
Chairman Ney. Thank you, Mr. Chairman, and our ranking
member, the gentlelady from California?
Ms. Waters. Thank you very much, Mr. Chairman. I think
somewhere along the line I was told that there were only about
five title insurance companies in the country. Is that true?
Ms. Toll. May I?
Ms. Waters. Yes.
Ms. Toll. Congresswoman Waters, no, that is not correct. It
is correct that 5 companies control a huge percentage of the
market, but there are actually 86 insurers. I checked before I
left the office.
Ms. Waters. All right. Thank you. That does help. And I
would like to know--I would like to try and understand the
pricing. What is reflected in the pricing that consumers are
paying? How much of this reflects the agent's costs, premiums,
etc.? Is there any consistency in pricing? Is there any
competition? How does it work?
Ms. Toll. Congresswoman Waters, it varies from State to
State. And in Colorado, you file the rate and use it, and the
companies are required to maintain justification for their
rates. And we would ask for justification in the event that
there was a problem.
To get at what you're really asking, we are trying to get
the rates down, because it's our position that there couldn't
be kickbacks if there wasn't a whole bunch of fluff somewhere
in these rates. So we are posting an interactive rating guide
up on the Internet, to hope that consumers will start shopping,
and then pushing the title insurers to get the price down. That
is one of the things that we are doing. But it does vary from
State to State. Some States don't even regulate the agents or
the agencies.
Ms. Waters. Do you find that more expensive properties pay
higher rates, and less expensive properties pay lower rates?
And what's the relationship to the cost of the property and the
title insurance rate?
Ms. Toll. That's a good question. The cost is directly
related to the price. The more expensive the property, the
higher the title insurance premium.
Ms. Waters. Why? The agents have to do more research? I
mean, what causes that? They have to justify them in your
State. What do they say? I mean, how do they do that?
Ms. Toll. They submit actuarial justification, where
actuaries--please don't ask me to explain actuarial
justifications--where they break down the components. But we
are just beginning this process.
I mean, it was just a little over a year ago now that we
found all these problems, and all the other States have banded
together, and we share information through the NAIC, all the
working groups there, and other States--because I also co-chair
the NAIC title insurance issues working group. So we're all
working together to figure out ways to examine these rates.
It's highly unusual. Title insurance is just so different from
all the other lines of insurance that we regulate. Indeed, it's
only 1.9 percent of all the premium volume that we regulate.
So, sadly, I think regulators just--it just hasn't been on
the radar screen. But it is now.
Ms. Waters. Let me just ask you, this committee is very
much involved in dealing with predatory lending, and trying to
determine how we protect consumers from predatory practices in
the financial services community. And I am wondering if we now
have to expand our look, and take a look at title insurance, as
we begin to try and reduce these costs to consumers.
Do you think that there is an issue here, as it relates to
predatory practices that is causing consumers to have to pay
unnecessarily exorbitant fees for premiums, etc.?
Ms. Toll. In Colorado, we are very concerned about
predatory lending. The problem is, we don't regulate mortgage
brokers. So, there is a lot of room for improvement there. And
as I stated earlier, there are three bills that are currently
pending in the State legislature that would address issues with
respect to mortgage brokers.
Ms. Waters. Let me just ask--I guess that I would ask this
of Ms. Williams. What specific steps should be taken, if any,
to reform the industry?
Ms. Williams. This is one of the issues that we are
planning to address in our ongoing work. Right now, we aren't
in a position to make any conclusions about specific steps. But
we hope, through the course of the work that we plan to do over
the next several months, that we would be in a position to
provide information that would be useful in laying out some of
those next steps.
Ms. Waters. Will that include perhaps some advice about how
to expand competition in the industry?
Ms. Williams. We are definitely looking at the issue of
competition, the dynamics of competition in the market, and
trying to come to terms with competition in the title insurance
industry. At this point, we don't know if we will have
recommendations.
Ms. Waters. All right. Thank you very much. Mr. Chairman, I
will yield back the balance of my time.
Chairman Ney. Thank you. One quick question, and I have to
go, but I will be back, and I yield my time to Mr. Miller.
The quick question I have is for GAO. The report indicates
that a lot of the title insurance companies offer discounted
refinance rate for title insurance.
Ms. Williams. Yes.
Chairman Ney. Do you get that automatically, or do you have
to ask for that discounted rate?
Ms. Williams. This is one of the fundamental questions that
we are currently grappling with. At this point, it's not clear
whether refinance rates are automatic. We understand that in
certain States it may be a requirement that these rates be
provided automatically. In other places, it appears that you
have to actually ask for the discounted or refinance rate.
And in our review of consumer information posted on various
websites, this is the guidance that they are giving to
consumers. That is, you have to make sure that you ask for
certain types of discounts.
Chairman Ney. And I am going to recognize Mr. Scott, and
then yield my remaining time to Mr. Miller. Mr. Scott?
Mr. Scott. Thank you very much, Mr. Chairman. I want to
thank you and Ranking Member Waters for holding this important
hearing on the cost of title insurance.
I guess my first question would be to Ms. Toll. Is there a
problem, in your opinion, with assessing the cost of title
insurance, due to the varying State regulations covering this
product?
Ms. Toll. I think everything is different in every State.
So, on a State level, there are varying factors to take into
account, depending on what systems they use, and so forth. In
Colorado, we can ask for anything of virtually anyone to get
rate justification, have anyone come in and testify to explain
things to us. Did that answer your question?
Mr. Scott. Yes. Since the title search process is
automated, why have insurance costs not decreased? I would
think that, since they were automated, that would have an
impact on bringing down the cost. Why has that not happened?
Ms. Toll. You would think that. The competition is very
different in title insurance, and there is not a lot of
competition around price. There is--it's just not there.
The competition is on the quality and the service. As long
as a realtor, a lender, and a mortgage broker have an incentive
to go with someone who will facilitate the deal, the consumer
will be protected. It's when they start--the real estate agent
and the broker and the home builder--start getting influenced
by these kickbacks, that the interests get out of line between
the consumer and the person who is in the position that is
doing all the referring of a business. I mean, that's the
problem.
Mr. Scott. Can you give us a little more detail on the
characterizations of the kickbacks?
Ms. Toll. Sure. The direct kickbacks, they're the easiest.
In Colorado, we have this agency that flew the four top real
estate agent producers in the State to a spa--female real
estate agents in the State--to a spa in Arizona, and they said
it was marketing. It was for an all-expenses-paid, 3-day thing,
and they said it was marketing. And we went after them for the
value of the whole package. And they said, ``Oh, no, you have
to subtract a lot of the value, because we took the company
jet.'' Anyway, we fined them.
Mr. Scott. Ms. Williams, you're with GAO. In your opinion,
what barriers prevent consumers from choosing their own title
insurance products?
Ms. Williams. Based on the information we have collected to
date, a lot of it has to do with a lack of understanding. The
entire home purchasing process is overwhelming. It's a lot of
information to absorb. It also moves quickly. And you're
dealing with uninformed consumers.
Mr. Scott. So you would think that a large part of the
answer to this is more financial literacy?
Ms. Williams. That may be part of it. I am not sure it's
the total solution--but literacy is likely some part of the
solution. The other issue to be considered is that this is
something that most homeowners do on a fairly infrequent basis.
They may purchase a home, refinance a home, or take out an
equity line on their home. However, it happens infrequently.
But title insurance tends to be a small piece of the
process, and I think that's part of the reason that it just
gets rolled up into the entire closing process, and the buyers'
attention isn't drawn to that particular piece of it.
Mr. Scott. Now, in your opinion, do affiliated business
arrangements provide cost savings to consumers, or to real
estate companies?
Ms. Williams. This is one of the issues that we are
currently dealing with in the study. And based on the work that
we have done preliminarily, we aren't in a position to answer
this definitively, one way or the other. But it does raise a
set of questions about conflicts of interest, and if the
consumers are benefitting.
Mr. Scott. So your answer to that would be probably the
real estate companies? Okay. I will take that as a yes, without
you having to say that.
To the gentleman from HUD, Mr. Cunningham, why was HUD so
unclear on its guidance on captive reinsurance arrangements?
Mr. Cunningham. I don't know that HUD was so unclear. I
think the issue with respect to captive reinsurance, the whole
scheme, if you will, or the whole set-up, we viewed in the
analysis as an arrangement which had no legitimate purpose, and
it was a way to get fees to a referring entity--the builder, or
the lender, or the real estate agent that had a captive
insurance company.
We did put some--a letter out referring to captive mortgage
insurance as guidance, but we felt that there was, because of
our affiliated business sham-control business entity policy
guidance that was out there, that people were warned, and
should have known that, essentially, in a transaction that had
no real substance, that HUD and other regulators would be
looking at it.
Mr. Scott. In your opinion--
Mr. Miller of California. [presiding] The gentleman's time
has expired about 35, 56 seconds ago.
Mr. Scott. Very fine, sir.
Mr. Miller of California. I think it's very appropriate we
talk about cost and competition and the title insurance
company, and Ms. Toll and Mr. Cunningham, I thank you for your
comments and your testimony you have given today. I think it's
very enlightening.
But it's--to me, I mean, I have been in the real estate
business for about 35 years as a developer, a home builder, and
a realtor. And the title company--and this is very complex,
very complicated. And I will tell you that when we talked about
why different fees are charged for different amounts of money,
we also need to discuss the concept that it doesn't matter how
extensive the title search is, or how limited it is, the cost
is the same, based on the amount of the title policy.
And I have had properties that I have bought that the title
searches had to go back to the 1800's, water easements, and
rights, and things you might have, and you get to a point where
you want to clear your title to buy the property, and you ask
these title companies to write around those easements and such
which are old and antiquated. And in doing that, there is a
cost associated with that, and a liability associated with
that.
And I noticed from the checking I've done over the years on
the cost--because I always wondered why I paid as much as I
paid for title policies--most of it is in the research, going
back and checking the title. That's the bulk of the cost with
most title companies. I know in California, they are extremely
regulated. I mean, California law is very extensive on title
companies, and they go to extensive issues on disclosure,
enforcement, liability issues, and those type of things.
And it's important that we deal with competition, because
competition is good for everybody. It keeps the costs down, it
creates a very robust marketplace. And just speaking for
myself, it seems that in California I have no shortage of title
company options. And of all the years that I have been in that
business--and I know a lot of people in the business--I can
tell you the truth, I don't know one person--and I speak for
myself--I have never been offered anything, a kick-back from a
title company, I don't know a realtor who has been, I don't
know a builder who has been.
But Ms. Toll, you talked about some bad apples in the
industry, and I applaud you for that, for going after those bad
apples, because--and I know HUD does the same thing, through
RESPA. The good players don't want the bad guys in the
marketplace. They just want to do their job.
And I will tell you, when it comes to something going
wrong--and we talked about, in the last year, about allowing
banks to do title policies, and the real problem I had with
that, I felt it was just a built-in conflict of interest,
because you had a lender making a loan on a piece of property,
and they guaranteed the title. And I will give you an example.
I had--I bought a piece of property one time that had an
easement for ingress and egress that looked real good on paper,
but it had expired, because the municipality had not enacted
that easement, and by law that easement expired after ``X''
amount of time.
Now, had my lender, whom I borrowed the money from, written
that title, he would be trying to find all kinds of ways to get
out of the liability. But I went back to the title company. I
said, ``You issued me a title policy that didn't have an
easement. There is no easement. Fix the problem.'' And that was
their liability and their problem.
That's why I think all the aspects we deal with in the
industry are integral, whether it be a realtor, a mortgage
broker, a banker, a title company, whatever it is. All of those
entities make the industry work.
And I mean, I go back--when I was in my twenties, I used to
do HUD work. I bid about the first 10 or 11 jobs with HUD, and
I got every one of them, because my partner and I were the
lowest bidder. And all of a sudden, one day the director from
LA called my partner into his office and he said that if I
don't give him a third of my profits in a kick-back before I
ever get the HUD contract, I will never be issued another HUD
contract. And I was young and naive, believing that they
couldn't keep me from being low bidder. I never got a contract
after that. They always found something wrong in the way they
prepared the bid, and it went out.
So there can be bad apples in any industry. And HUD, you're
doing a great job. I'm not impugning HUD today. Alfonso
Jackson, I just think highly of the man. But there are bad
apples in everything.
But my question for you, Ms. Toll, is are there adequate
regulations on the books, if they are enforced properly, to
deal with the bad apples?
Ms. Toll. My first comment is that you talked about how
complex this whole process is, and you were in it, and you
couldn't even understand it hardly. Imagine the average
consumer--
Mr. Miller of California. Oh, I do.
Ms. Toll. Which gets to the other Congressman's comments.
Mr. Miller of California. I do.
Ms. Toll. You know, in a lifetime you buy six homes. I
actually had my market analyst look at this. So you have only
six contacts with a title insurance agency. You just don't have
any incentive to learn about title insurance.
Mr. Miller of California. Yes.
Ms. Toll. Really, realtors are in the best position to know
what's going on. And as long as they're not taking kickbacks,
everything is great. Are there existing laws--
Mr. Miller of California. Is it illegal to take a kick-
back?
Ms. Toll. It is illegal to--yes.
Mr. Miller of California. I agree.
Ms. Toll. Oh, did you just want me to say, ``Yes?''
Mr. Miller of California. No, no, no. I just want--I'm
asking. When you said--
Ms. Toll. You know--
Mr. Miller of California. I applaud you for that. I am not
arguing with you. I think it's great. Go ahead.
Ms. Toll. I was going to say that RESPA actually gives the
State insurance commissioners authority to enjoin violations of
it, as well as our own State laws.
Mr. Miller of California. I am aware of that.
Ms. Toll. And so we--yes, I do think that there are laws on
the books--
Mr. Miller of California. So I think my question would go
more along the lines of what do we need to do to guarantee
adequate enforcement of the laws that are currently on the
books, or do you need additional laws? I mean, how many hammers
do you need to beat the same guy up with?
Ms. Toll. You know, I think the--thanks to the NAIC, and
being able to share all this information, I think we're doing a
great job at--
Mr. Miller of California. I think you are, too.
Ms. Toll. And actually, if I can say this, working with HUD
has been a delight. I think we could institutionalize the fact
that we need to cooperate. I mean, Ivy Jackson and I have a
great relationship, and we call each other and send each other
e-mails. So we are sharing. But what happens if, you know, God
forbid, she gets bored with her job, or I do, you know.
Mr. Miller of California. Yes.
Ms. Toll. That could be institutionalized, that cooperation
among all the different regulatory bodies.
Mr. Miller of California. I am a great supporter of sub-
prime, and I detest predatory lending. I really do. But there
is a huge market that the sub-prime lenders fill. And there is
a huge need that legitimate title companies fill in the
marketplace, and I applaud them for that.
And if nothing else, if we are sending a message today that
Congress and the States are looking at predators who are
violating the law, and we are going to enforce the law, then we
are going to accomplish a lot today. But I don't know what else
we can do.
I mean, my wife owns a business, and I am approached all
the time by people wanting to provide title policies. And there
is no shortage of competitors. In California, we have everybody
you can imagine. Well--and there are big companies and there
are little companies.
But what we have always based our decision on is who gives
us the best service, and do they act in a timely fashion? And
if there is a problem, are they accountable? That's all I care
about. When I sold houses to people, that was my main concern:
timing, are you competitive; and are you accountable; and
responsive. And I used the people who were. And if I didn't
think they were, and somebody else came along who I thought
gave me a better--did a better job, I used them.
And I guess I'm going to open it up to the three of you.
What do you need from us that you cannot do on your own?
Ms. Toll. First of all, if everybody operated the way you
did, I don't think we would have as big of a problem as we have
right now. So I just wanted to offer that comment, and then let
my--the rest of the panel--
Mr. Miller of California. You're up.
Mr. Carter. Mr. Miller, I would say this. Nobody disagrees
about the valuable role that title companies play, or the
service they provide. I think some of these we are finding,
particularly in the arena with respect to the fees and
kickbacks area and section eight, that entities are being
developed, more sophisticated entities, some of them tied to
affiliated business arrangements which, again, are not, per se,
bad. And if done properly, as many groups do, benefit the
consumer, from the standpoint of service.
But there has not been the directed competition on price
issues, because the marketing of title business is not done
directly to the consumer. So we have got to--the consumer has a
right to pick a title company, but they don't know that. They
don't know how to shop for it, etc. So that's one--I guess that
is one side of it.
We also think, from a RESPA enforcement standpoint, we only
have, in essence, injunctive authority. We can get an
injunction to stop a violation of section eight. We don't have
a civil money penalties type statute which would enable HUD to
go--or the State attorneys general, or the insurance
commissioners, or anyone else--to go against somebody who has
violated--
Mr. Miller of California. Can you do that regulatorily, or
is it--do you need legislation?
Mr. Cunningham. No, we need legislation to do that.
Mr. Miller of California. Okay, then we will write that
down.
Mr. Cunningham. So, we can't really directly enforce a
number of the provisions of RESPA, from that standpoint.
There--
Mr. Miller of California. I would encourage you, in your
RESPA proposal, for us to include that, then.
Mr. Cunningham. All right.
Mr. Miller of California. Because you are doing that. You
are coming forth with one. That would be a great
recommendation.
Mr. Cunningham. And there are two or three other things. We
might expand the injunction relief--and again, these are not
proposals that I am making today on behalf of HUD, these are--
you have asked the question, ``What could we possibly do?''
The statute of limitations under HUD--under RESPA, right
now, for private enforcement actions is only 1 year for private
actions, and it's 3 years for governmental actions.
Mr. Miller of California. Then maybe--
Mr. Cunningham. We might think about doing something like
that. We might make it--right now, the HUD-1 only has to be
given a day before closing to the home buyer, if the home buyer
asks. But there is no direct enforcement for--of somebody's
failure to do that--
Mr. Miller of California. Do we need to enact guidelines?
Mr. Cunningham. What?
Mr. Miller of California. We need to enact guidelines that
are clearly understood, and we need to provide for enforcement.
Mr. Cunningham. And we could--
Mr. Miller of California. And I think that's good. And we
need to work together to do that.
The issue you brought up on pricing, though, Ms. Toll,
don't they have to propose their pricing structure to you for
approval?
Ms. Toll. Actually, they file their rate with us, and they
use their rate. And if we find a problem with it, we require
justification.
Mr. Miller of California. And I think all States do that.
So they just can't go out and dream up some figure, they have
to file those figures with you. You review them, and you make
comments and ask for--your questions will be answered.
Ms. Toll. Yes.
Mr. Miller of California. Okay. Thank you very much. Mr.
Green, you are recognized.
Mr. Green. Thank you. I thank the chairman and the ranking
member for hosting these hearings, and I thank you, members of
the panel, for appearing.
Permit me to introduce a new term into the dialogue. But
first, let me make mention of the fact that in Texas, title
insurance will cost, on average, $1,443 for a $180,000 home.
The national average is $756. Quite a difference. Gouging,
something that we have heard a little bit about lately, haven't
talked about it as it relates to title companies. But price
gouging. Is that a term that we can apply to some of what we
are seeing in these disparities, Ms. Toll?
Ms. Toll. I have never heard that term used, and I believe
Texas sets their rates, so they're a little different from the
rest of the States. They actually fix the rate and say that,
``You have to use this rate.''
And I wanted to add also, because it hasn't been said, that
title insurance agencies have to charge consumers the rates
that they have on file with us. They can't deviate. You can't
go in and bargain, if that makes a difference to you.
Mr. Green. They have to charge a rate that they have on
file with you. But before it's filed with you, they use some
process in making a final determination as to what they will
file with you.
Ms. Toll. That's correct. That's called rate justification.
Mr. Green. Right, and that's the part that we have some
difficulty comprehending, totally.
Ms. Toll. And that's the part where the actuaries get into
the picture. And that's also the part that we are working on
together, as State regulators. It varies across States, but all
of us are looking for more rate transparency. We believe that
if you can just shine some light on the components, the
questions you're asking for--if you could see the components of
the rate, by then, automatically, justification would be
provided and the rates, we would hope, would start to go down,
by operation of the free market.
Mr. Green. Well, have we not concluded at some point in
life that people can justify almost anything that they really
set out to justify? I mean, doesn't that seem to happen quite a
bit in the world that we live in?
And given that we can justify these things, it just seems
to me that there is something that we need to look into when we
have the kinds of disparities that we are talking about. There
really ought to be some desire to protect the consumer from--I
will say it--price gouging. And it doesn't matter to me who is
involved in it, whether it's just the entity, the title
insurance entity, or whether the State is involved in it.
When you charge the consumer more than you can justify --
much, much more; sometimes it's arbitrary and capricious, but
you can justify it--seems to me that you are taking advantage
of a person who is involved in this process, maybe for the
first time. And it moves very fast. Very fast. You have paper
thrown at you, one after another, one piece after another,
``Sign here, sign there.'' And most people don't read what they
are signing. Most people don't know that they can shop. Most
people just want to fulfill the American dream and own a home.
And on that day, if someone said, ``You are paying $1,000
too much for your title insurance,'' my suspicion is a good
many people would say, ``Can I get the house? Will I still be
able to have my house? And if the answer is yes, I will pay
$1,000 too much.''
So, it seems to me, that we ought to want to find some way
to look out for the consumer who has, in a sense, said, ``Look,
I am sending you up there to Congress, Al, and I want you to be
my eyes and my ears, and I want you to look out for me, because
I don't know all of these things about this process.'' And it
seems to me that you ought to be concerned when the prices vary
so greatly.
So, how would you have us try to pull these prices in line,
such that we don't have these great disparities in pricing?
Ms. Williams. Pricing is another issue that GAO is planning
to look at in its study. One of the things that we have
discovered so far is that in States that have a file and use
policy, that means that the insurers simply file a rate. And
it's not that they have to wait for any type of formal approval
from the State regulator before they can use it. They file it,
they wait the required period of time, and then they can start
using that rate.
So, one of the things we are trying to get our arms around
is this issue of how the rates actually are set from State to
State, and what that variation is, and explanations for the
variation. So this is one of the things that we are planning to
look into further.
Mr. Miller of California. The gentleman's time has expired.
Mr. Neugebauer, you are recognized for 5 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman. I guess my
question to the panel is--and just for a little bit of
background, I have been a land developer, home builder, and in
the real estate business pretty much all of my life, and so I
have, you know, purchased and done business with title
companies for a number of years. And I understand the benefit
of title insurance to the system.
So, when you start talking about kickbacks, and things that
are going on in the industry, I guess the first question I have
is, is this a big problem, or a systemic problem throughout the
whole industry, or is this isolated companies and States--and
you mentioned two States, California and Colorado.
Because sometimes what we do, we chase the 1 percent, and
then punish the 99 percent while we're trying to chase the 1
percent of the people that aren't playing by the rules. So I
would like to hear your reflection on that.
Ms. Toll. Sadly, it's a problem that we are seeing all
across the country. It's not just Colorado and California. We
do see it concentrated, the kick-back schemes are concentrated
in areas where there is a lot of real estate development, such
as Colorado, California, Nevada, Florida, and Arizona--places
where we see a lot of new development. But it's a problem all
across the country, and that is why it is so critical that all
the States and all the different regulatory bodies work
together to combat the problem, and we share information,
including at the Federal level.
Mr. Neugebauer. Ms. Williams?
Ms. Williams. On this particular question, I think it would
be wisest for me to defer to Ms. Toll or Mr. Cunningham,
because we are still in the process of doing our work, and we
are relying on the work that they are doing.
Mr. Cunningham. Congressman, I am not sure that we have
statistical information in terms of how big a problem it is. We
see it on a pretty regular basis, and we believe that it's not
the direct payment kind of thing, where I pay you for this
referral.
What it is, is some sophisticated kind of relationship like
captive reinsurance was, like paying above-market rent for
conference rooms to close a loan in Detroit, like title
companies that set up affiliated--and this is not just a title
problem, this is across the industry.
You won't see it, I think, because my experience in private
practice is a lot from the commercial development side, where
you're used to bigger projects, and you're used to reinsurance,
and so forth. You don't see it in that setting, I think. But in
a single family real estate transaction--and what HUD thinks
is--we need to find a better way to let title companies and
other settlement service providers compete on the basis of
price.
And do an education process, maybe. Use the Internet. We
have a consumer settlement booklet that is already part of
RESPA that is supposed to be given out. We just collectively
need to let people know, ``Hey, before you buy title insurance
or hire a real estate appraiser, or anybody else in this
process, realize that you have some choices. Shop it some. Talk
to people, and you know, do those kinds of things.''
And then, do some things on the enforcement side, so that
when the rules are out there, and the rules are clear, and you
know, you're trying to set up an entity that really does no
work or performs no valuable service, and somehow is going to
get a premium or referral fee, that folks are going to suffer
the consequences for that. And they do. And when there are
settlements, they get posted on the Internet, it gets picked up
in your local paper, that this and that real estate agent or
whatever, paid a kick-back, or received a kick-back, and so
forth, and let people know.
So, competition, we think, is part of the heart of the
thing. But competition that's directed at the consumer. And
then sell the services and, ``My services are better than her
services,'' and so forth, too, as part of that process, but
don't market primarily to the referrers of the title service.
Mr. Neugebauer. Do you think that States ought to set title
insurance rates, or do you think they ought to just be open to
the market, and--
Mr. Cunningham. Well, I mean, this is me talking. I don't
think that--I think the States who regulate the title insurance
business, their job is to make sure that there is somebody of
substance standing behind the title policy that's issued, and
so the regulatory function that Erin is talking about, in terms
of we look at numbers and financial soundness, and those kinds
of things, are legitimate and should be done.
But beyond that, I think that the companies are going to
have to say, ``Our price is cheaper, and we can still make
money at a lower price, rather than a higher price, and so
forth.'' And if the playing field is level, and there is
enforcement, etc., most people will like that situation, and it
can benefit businesses and the consumer.
Mr. Neugebauer. So I'm clear about your answer, did I hear
you say that you think the State's focus ought to be on safety
and soundness, and that the marketplace ought to set the price?
Mr. Cunningham. That's my opinion, based on what I know.
Chairman Ney. Time has expired.
Mr. Neugebauer. Thank you, Mr. Chairman.
Chairman Ney. The gentleman from Missouri, Mr. Cleaver.
Mr. Cleaver. Thank you, Mr. Chairman. I am going to digress
just a moment, and I will come back about the subject at hand.
I am interested in knowing whether or not you are familiar
with an issue that has been at least surfacing around the
country in various places with regard to title companies.
California, 2 years ago, and Kansas, the State of Kansas, our
next door neighbor, the Kansas legislature met last week, and
they passed legislation that removed all references to race, in
terms of covenants, from titles.
My--I have introduced a bill here. Unfortunately, it's not
going anywhere. It's already, of course, unconstitutional, but
the language is still on probably tens of thousands of titles
all over the country.
One of the issues that has surfaced, as title companies
have watched what's going on, has been the cost, they say, of
going back and trying to take care of removing all of that. And
so it's going to be State-by-State that it's going to end up,
unfortunately, having to be removed. But is that an issue that
has any--that resonates with any of you, with the title
industry?
Ms. Toll. Congressman, that issue does not resonate with us
in Colorado. Our general laws prohibit discriminating on
pricing, and I believe that's part of model acts that virtually
every State has. But I can check on the specifics. But no, we
haven't seen a specific--
Mr. Cleaver. No, no, no--
Ms. Toll. Am I not understanding your question?
Mr. Cleaver. I am sorry. It's unconstitutional. It's
unconstitutional. The language is still there. Probably in
Colorado, too. But the language--I'm not saying that because
it's in the--it's on deeds or on titles that it's a legal
problem. It is not. But just still having that archaic
language, which is still offensive, is an issue that some are
concerned about.
California passed legislation for it to be removed. And so
whatever the cost was, it had to be removed. The State of
Kansas passed legislation 2 weeks ago to have it removed, no
matter the cost. And I--are we still on the same--
Ms. Toll. I'm not familiar with the issue at all. I'm
sorry.
Mr. Cleaver. Sir?
Mr. Cunningham. I share your Missouri background. I'm from
St. Louis, so I know you as mayor of Kansas City, and so forth.
I think that, whatever the records were 100 years ago--and
that's--Missouri has obviously got the same kind of problem--
will stay. But I sure haven't seen any recent title policies
that come up where that sort of racial restriction is listed as
something that is still part of the policy, or the real estate.
So it's going to be there and in the books, but I am not--and I
don't know how you ever get rid of that. But I'm not sure that
people are still seeing those kinds of racial restrictions,
even if they still exist in a particular title on current day
documents.
Mr. Cleaver. The Kansas City Star did a--one woman went to
buy a home, found it, and went to the Kansas City Star. They
did research, and found out that it was rampant. I mean, all
over. And after a conversation with the woman, I started
checking in it, found out that California had already done
something about it.
And it doesn't mean that we have a legal problem, it means
that we have an ugly problem. And--okay. I will leave that. Let
me go to another.
There is a lot of paranoia on the Gulf Coast, as you can
imagine, most of which is justifiable. And I'm wondering if you
had any issues down in the Gulf Coast with regard to titles.
Some of the folk--we have held hearings here, and many of the
people say that, you know, they are living on property that was
owned by their mother, and before that their grandmother. And
after the flood came, they found out miraculously that they
didn't own the property.
Many people are saying--I don't know if this is anecdotal
or not--but that, you know, property is actually being snatched
from individuals who owned it, you know, for a century.
And I don't know what all of the issues are in the Gulf
Coast region. I am wondering if you have had any--if you have
seen any issues like that surface since Katrina and Rita hit.
Ms. Toll. I'm sorry, no. In Colorado, we haven't seen those
issues. I could check with the NAIC, who could check with the
Gulf States, Louisiana and any States affected. But I haven't
heard of that. So, I'm sorry, I have to say, ``I don't know''
twice, but I don't.
Mr. Cleaver. I have to tell my children that, too. But no,
I appreciate it. Thank you.
Chairman Ney. Mr. Campbell?
Mr. Campbell. Thank you, Mr. Chairman. A couple of
questions for Ms. Toll, please, if I may. In your testimony,
you talked about large title companies setting up this sort of
reinsurance arrangement. Did they all, all the big players, did
they all do it?
Ms. Toll. You know, I'm really glad you asked that
question. No. About five large groups of insurers control about
90, or 95 percent of the market; it's a huge portion of the
market. And in Colorado, we found that three of the four top
companies were engaged in the process. But the fourth was not
engaged in captive title reinsurance. And when I asked them why
not--because I was just, frankly, curious so I asked their
principals why they did not engage in these practices. And they
said that they believed that they were illegal, so they never
entered into them.
Mr. Campbell. Did they lose market share?
Ms. Toll. They claim they lost--their exact words were,
``Erin, we're taking a beating in the market, but it's not
right.''
Mr. Campbell. Can title insurers in Colorado pay a sales
commission?
Ms. Toll. A sales--I don't know what you mean, I'm sorry.
Mr. Campbell. Okay. If this--this arrangement, or a kick-
back, if it were not illegal, wouldn't we say that that was a
sales commission? You are paying someone to market your product
for you?
Ms. Toll. Yes, that's a really interesting way to look at
it, and it gets back to the competition and the unique way that
insurers compete for business. If it were like other lines of
insurance, we wouldn't have anti-kick-back laws, and we don't
have them for other lines. You can split your commissions in
other lines of insurance.
But it's because this product is not marketed to the
consumer, they're not controlling it, they don't have knowledge
about it. It's those reasons that we have these kick-back laws.
Whoever came up with--oh, you all came up with RESPA--and the
various State legislatures passed mirror laws, or similar laws.
It's because they understood that the competition was
different. And so, it would not be illegal in other lines, at
least not in Colorado.
Mr. Campbell. Okay. I am trying to think if there--aren't
there other forms of insurance where--I'm just trying to
think--where someone else--I mean, you might have mortgage
insurance on the same transaction, which is really often
recommended, or put together, by the title company or the
lender, or whomever.
Ms. Toll. Okay, you're getting into this anecdotal
information I am starting to hear about.
Mr. Campbell. Okay.
Ms. Toll. I keep getting sort of anonymous calls and
whispers in the hallways, which is how I learned about captive
title reinsurance, that there is a problem with the issue
you're talking about. But I am not prepared to discuss it now;
I don't know anything about it.
Mr. Campbell. Okay. All right. Well, thank you. That's all.
I yield back my time, Mr. Chairman.
Chairman Ney. Thank you. Mr. Tiberi?
Mr. Tiberi. Thank you, Mr. Chairman. To the three of you,
obviously we all have experiences in the marketplace, whatever
market we're in. I will give you my bias and my experience, and
maybe we can have some sort of exchange.
Clearly, what you all are talking about is these affiliated
agreements in the marketplace. I was a realtor. Not a broker. I
didn't get anything out of referring somebody to a particular
title agency, whether they were in the office that I worked or
not. Nothing. Zero. I did it for one reason, and that's to
benefit my client. And I had an interest in benefitting my
client as a realtor, because if I serviced my client well,
hopefully they would be a client again.
And in the marketplace, I have to tell you, as a realtor, I
didn't have any clients say, ``I will pay an extra $1,000 to
get in this house.'' It was usually them beating on me to
reduce my commission, and beating on me to reduce wherever I
could reduce. So it was in my interest, quite frankly, to refer
them to different services.
And I usually did three, whether it was three mortgage
bankers, or three title insurers, or three termite inspectors,
or whatever, so they could be part of the process. But it was
in my interest, quite frankly, to try to do everything I could,
as a real estate professional, to get the best deal at the best
cost for my client.
Now, I'm not saying that every single realtor is going to
do that. But the ones that are most successful, and are going
to be in this for the long term, are doing that in the
marketplace for the benefit of their client. And I think that's
probably with most industries in the marketplace.
My question, I guess to you, going from your right to left,
my left to right, is isn't there an acknowledgment that in
today's world the real estate industry is so competitive that
the majority--certainly not all--the majority of folks that
are, number one, realtors at least, who aren't legally allowed
to get a--I think the word used earlier was kick-back--are in a
position in a competitive environment, and refer based upon
their reputation in the marketplace, and on behalf of their
client?
Ms. Toll. Congressman, am I on your left, because you
wanted--
Mr. Tiberi. Yes, that's right.
Ms. Toll. All right, then I will go first. As long as your
interests--pretending you're a realtor--are aligned with those
of the consumer, that is you are choosing appraisers and
termite control people based on quality of service, then I
don't think there is a big problem in the market.
Mr. Tiberi. But isn't it in my best interest to do that?
Ms. Toll. Yes, it--well, yes. But if I were standing there,
handing you money, maybe--not everybody is swayed by this--but
you might say--I hate to use you personally, but--
Mr. Tiberi. No, you can use me, because no one ever handed
me money.
Ms. Toll. But someone, a less scrupulous broker, might say,
``I will take that $1,000, and direct my business to the
company that you own.'' And then it's not based on the
reputation and the quality of the service that the title
insurance agency is providing, and it's not--you know, it might
not be a seamless closing. And so that's not in your interest.
But because title insurance is what's called a long claim
tail business, the consumer might not know about it for about 8
years, because it's only when you go to sell your house that
you went, ``Oh, my goodness, there was a problem.'' So you
might not find the problem right away, which is why we, as
State regulators--
Mr. Tiberi. And how are you defining the problem?
Ms. Toll. The kick-back or the lien.
Mr. Tiberi. The illegal kick-back.
Ms. Toll. Right. If you don't use a reputable title
insurance agency, there are a number of things that can go
wrong. They might not file the release of the liens on time.
There might be problems with disbursement of fees. It might not
be a seamless transaction. But you might not find that that
release was not filed until you go to sell your house. You
know, we don't all go around going, ``Oh, I think I'm going to
go over to the records and see if my note was released.''
So that's why it's critical that you use a reputable title
insurance agency, and that's why, if a realtor is referring
someone to somebody just based on the service, to a title
agency just based on the service, I don't think there is a big
problem. And unfortunately, it is a few bad actors that are
tainting the industry. It's a--and we're trying to get rid of
the bad actors so everybody else that does it right can
compete, and--
Mr. Tiberi. So you would acknowledge that it's a few bad
apples?
Ms. Toll. It's a pervasive problem in the sense that it
exists in every State. I think, as a percentage of premium,
that would be an interesting thing to explore. All I know is we
are just going crazy at the Colorado Division of Insurance,
finding the bad actors. And a lot of our complaints actually
come from competitors. So we know there are good guys out there
that want the playing field to be level, and we are trying to
respond.
Mr. Tiberi. Could you imagine that there might even be, in
a competitive marketplace, actually a benefit to consumers,
meaning if the three of you are title insurers, and I know all
three of you, and I said to my client, Mr. Campbell here, ``Go
talk to these three, and get the best deal possible,'' don't
you think that actually encourages competition and lowering the
cost?
Ms. Toll. If I, as a consumer?
Mr. Tiberi. No, he is the consumer. You are the title
agency.
Ms. Toll. Oh.
Mr. Tiberi. You three are the title agency, and he talks to
all three of you, and asks for a bottom line.
Ms. Toll. Sure.
Mr. Tiberi. Thank you.
Ms. Toll. We would start competing.
Mr. Tiberi. Okay, next--oh, I ran out of time.
Chairman Ney. Quickly, for the next--
Mr. Tiberi. Thank you, Mr. Chairman.
Chairman Ney. You want to answer?
Ms. Williams. This is one of the issues that we are also
looking at in our study.
Chairman Ney. Okay. Mr. Cunningham?
Mr. Cunningham. I think if you do it that way, and price is
one of the considerations that you use to base the referral,
absolutely. Anybody who refers business and takes price into
account as well as the other factors, that is part of the
solution to this whole problem.
Chairman Ney. Thank you. I yielded my time to Mr. Miller,
so I'm not going to take the time now. But I am going to put in
writing the question to you about competition. I want to thank
you for your time today.
Thank you. I want to thank panel two for being here. Bob
Hunter is the director of insurance for the Consumer Federation
of America, and a consultant on public policy and actuarial
issues. Mr. Hunter is the former commissioner of insurance for
the State of Texas. He also found the National Insurance
Consumer Organization.
Doug Miller is the president and CEO, and co-owner of Title
One, Incorporated, in Bloomington, Minnesota. Title One,
founded in 1992, currently has 8 offices with 55 employees. Mr.
Miller is certified by the Minnesota State Bar Association as a
real property law specialist.
Mr. Arthur Sterbcow has been president of New Orleans-based
Latter and Blum, Incorporated since 1995. He is also a member
of the board of directors for the Real Estate Services
Providers Council, Incorporated. Mr. Sterbcow was appointed by
former Louisiana Governor, Mike Foster, to the State's property
insurance task force.
Tom Stevens is a 2006 president of the National Association
of Realtors. The association represents more than one million
members, and is involved in all aspects of the residential and
commercial real estate industries. Mr. Stevens is a past
president of the Virginia Association of Realtors, and was
named Realtor of the Year by the State association in 1991.
And Rande Yeager is president and CEO of Old Republic Title
Insurance Company Group of Minneapolis, Minnesota. He joined
the company in 1987, and is responsible for all operations of
Old Republic Title and its subsidiaries. Mr. Yeager is also the
2006 president of the American Land Title Association. Welcome,
and we will start with Mr. Hunter.
STATEMENT OF ROBERT HUNTER, DIRECTOR OF INSURANCE, CONSUMER
FEDERATION OF AMERICA
Mr. Hunter. Good afternoon, Mr. Chairman, members of the
subcommittee. Excessive title insurance premiums are not a new
problem. In 1977, I assisted as Federal Insurance Administrator
when the Justice Department first criticized the practice of
reverse competition in title insurance. We haven't used the
word reverse competition, but this is the crux of the problem.
Reverse competition is a feature of certain insurance
transactions in which the buyer of the insurance is not the
shopper, but is really looking for something larger, like a car
or a home, and insurance is either required or suggested as
part of that process.
At that point, a third party--a real estate broker, car
dealer, or someone--is in a position to steer the consumer to a
particular insurer. The third party is often influenced in
making the selection of an insurer by kickbacks that take many
forms: commissions, underpriced services, captive reinsurance,
and so on. The focus of competition is on rewarding the third
party for the steering. Since this increases the price of the
insurance, the competition is the reverse of normal.
I heard Prudential say in a reverse competition situation,
that they could not sell insurance, because they were--their
price was too low. This was credit insurance. Their price was
too low, therefore they were non-competitive.
In the case of title insurance, title insurers market their
products to real estate professionals who, because of their
position of market power in the real estate transaction, can
steer consumers to a particular title agent or insurer. The
consumer has little or no market power in this transaction,
because title insurance is required, because the consumer
infrequently purchases reinsurance, and has little knowledge.
It is very powerful uninformed consumers buying required
insurance subject to market power exercised by trusted
professionals, and only breaking the power of this incentive
can end reverse competition and bring title insurance premiums
down.
In 2005, consumers paid $17 billion in title insurance
premiums: 4 times what they paid in 1995. This increase was
driven by increased home sales, mortgage refinancings, and
growth in home values. Yet the--given automation, there should
have been savings, and prices should not have gone up at the
same rate as these other factors.
BankRate estimates that national average premiums for title
insurance on a $180,000 loan is $925. I am an actuary, and I am
using the title report and other estimates, that it should only
cost somewhere between $200 and $300 for the 5 percent that was
paid out in claims, and for the costs. So we're talking about
triple the fair price.
The majority of title insurance costs are not for losses or
operating costs, but payments to title agents. The top four
title insurance paid an average of 80 percent of the title
insurance premiums to their agents, and it's not disclosed to
borrowers.
The widening number of investigations, State and Federal,
into allegations of illegal kickbacks are helpful, but too
little and too late. Congress must act to remove the financial
incentive for reverse competition.
There are two possibilities for doing this. One, replace
title insurance with a Torrens-type system. Torrens title is
another method for protecting buyers. It started in Australia
in 1858, and is used throughout the world in most countries. In
Torrens, title to the properties is created by the act of
registration in the central register. Once your name is on the
register, you are the owner, by the fact of registration. Title
by registration is the pivotal concept of Torrens.
The State of Iowa uses this system, and it saves a lot of
money. The current premium in Iowa is $110 for mortgages up to
$500,000. Here, in D.C., a $500,000 mortgage costs, for title
insurance, $1,775, 16 times what it was charged in Iowa. Given
that most of the world--and even Iowa--has moved to an
efficient method of protecting home buyers from defects in
titles, Congress should encourage more States to experiment
with less expensive alternatives.
Second, make lenders pay for their title insurance. Another
alternative is to have lenders pay for the title insurance
policies, and include the cost in the APR, which is clearly
subject to positive competitive forces. The general approach
would be to make those requiring title insurance pay for it:
the lender for lender's policies, and the buyers for the buyer
or owner's policies. This would hold down the cost of insurance
premiums, because there would no longer be an ability to
indirectly pass the costs through to the home buyer. The direct
pass-through approach, part of the APR, will pressure lenders
to squeeze out excessive kickbacks from title insurance
products.
We have known about these kickbacks for decades. Study
after study has shown that they exist, and that they are very
powerful, and have doubled or tripled the real price. As has
been true since 1977, these incentives for kickbacks are great.
And you just can't outlaw them by saying they are illegal--
Chairman Ney. I'm sorry--
Mr. Hunter. You have to stop them by taking away that
incentive.
[The prepared statement of Mr. Hunter can be found on page
55 of the appendix.]
Chairman Ney. I'm sorry, Mr. Hunter, your time has expired.
The reason I am--I just got notice that we are going to have
votes, so I want to get everybody's testimony in, so I am just
staying strict to the time because of that reason.
Mr. Hunter. Fine.
Chairman Ney. Mr. Miller? Thank you.
STATEMENT OF DOUGLAS R. MILLER, PRESIDENT AND CEO, TITLE ONE,
INC., MINNEAPOLIS, MN
Mr. Miller. Thank you. I am here today because I am being
shut out of the Minnesota title industry by controlled business
relationships. My company can no longer compete because we
won't pay referral incentives to realtors and loan officers.
There are a lot of realtors and loan officers who would like to
send me business, but because of management pressures, they
can't do it.
When you mix controlled business and fiduciary
relationships, competition becomes, ``Who can pay the most in
referral fees?''
I have been in business for 14 years. I have a great
company. We strive to have the best service, product, and
pricing. We are one of the most technologically advanced
companies in the Nation. We have 60 great employees and 8
convenient locations. But none of that matters any more.
Consumers typically rely upon realtors to select their title
company.
For title service providers, there is almost irresistible
incentive to financially influence these realtors to refer them
business. And nowhere are there more referral incentives
tainting the market than in Minnesota.
Minnesota is the most corrupt place in the Nation to close
a home. Service excellence and price are now meaningless in my
market. Instead, we have a system that rewards real estate
professionals for manipulating their clients into selecting the
highest priced title companies. That system is called
controlled business.
My title company is stopped at the door at most real estate
brokerage houses in town. They have their own affiliated title
company, and don't want to hear about us. Loan officers who are
loyal to our cause are powerless to risk making a title company
recommendation that is contrary to the realtor's
recommendation, for fear of losing a referral source. Consumers
are carefully guarded from key information about competing
title companies, and agents are chastised if they recommend a
title company other than their in-house company. I could give
away my services for free, and still be shut out.
RESPA was designed to prevent exactly what happened in
Minnesota. Unfortunately, RESPA created some loopholes for
certain affiliated businesses. Minnesota is now one big anti-
competitive loophole.
Real estate agents are trustees of their clients' real
estate affairs. They are fiduciaries. Controlled business and
fiduciary relationships don't mix. When you start talking about
capture rates in fiduciary relationships, it is the equivalent
of talking about manipulating fiduciary relationships for
financial gain.
It may be a great business plan, may make tons of profit
and they may be hugely successful, but for the same reason that
they are so successful is also why they are very illegal. It is
self-dealing and anti-competitive.
NAEBA, the National Association of Exclusive Buyer Agents,
is one organization of realtors that takes the position that it
would be self-dealing, and an obvious breach of fiduciary
duties, to accept pressures or incentives in the selection of a
title company. Take a look at Exhibit A.
CBA's don't have to compete, so they are expensive. In
fact, CBA's are the most expensive title companies in the Twin
Cities marketplace, sometimes by as much as 40 percent. And you
can take a look at my price comparison over there. The entire
basis for a CBA's existence is to control fiduciaries, so that
their clients are prevented from making an informed decision. A
vulnerable and trusting consumer will pay more, so controlled
business charges them more.
If you have a CBA, then you have a license to charge
whatever you want. CBA's are bad for consumers, and they
destroy competition. Joint ventures are the worst form of CBA.
They are created by title companies for the purpose of paying
referral incentives. Instead of competing on service and price,
the title company captures the realtor's business by setting up
a joint venture with them.
The joint venture provides identical services that the
title company already provides, but the realtors get to share
in the profits. There is no legitimate reason for their
existence, they add nothing to the transaction, except an extra
step and kickbacks or referral incentives to realtors. This
adds a huge, unnecessary step and cost to a transaction that is
already very complex and expensive.
The realtor just tells the client where to go for their
closing, the HUD will show an extra line item to the JV for
services that should have been done by the original title
company, the companies that compete on service and price never
even have a chance. The realtor's advice has been bought and
tainted, just as clearly as if they had been paid a cash kick-
back.
Where there used to be a handful of title companies in the
Twin Cities market, there are now over 500, and most of them
are JV's.
Although the elderly, first-time home buyers, and some
protected classes may be victimized the most, these schemes
cross over all racial and demographic borders.
The impact of CBA's is nowhere more apparent than in
Minnesota. The Federal Housing Finance Board conducted a survey
of mortgage closing costs in U.S. cities, and concluded that
our closing costs were more than twice the national average. A
recent investigation by Money Magazine concluded that
widespread existence of controlled business relationships was
the main reason Minnesota now has the highest closing costs in
the Nation.
Conclusion. Minnesota's free market system has been
horribly perverted, and it is harming consumers and legitimate
business to the tune of billions of dollars per year. Whether
legal or not, controlled business in a fiduciary relationship
will always have an anti-competitive effect. Why would any
fiduciary, truly acting in a client's best interests,
repeatedly send those clients to an affiliate that it knows
will cost them hundreds of dollars more, on average? The system
has been breached, and the culprit is controlled business.
Thank you.
[The prepared statement of Mr. Miller can be found on page
78 of the appendix.]
Chairman Ney. Thank you.
Mr. Sterbcow?
STATEMENT OF ARTHUR STERBCOW, PRESIDENT, LATTER AND BLUM,
REALTORS, NEW ORLEANS, LA, ON BEHALF OF THE REAL ESTATE
SERVICES PROVIDERS COUNCIL, INC.
Mr. Sterbcow. Good afternoon, Mr. Chairman, and members of
the subcommittee. My name is Arthur Sterbcow, and I am
president of Latter and Blum Realtors, a full service real
estate brokerage company, headquartered in New Orleans,
Louisiana, since 1916. Despite Hurricane Katrina, we are still
around.
Latter and Blum Realtors has 28 real estate brokerage
offices that engage in real estate sales and leasing in
Louisiana and southern Mississippi through over 1,000 sales
associates and 250 employees. Latter and Blum offers mortgage
services through our wholly owned subsidiary, Essential
Mortgage Company, and we offer title and closing services
through Essential Title, another wholly owned subsidiary.
We also offer insurance through Latter and Blum Insurance
Services, which is a joint venture, jointly owned by Latter and
Blum and Hartwig Moss Insurance Agency.
Today I am representing the Real Estate Services Providers
Council, known as RESPRO, as a member of its board of
directors, and as its 2006 vice chair. RESPRO is a national,
non-profit trade association of approximately 275 residential
real estate firms, mortgage lenders, home builders, title
companies, and other settlement service companies. The bond
that unites this diverse membership is that we all offer one-
stop shopping for home buyers and home owners through what are
known under RESPRO as affiliated business arrangements.
My testimony today will primarily focus on one topic of
this hearing, affiliated title businesses, and particularly the
difference between legitimate affiliated businesses and sham
affiliated businesses.
In RESPRO's opinion, affiliated title businesses that
comply with RESPA and similar State laws, which I will refer to
today as legitimate affiliated businesses, increase competition
by facilitating entry into the title industry by non-
traditional providers such as real estate brokers, home
builders, and mortgage lenders. They have also been documented
over the years as providing consumers the benefits of
convenience, accountability, and potentially lower costs.
One of the reasons that companies like Latter and Blum have
entered the title business over the last several years is
because it allows us to improve the quality of the title and
closing process for our customers. Another reason is consumer
surveys--that are more fully explained in my written
testimony--have shown that the majority of home buyers prefer
to be able to get everything they need in one place.
The reason these home buyers said they prefer one-stop
shopping, or that they have just one person to contact, it
speeds up the home buying process. It prevents potential
problems and falling through the cracks. It ensures one
standard level of service from all providers in the entire real
estate transaction.
Over the last 15 years, there have been a number of
economic studies by both independent economists and HUD that
have documented the increased competition and potentially lower
costs that legitimate affiliated business arrangements have
brought to the marketplace. In the interest of time, I won't
repeat their findings here. But the details are provided in my
written statement, and I will be glad to provide the complete
studies to the subcommittee for the record.
It is important, however, for affiliated businesses to
comply with the Federal regulatory framework governing them
that Congress and HUD have provided under RESPA. This
regulatory framework requires a person referring business to an
affiliate to disclose the nature of the financial interest. It
prohibits that person from requiring the use of the affiliated
service, and it prohibits that person from accepting illegal
referral fees from the affiliated company.
RESPRO has served as a regulatory compliance resource for
our members' affiliated businesses throughout the years through
our publications, a comprehensive desktop reference kit on
regulatory compliance issues for managers of affiliated
businesses, our workshops, and through our website at
www.respro.org.
Our organization, however, is very frustrated, frustrated
that some providers in today's marketplace are violating RESPA
and similar State laws by creating sham affiliated businesses
that are established primarily through a vague RESPA's anti-
kickback prohibitions.
In addition, we see illegal kickbacks in the marketplace,
such as certain title agents or mortgage originators blatantly
paying certain real estate agents for referrals of business.
RESPRO has long been concerned about these violations,
because they make it more difficult for legitimate affiliated
businesses to compete, and because they tarnish the reputation
of our companies. It is, frankly, frustrating for companies
like mine to devote substantial resources to assuring that our
affiliated business are in compliance with RESPA and similar
State laws, and then observe competitors bypassing those
protections with clear-cut violations.
For that reason, we totally support efforts by HUD and the
States to more effectively enforce RESPA and State laws, and we
support State efforts to put more teeth in their State laws, to
enable them to more effectively curb sham affiliated businesses
and illegal cut-backs by both affiliated and unaffiliated title
companies.
In fact, RESPRO's Colorado chapter recently worked closely
with Colorado regulators on a new State law governing
affiliated businesses that is modeled after RESPA. We believe
this law could provide a workable framework that can be a model
for other States in the future.
Mr. Chairman, we offer our assistance to Congress, HUD, and
State regulatory agencies, as you effectively deal with shams
and illegal kickbacks in the future. I thank the committee for
the opportunity to testify, and I will be happy to answer any
questions.
[The prepared statement of Mr. Sterbcow can be found on
page 153 of the appendix.]
Chairman Ney. Thank you.
Mr. Stevens?
STATEMENT OF THOMAS M. STEVENS, PRESIDENT, NATIONAL ASSOCIATION
OF REALTORS
Mr. Stevens. Thank you, Chairman Ney, and members of the
subcommittee. Thank you for inviting me here today. My name is
Tom Stevens, and I am the former president of Coldwell Banker
Stevens Realtors, which is now Coldwell Banker Residential Mid-
Atlantic, right here in the Washington/Baltimore area.
As the 2006 president of the National Association of
Realtors, I am here to testify on behalf of our nearly 1.3
million realtor members, representing all aspects of the
residential and commercial real estate industry. I appreciate
the opportunity to share our views on title insurance costs and
competition in the marketplace.
Realtors take concerns about competitiveness and any sector
of the real estate services industry very seriously. In fact,
just a few months ago, the Government Accountability Office was
asked to analyze competition among real estate brokerages. The
GAO concluded that the industry has a number of attributes
associated with active price competition. These include a large
number of relatively small firms that are active throughout the
country, and the ease of entry into the profession.
Realtors have a particular interest in ensuring
competitiveness in the title industry, as title companies play
an important role in the real estate transaction. As you may
know, real estate professionals interact with title companies
in a number of ways. Let me highlight one, in particular, that
explains why we believe the industry is competitive.
Through affiliate business arrangements, a real estate
broker or agent may refer business to a settlement service
provider, such as a title company that is owned in whole or in
part by the referring party. Under this arrangement, the
referring party receives no direct payment for the referral,
but he or she can benefit indirectly, based on the financial
growth of the affiliated provider.
While NAR does not have comprehensive data on nationwide
real estate affiliated title companies, based on my experience
I estimate that about 20 percent of real estate professionals
have established title company affiliations. Industry experts
acknowledge that the average capture rate, or the number of
transactions completed by the affiliate, is around 30 percent.
Why is this number so low? First, a broker-owner has little
influence over how real estate agents manage their clientele.
Second, agents are highly motivated individuals, whose future
business depends on giving their clients a high level of
customer satisfaction. Consequently, an agent will recommend
the provider that they believe will provide the best experience
for their client. More often than not, it is not the broker's
affiliated company.
Title insurance providers must be highly competitive to win
business from their partners in the transaction. I have
detailed in my written testimony additional reasons why we
believe title insurance also is competitive. These facts are
not in serious dispute among real estate service providers.
The question we have often heard debated is, if the
business is so competitive, why haven't the costs of title
insurance decreased, especially with the proliferation of the
Internet? Simply put, there is no do-it-yourself easy way to
issue title insurance. Each home has its unique title and
history. Each sales transaction requires its own title search,
its own title examination and commitment, title policy, and
settlement closing.
Purchasing a home requires weeks, if not 1 or 2 months of
work, and there is tremendous liability at stake for all
parties. So while a person can go on the Internet and in just a
few minutes have an airline ticket to virtually anywhere in the
world, the time, complexity, and liability part of the real
estate transaction precludes a point and click approach.
However, there is one area of the title insurance market
that greatly concerns realtors: illegal kickbacks. Not only are
illegal kickbacks wrong, but they drive up closing costs for
consumers. Real estate professionals want to see sham companies
who engage in such practices removed from the marketplace
quickly. NAR applauds HUD and State insurance commissioners for
shining a bright light on sham companies and illegal kickbacks.
We are optimistic that HUD's increased enforcement and
coordination with Federal agencies and State regulators will
send a clear signal to the bad actors, that they are not
welcome in our industry.
We also wish to issue a challenge to our industry partners
to allocate resources to RESPA education efforts, as NAR has
done with its RESPA awareness campaign. NAR is committed to
ensuring that realtors understand RESPA, and fully comply with
its provisions. We welcome every opportunity to work with HUD
on our compliance efforts, to ensure that the real estate
industry remains strong and competitive, well into the future.
And I want to thank you for your time, and I would be happy
to answer questions.
[The prepared statement of Mr. Stevens can be found on page
171 of the appendix.]
Chairman Ney. Thank you.
Mr. Yeager?
STATEMENT OF RANDE YEAGER, PRESIDENT AND CEO, OLD REPUBLIC
NATIONAL TITLE INSURANCE CO., MINNEAPOLIS, MN, ON BEHALF OF THE
AMERICAN LAND TITLE ASSOCIATION
Mr. Yeager. Thank you Chairman Ney, members of the
subcommittee. Again, I am Rande Yeager. I am president and CEO
of Old Republic National Title Insurance Group. But today I am
appearing as the 2006 president of the American Land Title
Association.
ALTA represents those poor souls sentenced to life in
painful title insurance. We have over 3,000 members, including
title insurers, title insurance agents, abstractors, and
attorneys.
Mr. Chairman, all of us who work in the land title business
are justifiably proud of the essential role our industry plays
in making our real estate market the envy of the world. Nowhere
else is the creation and transfer of interest in real property
accomplished more efficiently and securely than in the United
States. It is because we are so proud of the many good and
unnoticed things that our industry does, that we are so
concerned about any questionable practices involving our
members.
Let me make this clear at the outset. We support strong,
consistent enforcement of State and Federal regulations that
address referral fee arrangements. Businesses that do not play
by the rules gain an unfair competitive edge, and often provide
inferior services at higher prices to the consumer.
Because my time is so limited today, I will urge you to
read our comprehensive written statement.
And while consumers today are more knowledgeable about real
estate transactions than they ever were in the past, the fact
remains that most consumers still look for advice to their real
estate agent or mortgage lender in selecting a title company.
That is not likely to change in the foreseeable future.
When title companies compete for recommendations on the
basis of service, quality, and price, consumers benefit.
However, captive reinsurance and sham affiliated business
arrangements may involve indirect kickbacks or referral fees to
the builder, lender, or broker, as a way of securing their
recommendations.
It's important for the subcommittee to appreciate that ALTA
has always been a strong supporter of RESPA, and its objective
to insure that competition is not skewed by illegal referral
fees and other kickbacks. The reason for this support is clear.
Such payments and practices cause great harm to the vast number
of ALTA members who are complying with RESPA.
Our association, therefore, has a strong interest in
working with HUD and State authorities, and we do applaud the
efforts of Erin Toll to insure that the rules are enforced
fully, consistently, and fairly. Indeed, most enforcement
actions are brought due to industry complaints to regulators.
Accordingly, some of the changes we recommend to build on
this private relationship are: section eight should be amended
to provide competitors to bring a section eight case for
injunctive relief. At present they do not have that right.
Companies in the industry know when their competitors are
engaged in unlawful payments to get business, and they have a
strong incentive to stop such practice.
Second, we would ask HUD to respond with a reasonable time
to request for guidance on RESPA issues that are submitted by
ALTA or other national settlement service associations. This
screening process will ensure that only important questions
with broad significance will be brought to HUD's attention.
Third, we believe that States should be encouraged to adopt
and enforce referral fee prohibitions against the recipients of
such payments. Frequently, it is the title companies that are
under pressure from persons in a position to refer business to
make questionable payments in order to get referrals.
Fourth, greater emphasis should be placed on consumer
education, both directly and through the Internet. ALTA
allocates substantial resources to educating its members, and
for many years has been actively engaged in consumer education.
ALTA's website contains clear and helpful information for
consumers, as well as regulators.
ALTA appreciates this opportunity to provide its views to
the subcommittee, and I am prepared to respond to questions
that any of the members have about the title insurance or its
industry.
[The prepared statement of Mr. Yeager can be found on page
212 of the appendix.]
Chairman Ney. Thank you. Without objection, the statement
of the American Homeowners Grassroots Alliance will be entered
into the record.
Chairman Ney. Mr. Green, do you have a question?
Mr. Green. Mr. Chairman, I do realize that we have the
vote, and I will just compliment the persons who have appeared
for doing so, and thank you for your testimony. And I thank
you, Mr. Chairman, for providing the opportunity.
Chairman Ney. Thank you for your participation in the
hearing. I appreciate the second panel and I think it's
important for your views to have been here today, to be part of
the record.
And I would note that some members, including myself, may
have additional questions that they wish to submit in writing
so, without objection, the hearing record will remain open for
30 days for members to submit written questions to the
witnesses, and for the responses to be placed in the record.
Thank you.
With that, the hearing is adjourned.
[Whereupon, at 4:55 p.m., the subcommittee hearing is
adjourned.]
A P P E N D I X
April 26, 2006
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