Title Insurance: Preliminary Views and Issues for Further Study  
(24-APR-06, GAO-06-568).					 
                                                                 
Title insurance is a required element of almost all real estate  
purchases and is not an insignificant cost for consumers.	 
However, consumers generally do not have the knowledge needed to 
"shop around" for title insurance and usually rely on		 
professionals involved in real estate--such as lenders, real	 
estate agents, and attorneys--for advice in selecting a title	 
insurer. Recent state and federal investigations into title	 
insurance sales have identified practices that may have benefited
these professionals and title insurance providers at the expense 
of consumers. At your request, GAO currently has work under way  
studying the title insurance industry, including pricing,	 
competition, the size of the market, the roles of the various	 
participants in the market, and how they are regulated. You asked
GAO to identify and report on preliminary issues for further	 
study. In so doing, this report focuses on: (1) the		 
reasonableness of cost structures and agent practices common to  
the title insurance market that are not typical of other	 
insurance markets; (2) the implications of activities identified 
in recent state and federal investigations that may have	 
benefited real estate professionals rather than consumers; and	 
(3) the potential need for regulatory changes that would affect  
the way that title insurance is sold.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-568 					        
    ACCNO:   A52339						        
  TITLE:     Title Insurance: Preliminary Views and Issues for Further
Study								 
     DATE:   04/24/2006 
  SUBJECT:   Consumer protection				 
	     Cost analysis					 
	     Financial analysis 				 
	     Insurance						 
	     Insurance companies				 
	     Insurance premiums 				 
	     Insurance regulation				 
	     Investigations by federal agencies 		 
	     Kickbacks						 

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GAO-06-568

     

     * Results in Brief
     * Background
     * Certain Aspects of the Title Insurance Market Merit Further
          * Extent to Which Premium Rates Reflect Underlying Costs Not A
          * Extent of Regulatory Focus on Title Agents Merits Further Re
          * Extent of Competition in the Industry That Could Benefit Con
          * Further Study of the Effect of Affiliated Business Arrangeme
          * Extent of Involvement and Coordination among Regulators of t
     * Further Study of the Implications of Recent State and Federa
          * Investigations Have Alleged Existence of Kickback Schemes an
          * Some Industry Participants Say the Issues Raised by the Inve
     * Potential Regulatory Changes Raise a Number of Issues
     * GAO Contact
     * Staff Acknowledgments
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Report to the Chairman, Committee on Financial Services, House of
Representatives

United States Government Accountability Office

GAO

April 2006

TITLE INSURANCE

Preliminary Views and Issues for Further Study

GAO-06-568

Contents

Letter 1

Results in Brief 2
Background 5
Certain Aspects of the Title Insurance Market Merit Further Study 7
Further Study of the Implications of Recent State and Federal
Investigations Could Be Beneficial 14
Potential Regulatory Changes Raise a Number of Issues 17
Appendix I GAO Contact and Staff Acknowledgments 20

Abbreviations

ALTA American Land Title Association

HUD Department of Housing and Urban Development

NAIC National Association of Insurance Commissioners

RESPA Real Estate Settlement Procedures Act

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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separately.

United States Government Accountability Office

Washington, DC 20548

April 24, 2006

The Honorable Michael G. Oxley Chairman Committee on Financial Services
House of Representatives

Dear Mr. Chairman:

Title insurance guarantees clear ownership of a property that is being
sold and protects both buyers and lenders. Typically it is required in
real estate purchases and is not an insignificant cost for consumers, who
may pay not only for their own policies but also for the lenders'.
However, consumers are generally not knowledgeable of the costs and
benefits of particular title insurance services and usually rely on
professionals involved in real estate, such as lenders, real estate
agents, or attorneys, for advice in selecting a title insurer.1 Recent
state and federal investigations into title insurance sales have
identified practices that may have benefited these professionals and title
insurance providers at the expense of consumers. Similarly, a recent study
on the competitiveness of the California title insurance market concluded
that the market was not competitive and that consumers were being
overcharged, provoking a strong and critical response from various market
participants.2

In response to these concerns we have work under way, at your request, on
the title insurance market, including pricing, competition, the size of
the market, and the roles of the various participants in the market and
how they are regulated. You requested that we report on the preliminary
results of our work to date and identify issues for further study. This
report focuses on issues related to: (1) the reasonableness of cost
structures and agent practices common to the title insurance market that
are not typical of other insurance markets; (2) the implications of
activities identified in recent state and federal investigations that may
have benefited real estate or other professionals rather than consumers;
and (3) proposed regulatory changes that would affect the way in which
title insurance is sold.

1Individual states regulate real estate brokerage, establishing licensing
and other requirements for brokers and agents. Of the two categories of
state-licensed real estate practitioners, brokers generally manage their
own offices, and agents (or salespeople) must work for licensed brokers.
States generally require brokers to meet more educational requirements
than agents, have more experience, or both.

2B. Birnbaum, Report to the California Insurance Commissioner: An Analysis
of Competition in the California Title Insurance and Escrow Industry,
(Austin, TX: Dec. 2005).

For this work, we reviewed available studies of the title insurance
industry. These included the aforementioned study on the California title
insurance market (as well as numerous criticisms of that study) and a
recent study conducted on behalf of Fidelity National Title Group.3 To
determine what role states play in overseeing the various parties involved
in the title insurance industry, we reviewed title insurance regulations
in selected states and other publicly available financial information on
title insurers and agents. To gain a better understanding of how title
insurance premiums are shared between insurance companies and agents, we
reviewed data collected by the National Association of Insurance
Commissioners (NAIC) and the American Land Title Association (ALTA).4 To
determine how insurers account for premiums, we also looked at financial
data filed with the Securities and Exchange Commission. Finally, to gain a
better understanding of the dynamics of the industry and current practices
and issues within the title insurance industry, we interviewed officials
from a variety of national organizations whose members are involved in the
marketing or sale of title insurance, or related activities; NAIC; the
Department of Housing and Urban Development (HUD); several state
regulators, including insurance departments and, in one state, the real
estate commissioner; title insurers; title agents; and industry
consultants. We performed our work primarily in Chicago, Illinois, and
Washington, D.C., between February and April 2006. We performed our work
in accordance with generally accepted government auditing standards.

                                Results in Brief

The reasonableness of cost structures and certain agent practices that are
common to the title insurance market-but not to other lines of
insurance-merit further study. First, while state regulations generally
require premium rates to be supported by underlying costs, the extent to
which title insurance premium rates reflect such costs is not always
clear. For example, according to data compiled by ALTA, the amount of
premium paid to or retained by title agents, generally to pay for title
search and examination costs and agents' commissions, accounted for
approximately 71 percent of title insurers' total premiums written in
2004. However, most states do not appear to consider such costs to be part
of the premium, and thus do not include them in their premium rate
reviews. Second, although title agents appear to play a very critical role
in the underwriting process, the extent to which state insurance
regulators review their operations is unclear. It appears that few states
regularly collect information on title agents' operations, and three
states plus the District of Columbia do not even license title agents.
Third, the extent to which a competitive environment that benefits
consumers exists within the title insurance market is also not clear. For
example, consumers generally lack the knowledge necessary to "shop around"
for a title insurer and therefore often rely on the advice of
professionals, such as real estate agents and lenders. As a result, title
agents normally market their business to these professionals, creating a
form of competition from which the benefit to consumers is not always
clear. Fourth, entities such as real estate brokers, lenders, and builders
are increasingly becoming full or partial owners of title agencies in what
are called "affiliated business arrangements." Such arrangements may
benefit consumers by facilitating "one-stop shopping" and lowering costs,
but they can also create conflicts of interest and can be used in ways
that do not benefit consumers. Finally, multiple regulators oversee the
different entities involved in the title insurance industry, including HUD
and state insurance, real estate, and mortgage regulators, but the degree
of their involvement and the extent of coordination among them are also
not clear. Oversight of this, and other areas, is essential to ensuring
that title insurance markets are functioning fairly, and the extent of
examination and oversight afforded this industry segment reportedly has
varied significantly.

3G. Vistnes, An Economic Analysis of Competition in the Title Insurance
Industry, (Washington, D.C.: Mar. 2006).

4ALTA is a national trade association for title insurers and agents, but
its members may also include attorneys, builders, developers, lenders, and
real estate brokers.

Recent state and federal investigations into the sale of title insurance
have identified potentially illegal activities-primarily involving alleged
kickbacks-that also merit further study. The investigations alleged
instances of real estate agents, mortgage brokers, lenders, and attorneys
receiving referral fees or other inducements in return for steering
business to title insurers or agents, activities that may have violated
federal or state anti-kickback laws. Participants allegedly used several
methods to convey the fees or inducements, including captive reinsurance
agreements, allegedly inappropriate or fraudulent business arrangements,
and free or discounted business services or other things of value. For
example, in one case, investigators alleged that a title agent created
several "shell" title agencies, some of which had few or no employees and,
at least in one case, no physical location. Investigators alleged that the
agencies did not actually perform any business (including settlements) but
were created as vehicles to provide kickbacks to mortgage brokers for
referring business. The investigators also alleged that title agents
mishandled or misappropriated customers' premium payments, so that
customers did not get the insurance they paid for.5 Insurers and industry
associations with whom we spoke told us that they had taken steps to
address alleged illegal activities, but also said that current regulations
did not clearly address some aspects of affiliated business relationships
and that they would support greater enforcement.

In the past several years, regulators, industry groups, and others have
suggested several changes to regulations that would affect the way title
insurance is sold, and further study of these suggestions could be
beneficial. In 2002, HUD proposed revisions to the regulations that
implement the Real Estate Settlement Procedures Act (RESPA) 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 could
affect the pricing and sale of title insurance. Such revisions proved to
be controversial, and in response to considerable comment from industry
(including the title industry), consumers, and others, HUD withdrew 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. In addition, NAIC, which among
other things develops model insurance laws that states can adopt, is
considering changes to the model laws for title insurers and title
agents.6 Finally, at least one consumer advocate has suggested that
requiring lenders to pay for the title policies from which they benefit
might increase competition and ultimately lower costs for consumers.
Further review of the effects of such potential changes on the title
industry and the feasibility of making such changes could help Congress,
HUD, and state regulatory agencies in their oversight and decision-making
processes.

5Colorado Division of Insurance Order No. 0-06-089 (Nov. 15, 2005).

6NAIC is a voluntary organization of the chief insurance regulatory
officials of the 50 states, the District of Columbia, and four U.S.
territories. NAIC assists state insurance regulators by providing
guidance, model (or recommended) laws and guidelines, and
information-sharing tools.

This is a preliminary report based on information collected to date and
does not include conclusions or recommendations.

                                   Background

In any real estate transaction, the buyer and lender providing the
mortgage need a guarantee that the buyer will have clear ownership of the
property. Title insurance is designed to provide that guarantee by
agreeing to compensate the lender (through a lender's policy) or the buyer
(through an owner's policy) up to the amount of the loan or the purchase
price, respectively. Lenders' policies are in force for as long as the
original loan is still outstanding, but end when the loan is paid off-for
instance, through a refinancing transaction-while owners' policies remain
in effect as long as the purchaser of the policy owns the property.

Title insurance is sold primarily through title agents. Before issuing a
policy, a title agent checks the history of a title by examining public
records such as deeds, mortgages, wills, divorce decrees, court judgments,
and tax records. If the title search discovers a problem-such as a tax
lien that has not been paid-the agent either arranges to resolve the
problem, decides to provide coverage despite the problem, or excludes it
from coverage. The title policy insures the policyholder against any
claims that might have existed at the time of the purchase but were not
identified in the public record. The title policy does not require that
title problems be fixed but compensates policyholders if a covered problem
arises. Except in very limited instances, title insurance does not insure
against title defects that arise after the date of sale.

Title searches are generally carried out locally by title agents because
the public records to be searched are usually only available locally. In
addition, the variety of sources that agents must check has fostered the
development of privately owned, indexed databases called "title plants."
These plants contain copies of the documents obtained through searches of
public records, indexed by property address, and must be regularly
updated. Title plants may be owned by insurers, title agents, or a
combination of entities. In some cases, the owner of a title plant sells
access to other insurers and agents, charging them to use the service.

Title insurance premiums are paid only once, at the time of sale or
refinancing, to the title agent. Agents retain or are paid a portion of
the premium amount as a fee for conducting the title search and related
work, and for their commission. Agents have a fiduciary duty to account
for premiums paid to them, and insurers generally have the right to audit
the agents' relevant financial records. The party responsible for paying
for the title policies varies by state and can even vary by areas within
states. In many areas, the seller pays for the owner's policy and the
buyer for the lender's policy, but the buyer may also pay for both
policies or split some (or all) of the costs with the seller. In most
cases, the policies are issued simultaneously by the same insurer, so that
the same title search can be used for both policies. In a recent
nationwide survey, the average cost for simultaneously issuing lender's
and owner's policies on a $180,000 loan, plus other associated title
costs, was approximately $925-or approximately 34 percent of the average
total loan origination and closing fees.7

In almost all states, title insurance is regulated by state insurance
departments; in all states, insurers selling title insurance in that state
are subject to the state's regulations for their operations within that
state. State regulators are responsible for enforcing these regulations,
primarily through the licensing of agents, the approval of insurance rates
and products, and the examination of insurers' financial solvency and
conduct. State regulators typically conduct financial solvency
examinations every 3 to 5 years, while examinations reviewing insurers'
conduct are generally done in response to specific complaints by consumers
or concerns on the part of the regulator.

Insurance regulations can vary across states, creating differences in the
way insurers are regulated. For example, most states require insurers to
submit proposed premium rates to the state regulator, and then perform
some level of review of those rates. In several states, however, the state
regulator sets the premium rate which all insurers must charge, and in at
least one state the regulator does not review rates at all. In addition,
while most states license title insurance agents, several do not. At the
federal level, HUD is responsible for enforcing RESPA, which regulates
real estate settlement practices. Among other things, RESPA requires that
borrowers receive certain information regarding closing costs, including
title insurance fees. RESPA also generally prohibits giving or accepting
any thing of value for the referral of settlement services, such as the
referral of business to a particular title agent. RESPA also allows state
insurance commissioners to take enforcement actions, under RESPA, against
these prohibited activities.

7The survey was conducted by Bankrate.com in 2005 by obtaining information
online where available, and contacting title agents as necessary. We did
not assess the validity of the data collected in the survey.

       Certain Aspects of the Title Insurance Market Merit Further Study

Some aspects of the title insurance market that set it apart from other
lines of insurance merit further study, including:

           o  the importance of title search costs, rather than losses, in
           setting premium rates;
           o  the fact that title insurance agents play a more important role
           than agents for other lines of insurance;
           o  the fact that title insurance is generally marketed not to
           consumers but to professionals such as real estate agents or
           mortgage brokers;
           o  the proliferation of affiliated business arrangements between
           title agents and these professionals; and
           o  the involvement and coordination among the regulators of
           multiple types of entities involved in the marketing and sale of
           title insurance.

Extent to Which Premium Rates Reflect Underlying Costs Not Always Clear

The extent to which title insurance premium rates reflect insurers'
underlying costs is not always clear. Insurance rate regulation, among
other things, aims to protect consumers by ensuring that premium rates
accurately reflect insurers' expected and actual costs, and that they are
not excessive. However, most state regulators do not appear to consider
title search expenses to be part of the premium. As a result, these
expenses are not included in regulatory reviews that seek to determine
whether premium rates accurately reflect insurers' costs. To complicate
matters, it also appears that few state regulators collect financial data
from title agents, who generally conduct the title search and examination
work, so that examining such expenses would be difficult. Further, unlike
other lines of insurance, the largest costs for title insurers are
expenses related to title searches and agent commissions, not losses on
policy claims. In 2004, according to data compiled by ALTA, losses and
loss adjustment expenses incurred by title insurers as a whole were
approximately 5 percent of total premiums written, while the amount paid
to or retained by agents (primarily for work related to title searches and
examinations, and for agents' commissions) was approximately 71 percent of
premiums written. In contrast, property casualty insurers' losses and loss
adjustment expenses accounted for approximately 73 percent of total
premiums in 2004.8

A related area worthy of further review is premium rate regulation for
mortgage refinance transactions. In these cases, a title search most
likely has been performed relatively recently, and the property is not
changing hands. If the same title insurer was conducting another title
search for the refinancing, that search would presumably need to cover a
shorter period of time. Because title search and examination costs are the
largest component of premium rates for title insurance, the premium rates
for refinance transactions could reasonably be expected to be lower than
for home purchases. While it appears that many insurers do provide
discounted premiums on refinance transactions, the extent of such
discounts and how widely they are used-that is, whether consumers know
about them and know how to take advantage of them-is unclear.

Finally, the extent to which premium rates increase as loan amounts or
purchase prices increase could also usefully be examined. Costs for title
search and examination work do not appear to rise as loan or purchase
amounts increase, and the portion of premiums that covers potential losses
is only about 5 percent of total premiums. If premium rates reflected the
underlying costs, premium rates could reasonably be expected to increase
at a relatively slow rate as loan or purchase amounts increase. However,
this does not always appear to be the case. For example, using premium
rates posted on the Internet by two state regulators with whom we spoke,
we found that when the purchase price or loan amount doubled from $150,000
to $300,000, the increase in total premium for an owner's policy for
selected insurers in the same county ranged from approximately 27 to 57
percent. According to an industry expert and officials from an industry
association, allowing such pricing reflects a policy decision by state
regulators to have higher-income purchasers subsidize the title insurance
costs of lower-income purchasers.

8According to industry consultants and analysts, the different loss and
expense structure of the title insurance industry reflects the fact that
title insurance is primarily focused on preventing losses through title
searches and examinations; meanwhile, most property casualty insurance is
focused on compensating policyholders for losses.

Preliminary Questions                                                      
                                                                              
      o  How do title insurers determine premium rates, and how have these    
      rates changed in recent years?                                          
      o  How does the current rate review structure in most states examine    
      the costs that determine title insurance premium rates?                 
      o  What data are collected that could be used to assess the extent to   
      which title insurance premium rates reflect the associated costs?       
      o  To what extent do title insurers offer discounted premium rates on   
      mortgage refinance transactions?                                        

Extent of Regulatory Focus on Title Agents Merits Further Review

Title agents play a more significant role in the title insurance industry
than most other types of insurance agents. For most lines of insurance, an
agent's role is primarily a marketing role. Title insurance agents not
only perform this task, but also carry out most underwriting tasks,
including title search and examination work. In many cases, title agents
retain the actual insurance policy and, after deducting expenses, remit
the title insurer's portion of the premium. As we have seen, amounts paid
to or retained by title agents for this work in 2004 were around 71
percent of total premiums written.

Despite title agents' critical role, the amount of attention they receive
from state regulators is not clear. For example, according to data
compiled by ALTA, while most states require title agents to be licensed,
three states plus the District of Columbia do not.9 In addition, also
according to the same source, 18 states and the District of Columbia do
not require agents to pass a test to become licensed, and only 20 states
require some form of continuing education as a prerequisite for title
agents. At least one state does not regulate title agents. While NAIC has
produced model legislation that states can use as a basis for their own
regulation of title agents, according to NAIC, as of October 2005, only 3
states had passed the model act or similar legislation.10

9The District of Columbia does not require title agents based there to be
licensed, but title agents based in Maryland or Virginia who conduct
business in the District must be licensed by their respective states.

10NAIC, among other things, develops model insurance laws that states can
adopt, and has developed such laws for both title insurers and agents.
NAIC also manages the accreditation process for state insurance
regulators, requiring them to adopt certain key laws in order to take
advantage of reciprocity arrangements between states. However, states do
not need to adopt the model laws in order to be accredited.

The level of oversight of title agents by the state regulators that we
spoke with for this report varied. For example, one state regulator told
us that examiners conduct regular but informal visits to the title agents
in their state but do not track such contacts. Another regulator told us
that the agency's review of title agents' operations focused primarily on
financial condition, not on compliance with state laws. This regulator
also collected financial data from title agents, but had only recently
begun systematically analyzing that data and questioned its quality.
Another regulator told us that the agency had recently begun an intense
examination of title agents' activities and had taken a number of related
enforcement actions.

The state insurance regulators with whom we spoke expected or required
insurers to oversee the operations of the title agents writing policies
for them. One regulator said that the state did not have specific
regulations requiring insurers to monitor title agents' operations, but
expected such monitoring as a matter of course. This regulator also
expected insurers to resolve any problems the regulator might find with
agents' operations. Another state regulator told us that, in light of
activities identified in recent investigations, their office recently
revised its regulations to require title insurers to monitor the
activities of their agents and hold insurers responsible for their agents'
actions.

Preliminary Questions                                                      
                                                                              
      o  To what extent do state insurance regulators review and collect      
      information from title agents operating in their state?                 
      o  To what extent are title insurers required to oversee the agents who 
      write insurance for them? To what extent have state insurers adopted    
      model title insurance and agent laws?                                   

Extent of Competition in the Industry That Could Benefit Consumers Is Not Clear

For several reasons, the competitiveness of the title insurance market
merits further study. First, because the purchase of title insurance is an
infrequent and unfamiliar transaction for most people, consumers often
rely on the advice of a real estate or mortgage professional in choosing a
title insurer. As a result, title insurers and agents normally market
their product to such professionals rather than to consumers. Thus, while
consumers are the ones paying for title insurance, they generally do not
know how to "shop around" for the best deal, and may not even know that
they can. Meanwhile, the potential exists for real estate or mortgage
professionals to recommend-not the least expensive or most reputable title
insurer or agent-but the one that is most closely aligned with the
professional's best interests. While RESPA generally prohibits the payment
of fees for such business referrals, as discussed later in this report,
recent federal and state investigations have alleged such arrangements.
Some industry officials pointed out that cost was not the only basis for
selecting a title insurer because service and speed were also important.

Second, concentration in the industry has raised further questions about
its competitiveness. In 2004, according to data compiled by ALTA, the five
largest title insurers and their subsidiary companies accounted for over
90 percent of the total premiums written. However, according to the annual
reports of several of these companies, a large number of local agents are
used to conduct their business-for example, one company noted in its
annual report that more than 9,500 agents sold the company's insurance
nationwide. And while a recent analysis of competition in the California
title insurance market concluded that the market was overly concentrated,
some experts disagree with the study's methodology and its conclusions.11

Finally, certain aspects of the financial performance of title insurers
and agents have also caused some to question the competitiveness of the
title insurance market. For example, as previously discussed, losses on
title insurance claims accounted for only about 5 percent of total
premiums written in 2004-a very low percentage compared with most other
lines. In addition, according to data collected by ALTA, total operating
revenue for the industry as a whole rose approximately 68 percent between
2001 and 2004, from approximately $9.8 to $16.4 billion. Such conditions
could create the impression of excessive profits. The same study of
competition in the California market analyzed the profitability of
insurers and agents in that market and concluded that they were earning
large profits at consumers' expense.

Preliminary Questions                                                      
                                                                              
      o  To what extent do aspects of competition beneficial to the consumer  
      appear to exist in the current title insurance market?                  
      o  What has been the short- and long-term financial performance of      
      title insurers and agents, and what accounts for the dramatic increase  
      in total operating revenue?                                             

11Birnbaum, Report to the California Insurance Commissioner.

Further Study of the Effect of Affiliated Business Arrangements Could Be
Beneficial

The use of affiliated business arrangements involving title agents and
others such as lenders, real estate brokers, and builders, appears to have
grown over the past several years, and further study of their effect could
be beneficial. Within the title insurance industry, the term "affiliated
business arrangements" generally refers to some level of joint ownership
among title insurers, title agents, real estate brokers, mortgage brokers,
lenders, and builders. For example, a mortgage lender and a title agent
might form a new jointly owned title agency, or a lender might buy a
portion of a title agency. According to some industry groups, consumers
can benefit from such arrangements, which may provide convenient, one-stop
shopping and lower costs. But some consumer groups and state insurance
regulators point out that such arrangements can also be abused and could
present conflicts of interest. For example, a real estate broker that is
part owner of a title agency might be seen as unable to provide objective
advice on which title insurer a consumer should use. In addition, some see
such arrangements as a way to hide referral fees by allowing title
insurers or agents to mask such fees as a return on ownership interest. As
detailed later in this report, a number of recent investigations have
alleged improper use of affiliated business arrangements.

State regulation of affiliated business arrangements appears to vary. For
example, according to one industry association, a number of states limit
the amount of business title insurers and agents can receive from an
affiliate. In addition, among the state regulators with whom we spoke for
this review, one did not normally examine such arrangements, but the
others were beginning to conduct more extensive reviews. RESPA regulations
require disclosure of affiliated arrangements whenever a settlement
service provider refers a consumer to a business with which the provider
has an ownership or other beneficial interest. In addition, while owners
of affiliated business may be compensated for their ownership interest in,
for example, a title agent, RESPA regulations prohibit compensation beyond
that interest.

As noted above, the extent of information collected regarding the
activities of title agents appears to be limited. As a result, the extent
of information collected on affiliated business arrangements involving
title agents is likely similarly limited. The use of affiliated business
arrangements, and the potential benefits and concerns regarding their use,
make this an issue on which further study could be beneficial.

Preliminary Questions                                                      
                                                                              
      o  To what extent is information available on the growth and use of     
      affiliated business arrangements in the title insurance industry?       
      o  What are the potential benefits and concerns associated with the use 
      of affiliated business arrangements?                                    
      o  To what extent do state insurance and other regulators review        
      affiliated business arrangements?                                       
      o  How are RESPA disclosure requirements of affiliated business         
      arrangements, and the related prohibitions on referral fees, enforced?  

Extent of Involvement and Coordination among Regulators of the Multiple Entities
Involved in the Sale of Title Insurance Is Worthy of Further Study

Several types of entities (besides the insurers and their agents) are
involved in the sale of title insurance, and the degree of involvement and
the extent of coordination among the regulators of these entities appears
to vary, making this an area meriting further review. Multiple types of
entities are involved in the marketing of title insurance, including real
estate brokers and agents, mortgage brokers, lenders, and builders who
refer clients to the insurers and agents. These entities are generally
overseen at the state level by different regulators, and the extent of
regulation related to title insurance sales practices tends to vary across
states. One state insurance regulator with whom we spoke told us that they
informally coordinate with the state real estate commission as well as
HUD. Another regulator said that, while they have tried to coordinate
their efforts with the state regulators of real estate and mortgage
brokers, those regulators have generally not been interested in such
coordination. The apparent growth of affiliated business arrangements,
which give some of these entities an ownership interest in others, makes
examining the strengths of-and need for-such coordination even more
important. However, some coordinated regulatory efforts have taken place.
At the federal level, HUD, which is responsible for implementing RESPA,
has conducted some investigations with state insurance regulators. As we
will see, some of these investigations of the marketing of title insurance
by title insurers and agents, real estate brokers, and builders have
turned up allegedly illegal activities in the market. Oversight of this,
and other areas, is critical to ensure that title insurance markets are
functioning fairly.

Preliminary Questions                                                      
                                                                              
      o  To what extent do regulatory differences among those involved in the 
      sale of title insurance create concerns, and to what extent is there    
      regulatory coordination?                                                
      o  To what extent do current regulations address the potential concerns 
      about affiliated business arrangements?                                 
      o  What could state and federal regulators do to improve coordination?  

  Further Study of the Implications of Recent State and Federal Investigations
                              Could Be Beneficial

Federal and state investigators have identified two primary types of
potentially illegal activities associated with the sale of title
insurance. The first involves providing home-builders, real estate agents,
real estate brokers, and lenders with potentially unlawful referral fees
through captive reinsurer agreements, allegedly inappropriate or
fraudulent business arrangements, and free or discounted business services
and other items of value. The second involves potential fraud committed by
title agents who allegedly misappropriate or mishandle customers'
premiums. Industry representatives told us that title insurers have begun
to address these problems but that clearer regulations and more
enforcement are needed.

Investigations Have Alleged Existence of Kickback Schemes and Fraudulent
Activities in the Title Insurance Industry

In several states, state insurance regulators identified captive
reinsurance arrangements that they alleged were being used by title
insurers and agents to inappropriately compensate others-such as builders
or lenders-for referrals.12 In such arrangements, a home-builder, real
estate broker, lender, title insurance company, or some combination of
these entities forms a reinsurance company that works in conjunction with
a title insurer. The title insurer agrees to "reinsure" all or part of its
business with the reinsurer by paying the company a portion of the premium
(and ostensibly transferring a portion of the risk) for each title
transaction. Investigators alleged that these reinsurance companies did
not actually provide reinsurance services in return for this compensation
because the amount the reinsurers received exceeded the risk they assumed.
The investigators considered these arrangements a way to pay for
referrals, a practice that is unlawful under some state anti-kickback and
anti-rebating laws as well as under RESPA. In one investigation, a
reinsurer controlled by three title insurance underwriters entered into
agreements with lenders, real estate brokerages, and builders to pay part
of its premiums to these entities. State investigators alleged that the
reinsurer was transacting reinsurance business without a required
certificate from the state and that the title insurers were using unfair
practices. As part of the settlement, state investigators demanded that
the reinsurer cease operations in the state and that the underwriters end
their captive reinsurance arrangements with unauthorized reinsurers but
also reimburse affected consumers and pay penalties to the state.13 In New
York, regulators and the attorney general confirmed that they are
currently investigating alleged illegal kickbacks in the title insurance
industry.

12Reinsurance is a mechanism that insurance companies routinely use to
spread risk associated with insurance policies. Simply put, it is
insurance for insurance companies.

State and federal investigators have also alleged the existence of
inappropriate or fraudulent business arrangements among title agencies,
title insurers, mortgage brokers, attorneys, and real estate brokers that
were allegedly being used to convey kickbacks and referral fees. Most of
the investigations we reviewed have examined activities by title agents
that involve affiliated business arrangements-that is, part or full
ownership of title agencies by real estate brokers, lenders,
home-builders, and mortgage brokers. A typical fraudulent business
arrangement involves a shell title agency that is set up by a title agent
but that generally has no physical location, employees, or assets, and
does not actually perform title and settlement business. In cases we
examined, regulators alleged their primary purpose is to serve as a
vehicle to provide kickbacks by being a pass-through for payments or
preferential treatment given by the title agent to real estate agents and
brokers, home-builders, attorneys, or mortgage brokers for business
referrals. Investigations have alleged that the arrangements in these
cases violate RESPA. For example:

           o  In one federal investigation, a title insurer and eight
           home-builders were alleged to have formed shell agencies that
           performed little or no title work, were not independent entities,
           and benefited financially from referrals.14 
           o  In a multi-state federal investigation, a title agency and its
           affiliates were found to have created "preferred" attorney lists
           for real estate closings. Attorneys were allegedly placed on the
           list only if they agreed to refer their clients to the title
           agency's affiliated online title company. As part of the
           settlement, the parties agreed to stop creating "preferred"
           attorney lists and pay monetary penalties to the federal
           government.15

           State and federal investigators have also looked at other types of
           alleged kickbacks that title agents have given real estate agents
           and brokers, and attorneys involved in real estate transactions.
           In investigations we reviewed, these alleged kickbacks included
           free or discounted business services or other items of value and
           included gifts, entertainment, business support services,
           training, and printing costs. One state investigation identified
           items such as spa treatments, event tickets, electronics, and
           trips to domestic and foreign vacation locations. Investigators
           alleged that these inducements also violated federal and state
           anti-kickback and anti-rebating laws.16

           Finally, federal and state investigators have alleged that some
           title agents have misappropriated or mishandled customers'
           premiums. For example, one licensed title insurance agent, who was
           an owner or partial owner of more than 10 title agencies,
           allegedly failed to remit approximately $500,000 in premiums to
           the title insurer. As a result, the insurer allegedly did not
           issue 6,400 title policies to consumers who had paid for them. The
           agent also had allegedly mixed funds from premiums with business
           assets and allegedly misappropriated escrow funds for his personal
           use. The investigators, who alleged that the agent had failed to
           perform his fiduciary duty and had violated several state laws,
           subsequently suspended his license and, pending the outcome of
           hearings, plan to shut down the title agencies he owned or
           controlled.17 Some employees of title agencies have also been
           alleged to have submitted fraudulent receipts, invoices, and
           expense reports and then used the reimbursement money for personal
           expenses or to pay for items on behalf of those who referred
           business to them.18

           In response to these and other investigations, insurers and
           industry associations say they have addressed some concerns but
           that clearer regulations and stronger enforcement regarding
           affiliated businesses are needed. One title-insurance-industry
           association told us that some title insurers have been motivated
           by recent federal and state enforcement actions to increasingly
           address kickbacks and rebates through, for example, increased
           oversight of title agents. In addition, they said that companies
           operating legally are hurt by competition from those breaking the
           rules and that these businesses welcome greater enforcement
           efforts. Another industry association, however, told us that
           clearer regulations regarding referral fees and affiliated
           business arrangements would aid the industry's compliance efforts.
           Specifically, regulations need to be more transparent about what
           types of discounts and fees are prohibited and what types are
           allowed.

           Over the past several years, regulators, industry groups, and
           others have suggested changes to regulations that would affect the
           way title insurance is sold. In 2002, in order to simplify and
           improve the process of obtaining home mortgages and to reduce
           settlement costs for consumers, HUD proposed revisions to the
           regulations implementing RESPA. The proposed revisions included
           the creation of a guaranteed mortgage package that included
           guaranteed prices for loan origination and settlement services and
           a guaranteed interest rate, as well as a revised good faith
           estimate that would have required additional disclosures of
           settlement fees and limit fee increases over the original
           estimates. In response to considerable comment from the title
           industry, consumers, and other federal agencies, HUD withdrew the
           proposal in 2004. Opponents argued that the revisions would have
           given lenders too much leverage in putting together the guaranteed
           mortgage packages and would have included title insurance-a
           product priced in part on risk-in a package that was priced based
           on market forces. HUD announced in June of 2005 that it was again
           considering revisions to the regulations, and has subsequently
           held a number of industry roundtables to get input from industry
           and others.19

           NAIC officials told us that NAIC is considering changes to the
           model title insurance act in order to address current issues such
           as the growth of affiliated business arrangements. The model law
           for title insurers, among other things, covers premium rate
           regulation and title insurers' oversight of title agents that
           write insurance for them. The model law for title agents includes,
           among other things, agent licensing requirements and prohibitions
           on referral fees. According to NAIC, they will likely change the
           model title insurers act to more closely mirror RESPA's provisions
           regarding referral fees and available sanctions against violators.
           In addition, they would like to revise the model title agents act
           by strengthening the licensing requirements for title agents,
           because doing so can discourage the formation of shell agencies as
           part of an improper affiliated business arrangement.

           Finally, at least one consumer advocate has suggested that
           requiring lenders to pay for the title policies from which they
           benefit might increase competition and ultimately lower costs for
           consumers. Lenders could then use their market power to force
           title insurers to compete for lenders' business based on price.
           Additional regulation, these advocates said, might be necessary to
           require lenders to pass such cost savings on to consumers. Some
           title industry officials have voiced concern with such an approach
           because it would allow the lender to decide which title insurer
           the buyer must use. That is, if the buyer wanted to get the cost
           savings associated with simultaneously issued lender's and owner's
           policies, the buyer would have to use the same insurer as the
           lender.

           As agreed with your office, unless you publicly announce its
           contents earlier, we plan no further distribution of this report
           until 30 days from the report date. At that time, we will send
           copies to the Senate Committee on Banking, Housing and Urban
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           of Housing and Urban Development; and other interested parties. We
           will make copies available to others upon request. The report will
           also be available at no charge on our Web site at
           http://www.gao.gov .

           Please contact me at (202) 512-8678 or [email protected] if you or
           your staff have any questions about this report. Contact points
           for our Offices of Congressional Relations and Public Affairs may
           be found on the last page of this report. Key contributors to this
           report are listed in appendix I.

           Sincerely Yours,

           Orice M. Williams

           Orice M. Williams

           Director, Financial Markets and Community Investment

           Orice Williams, (202) 512-8678, [email protected]

           In addition to the contact named above, Lawrence Cluff, Assistant
           Director; Tania Calhoun, Emily Chalmers, Nina Horowitz, Marc
           Molino, Donald Porteous, Melvin Thomas, and Patrick Ward made key
           contributions to this report.

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13California Department of Insurance File No. DISP05046621, Accusation,
Notice of Noncompliance, Demand for Monetary Penalty, and Right to Issue
Order to Show Cause (July 18, 2005); and Order Restipulation and Waiver
(Feb. 21, 2006).

14HUD Settlement Agreement (Dec. 15, 2005).

15HUD Settlement Agreement (July 10, 2003).

Some Industry Participants Say the Issues Raised by the Investigations Are Being
Addressed, but Clearer Regulations Are Needed

16California Department of Insurance, File Nos. LA 15489-A and LA 15516-A,
Accusation, Notice of Noncompliance and Hearing, Demand for Monetary
Penalty, and Right to Issue Order to Show Cause (Feb. 2, 2006).

17Colorado Division of Insurance Order No. 0-06-089 (Nov. 15, 2005).

18California Department of Insurance, File No. VA 1012-A, Accusation,
Notice of Noncompliance and Hearing, Demand for Monetary Penalty, and
Right to Issue Order to Show Cause, Statement of Charges, and Notice of
Hearing (June 10, 2002);Order of Restricted License and Payment of
Monetary Penalty (2003).

Preliminary Questions                                                      
                                                                              
      o  How widespread are cited infractions associated with the sale of     
      title insurance?                                                        
      o  What are the implications of the findings of state and federal       
      investigations for the title insurance industry and consumers?          
      o  What actions have regulators and title industry participants taken   
      to reduce the extent of illegal activities?                             

             Potential Regulatory Changes Raise a Number of Issues

19Department of Housing and Urban Development, "Real Estate Settlement
Procedures Act (RESPA); Simplifying and Improving the Process of Obtaining
Mortgages to Reduce Settlement Costs to Consumers: Notice of
Meetings-RESPA Reform Roundtables; Notice," 70 Fed. Reg. 37646 (June 29,
2005).

Preliminary Questions                                                      
                                                                              
      o  What benefits and concerns might arise from the implementation of    
      potential regulatory changes?                                           
      o  What barriers to implementation exist, and how serious are they?     
      o  What other regulatory alternatives exist?                            

Appendix I: A Appendix I: GAO Contact and Staff Acknowledgments

                                  GAO Contact

                             Staff Acknowledgments

(250140)

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For more information, contact Orice M. Williams at (202) 512-8678 or
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Highlights of GAO-06-568, a report to the Chairman, Committee on Financial
Services, House of Representatives

April 2006

TITLE INSURANCE

Preliminary Views and Issues for Further Study

Title insurance is a required element of almost all real estate purchases
and is not an insignificant cost for consumers. However, consumers
generally do not have the knowledge needed to "shop around" for title
insurance and usually rely on professionals involved in real estate-such
as lenders, real estate agents, and attorneys-for advice in selecting a
title insurer. Recent state and federal investigations into title
insurance sales have identified practices that may have benefited these
professionals and title insurance providers at the expense of consumers.

At your request, GAO currently has work under way studying the title
insurance industry, including pricing, competition, the size of the
market, the roles of the various participants in the market, and how they
are regulated. You asked GAO to identify and report on preliminary issues
for further study. In so doing, this report focuses on: (1) the
reasonableness of cost structures and agent  practices common to the title
insurance market that are not typical of other insurance markets; (2) the
implications of activities identified in recent state and federal
investigations that may have benefited real estate professionals rather
than consumers; and (3) the potential need for regulatory changes that
would affect the way that title insurance is sold.

Some cost structures and agent practices that are common to the title
insurance market are not typical of other lines of insurance and merit
further study. First, the extent to which premium rates reflect underlying
costs is not always clear. For example, most states do not consider title
search and examination costs-insurers' largest expense-to be part of the
premium, and do not review them. Second, while title agents play a key
role in the underwriting process, the extent to which state insurance
regulators review them is not clear. Few states regularly collect
information on agents, and three states do not license them. Third, the
extent to which a competitive environment exists within the title
insurance market that benefits consumers is also not clear. Consumers
generally lack the knowledge necessary to "shop around" for a title
insurer and therefore often rely on the advice of real estate and mortgage
professionals. As a result, title agents normally market their business to
these professionals, creating a form of competition from which the benefit
to consumers is not always clear. Fourth, real estate brokers and lenders
are increasingly becoming full or part owners of title agencies, which may
benefit consumers by allowing one-stop shopping, but may also create
conflicts of interest. Finally, multiple regulators oversee the different
entities involved in the title insurance industry, but the extent of
involvement and coordination among these entities is not clear.

Recent state and federal investigations have identified potentially
illegal activities-mainly involving alleged kickbacks-that also merit
further study. The investigations alleged instances of real estate agents,
mortgage brokers, and lenders receiving referral fees or other inducements
in return for steering business to title insurers or agents, activities
that may have violated federal or state anti-kickback laws. Participants
allegedly used several methods to convey the inducements, including
captive reinsurance agreements, fraudulent business arrangements, and
discounted business services. For example, investigators identified
several "shell" title agencies created by a title agent and a real estate
or mortgage broker that had no physical location or employees and did not
perform any title business, allegedly serving only to obscure referral
payments. Insurers and industry associations with whom we spoke said that
they had begun to address such alleged activities but also said that
current regulations needed clarification.

In the past several years, regulators, industry groups, and others have
suggested changes to the way title insurance is sold, and further study of
these suggestions could be beneficial. For example, the Department of
Housing and Urban Development announced in June 2005 that it was
considering revisions to the regulations implementing the Real Estate
Settlement Procedures Act. In addition, the National Association of
Insurance Commissioners is considering changes to model laws for title
insurers and title agents. Finally, at least one consumer advocate has
suggested that requiring lenders to pay for the title policies from which
they benefit might increase competition and ultimately lower consumers'
costs.
*** End of document. ***