Title Insurance: Preliminary Views and Issues for Further Study
(26-APR-06, GAO-06-569T).
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 the request of the House Financial Services
Committee, 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 the industry is regulated. This testimony discusses the
preliminary results of GAO's work to date and identifies issues
for further study. In so doing, this testimony 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-06-569T
ACCNO: A52540
TITLE: Title Insurance: Preliminary Views and Issues for Further
Study
DATE: 04/26/2006
SUBJECT: Consumer protection
Cost analysis
Financial analysis
Insurance
Insurance companies
Insurance premiums
Insurance regulation
Investigations by federal agencies
Kickbacks
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GAO-06-569T
* Background
* Certain Aspects of the Title Insurance Market Merit Further
* The Extent to Which Premium Rates Reflect Underlying Costs I
* The Extent of Regulatory Focus on Title Agents Merits Furthe
* The Extent of Competition in the Industry That Could Benefit
* Further Study of the Effect of Affiliated Business Arrangeme
* The Extent of Involvement of and Coordination among Regulato
* Recent State and Federal Investigations Have Identified Area
* Proposed Regulatory Changes Raise a Number of Issues
* Contact and Acknowledgments
* Order by Mail or Phone
Testimony
Before the Subcommittee on Housing and Community Opportunity, Committee on
Financial Services, House of Representatives
United States Government Accountability Office
GAO
For Release on Delivery Expected at 2:00 p.m. EDT
Wednesday, April 26, 2006
TITLE INSURANCE
Preliminary Views and Issues for Further Study
Statement of Orice M. Williams, Director Financial Markets and Community
Investment
GAO-06-569T
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss our preliminary views and issues
concerning the title insurance industry. As you are aware, title insurance
is designed to ensure clear ownership of a property when it is sold or
refinanced, and is a required part of most real estate purchases.
According to a recent national survey of lenders, title insurance can
account for as much as one-third of loan origination and closing fees.1
Recent investigations and studies have raised questions about practices
and competition within the industry, in part because title insurance
differs markedly from other types of insurance. My remarks today focus on
our preliminary report, which identifies issues for further study that was
completed as part of ongoing work in this area for the Chairman of the
House Financial Services Committee.2 These issues relate to (1) the
reasonableness of cost structures and agent practices in the title
insurance market that are not typical of other insurance markets; (2)
activities identified in recent investigations that may have benefited
real estate or other professionals rather than consumers; and (3) proposed
regulatory changes that would affect the way that title insurance is sold.
My remarks are based on a review of studies of the title insurance
industry, title insurance regulations in selected states, and financial
information on title insurers and agents. We also had discussions with
officials from national organizations whose members are involved in the
marketing or sale of title insurance; the National Association of
Insurance Commissioners (NAIC); the Department of Housing and Urban
Development (HUD); several state regulatory officials; title insurers and
agents; and industry consultants.
In summary:
In part because title insurance differs from other lines of insurance,
some aspects of the industry raise questions that merit further study.
First, while the amount of premium paid to or retained by title
agents-generally to pay for title search and examination costs and agents'
commissions-is commonly title insurers' largest expense, most states do
not take these costs into account during premium rate reviews. Second,
although title agents play a key role in the underwriting process, the
extent to which state insurance regulators review their operations is
unclear. Few states regularly collect information on title agents'
operations, and three states do not license title agents. Third, while the
competition among agents for their share of the business can be intense,
the extent to which a competitive environment that benefits consumers
exists within the title insurance market is also not clear. Consumers
generally lack the knowledge necessary to "shop around" for a title
insurer and often rely on real estate professionals for referrals that may
not always be the most cost-effective choices. Fourth, real estate
brokers, lenders, and builders are increasingly becoming full or partial
owners of title agencies in what are called "affiliated business
arrangements." These arrangements may benefit consumers to some extent,
but also create potential conflicts of interest. Finally, multiple
regulators oversee the different entities involved in the title insurance
industry, but the degree of regulatory involvement and coordination among
agencies is also not clear.
1Bankrate.com conducted a 2005 mortgage closing cost survey using online
information when it was available, and contacted title agents as
necessary. We did not assess the validity of the survey data.
2 GAO, Title Insurance: Preliminary Views and Issues for Further Study,
GAO-06-568 (Washington, D.C.: Apr. 24, 2006).
In addition, recent state and federal investigations 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 particular
title insurers or agents. These activities may have violated federal or
state anti-kickback laws. Participants used several methods to convey the
fees or inducements, including captive reinsurance agreements, allegedly
fraudulent business arrangements, and free or discounted business
services. Other investigations alleged that title agents mishandled or
misappropriated customers' premium payments, so that customers did not get
the insurance they paid for.3
Finally, in the past several years, regulators and others have suggested
changes to regulations that would affect the way title insurance is sold.
For example, HUD is considering revisions to regulations that implement
the Real Estate Settlement Procedures Act (RESPA), and NAIC is considering
changes to the model laws for title insurers and title agents.4 Further
review of the effects and feasibility of such changes will help Congress,
HUD, and state regulatory agencies in their oversight and decision-making
processes.
3Colorado Division of Insurance Order No. 0-06-089 (Nov. 15, 2005).
4Pub. L. No. 93-533, 88 Stat. 1724 (Dec. 22, 1974), as amended, codified
at 12 U.S.C. S:S: 2601-2617.
Background
Title insurance is designed to guarantee clear ownership of a property
that is being sold. The policy is designed to compensate either 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. Title
insurance is sold primarily through title agents who check the history of
a title by examining public records. The title policy insures the
policyholder against any claims that existed at the time of purchase but
were not in the public record.
Title insurance premiums are paid only once during a purchase,
refinancing, or, in some cases, home equity loan transaction. The title
agent receives a portion of the premium as a fee for the title search and
examination work and its commission. The party responsible for paying for
the title policies varies by state. In many areas, the seller pays for the
owner's policy and the buyer pays 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. According to 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 about 34
percent of the average total loan origination and closing fees.5
Certain Aspects of the Title Insurance Market Merit Further Study
We identified several important items for further study, including the way
policy premiums are determined, the role played by title agents, the way
that title insurance is marketed, the growth of affiliated business
arrangements, and the involvement of and coordination among the regulators
of the multiple types of entities involved in the marketing and sale of
title insurance.
52005 Bankrate.com survey.
The Extent to Which Premium Rates Reflect Underlying Costs Is Not Always Clear
For several reasons, the extent to which title insurance premium rates
reflect insurers' underlying costs is not always clear. First, the largest
cost for title insurers is not losses from claims-as it is for most types
of insurers-but expenses related to title searches and agent commissions
(see fig. 1). However, most state regulators do not consider title search
expenses to be part of the premium, and do not include them in regulatory
reviews that seek to determine whether premium rates accurately reflect
insurers' costs. Second, many insurers provide discounted premiums on
refinance transactions because the title search covers a relatively short
period, but the extent of such discounts and their use is unclear. Third,
the extent to which premium rates increase as loan amounts or purchase
prices increase is also unclear. Costs for title search and examination
work do not appear to rise as loan or purchase amounts increase, and such
costs are insurers' largest expense. If premium rates reflected the
underlying costs, total premiums could reasonably be expected to increase
at a relatively slow rate as loan or purchase amounts increased, however,
it is not clear that they do so.
Figure 1. Where the Money Goes: 2004 Title Industry Costs as a Percentage
of Premiums Written
a"Other" represents the difference between total premiums written and
total expenses, and is not meant to be a measure of profitability. b"Other
expenses" includes all other expenses such as salaries, rent, and
equipment costs incurred by the insurer. cThe "Paid to or retained by
agents" category includes both affiliated and nonaffiliated agents.
The Extent of Regulatory Focus on Title Agents Merits Further Review
Title agents play a more significant role in the title insurance industry
than agents do in most other types of insurance, performing most
underwriting tasks as well as the title search and examination work.
However, the amount of attention they receive from state regulators is not
clear. For example, according to data compiled by the American Land Title
Association (ALTA), while most states require title agents to be licensed,
3 states plus the District of Columbia do not; 18 states and the District
of Columbia do not require agents to pass a licensing exam.6 Although NAIC
has produced model legislation that states can use in their regulatory
efforts, according to NAIC, as of October 2005 only three states had
passed the model law or similar legislation.
The Extent of Competition in the Industry That Could Benefit Consumers Is Not
Clear
For several reasons, the competitiveness of the title insurance market has
been questioned. First, while consumers pay for title insurance, they
generally do not know how to "shop around" for the best deal and may not
even know that they can. Instead, they 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 products exclusively to
these types of professionals, who in some cases may recommend not the
least expensive or most reputable title insurer or agent but the one that
represents the professional's best interests. Second, the title industry
is highly concentrated. ATLA data show that in 2004 the five largest title
insurers and their subsidiary companies accounted for over 90 percent of
the total premiums written. Finally, the low level of losses title
insurers generally suffer-and large increases in operating revenue in
recent years-could create the impression of excessive profits, one
potential sign of a lack of competition.
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, or builders has grown over
the past several years. Within the title insurance industry, the term
"affiliated business arrangements" generally refers to some level of joint
ownership among a title insurer, title agent, real estate broker, mortgage
broker, lender, and builder (see fig. 2). 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 an existing title agency. Such arrangements, which
may provide consumers with "one-stop shopping" and lower costs, can also
can also be abused, presenting conflicts of interest when they are used as
conduits for giving referral fees back to the referring entity or when the
profits from the title agency are significant to the referring entity.
6The District of Columbia does not require title agents based there to be
licensed, but agents based in Maryland or Virginia that conduct business
in the District must be licensed by their respective states.
Figure 2: Example of an Affiliated Business Arrangement
The Extent of Involvement of 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 insurers and their agents are involved
in the sale of title insurance, and the degree of involvement of and the
extent of coordination among the regulators of these entities appears to
vary. These entities include real estate brokers and agents, mortgage
brokers, lenders, and builders, all of which may refer clients to
particular agencies and insurers. These entities are generally overseen by
a variety of state regulators, including insurance departments, real
estate commissions, and state banking regulators, that interact to varying
degrees. For example, one state insurance regulator with whom we spoke
told us that the agency coordinated to some extent with the state real
estate commission and at the federal level with HUD, but only informally.
Another regulator said that it had tried to coordinate its efforts with
other regulators in the state, but that the other regulators had generally
not been interested. HUD, which is responsible for implementing RESPA, has
conducted some investigations in conjunction with insurance regulators in
some states. 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.
Recent State and Federal Investigations Have Identified Areas of Potential
Interest
Federal and state investigations have identified two primary types of
potentially illegal activities in the sale of title insurance, but the
extent to which such activities occur in the title insurance industry is
unknown. The first involves allegations of kickbacks-that is, fees that
title agents or insurers may give to home builders, real estate agents and
brokers, or lenders in return for referrals. Kickbacks are generally
illegal. In several states, state insurance regulators identified captive
reinsurance arrangements that title insurers and agents were allegedly
using to inappropriately compensate others, such as builders or lenders,
for referrals.7 State and federal investigators have also alleged the
existence of inappropriate or fraudulent affiliated business arrangements.
These involve a "shell" title agency that generally has no physical
location, employees, or assets, and does not actually perform title and
settlement business. Investigators alleged that the primary purpose of
these shell companies was to provide kickbacks for business referrals.
Investigators have also looked at the various types of alleged kickbacks
that title agents have provided, including gifts, entertainment, business
support services, training, and printing costs.
Second, investigators have uncovered instances of alleged misappropriation
or mishandling of customers' premiums by title agents. For example, one
licensed title insurance agent who was the 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.
In response to the investigations, insurers and industry associations say
they have begun to address some concerns raised by affiliated businesses,
but that clearer regulations and stronger enforcement are needed. One
title insurance industry association told us that recent federal and state
enforcement actions had motivated title insurers to address potential
kickbacks and rebates through, for example, increased oversight of title
agents. In addition, the insurers and associations said that competition
from companies that break the rules hurt companies that were operating
legally and that these businesses welcome greater enforcement efforts.
Several associations also told us that clearer regulations regarding
referral fees and affiliated business arrangements would aid the
industry's compliance efforts. Specifically, we were told that regulations
need to be more transparent about the types of discounts and fees that are
prohibited and the types that are allowed.
7Reinsurance is a mechanism that insurance companies routinely use to
spread the risk associated with insurance policies. Simply put, it is
insurance for insurance companies.
Proposed Regulatory Changes Raise a Number of Issues
Over the past several years, regulators and others have suggested changes
to regulations that would affect the way title insurance is sold, and
further study of the issues raised by these potential changes could be
beneficial. In 2002, in order to simplify and improve the process of
obtaining a home mortgage and to reduce settlement costs for consumers,
HUD proposed revisions to the regulations that implement RESPA. But HUD
later withdrew the proposal in response to considerable comments from the
title industry, consumers, and other federal agencies. In June 2005, HUD
announced that it was again considering revisions to the regulations. In
addition, NAIC officials told us that the organization was considering
changes to the model title insurance and agent laws to address current
issues such as the growth of affiliated business arrangements and to more
closely mirror RESPA's provisions on referral fees and sanctions for
violators. Finally, some consumer advocates have suggested that requiring
lenders to pay for the title policies from which they benefit might
increase competition and ultimately lower costs for consumers, because
lenders could then use their market power to force title insurers to
compete for business based on price.
The issues identified today raise a number of questions that we plan to
address as part of our ongoing work. We look forward to the continued
cooperation of the title industry, state regulators, and HUD as we
continue this work.
Mr. Chairman, this completes my prepared statement. I would be pleased to
answer any questions that you or Members of the Subcommittee may have.
Contact and Acknowledgments
For further information about this testimony, please contact Orice
Williams on (202) 512-8678 or williamso@gao.gov . Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this statement. Individuals making key contributors to this
testimony include Larry Cluff (Assistant Director), Tania Calhoun, Emily
Chalmers, Nina Horowitz, Marc Molino, Donald Porteous, Melvin Thomas, and
Patrick Ward.
(250292)
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Highlights of GAO-06-569T , a testimony before the Subcommittee on Housing
and Community Opportunity. Committee on Financial Services, House of
Representatives
April 26,2006
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.
At the request of the House Financial Services Committee, 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 the industry is regulated. On April
24, 2006, GAO issued a report on the preliminary results of its work to
date that identifies issues for further study. This testimony discusses
that work, and 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 these costs. Second, while title agents play a
key role in the underwriting process, the extent to which state insurance
regulators review agents is not clear. Few states collect information on
agents, and three states do not license them. Third, the extent to which a
competitive environment that benefits consumers exists within the title
insurance market 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. ***