Title Insurance: Actions Needed to Improve Oversight of the Title
Industry and Better Protect Consumers (13-APR-07, GAO-07-401).
In a previous report and testimony, GAO identified issues related
to title insurance markets, including questions about the extent
to which premium rates reflect underlying costs, oversight of
title agent practices, and the implications of recent state and
federal investigations. This report addresses those issues by
examining (1) the characteristics of title insurance markets
across states, (2) factors influencing competition and prices
within those markets, and (3) the current regulatory environment
and planned regulatory changes. To conduct this review, GAO
analyzed available industry data and studies, and interviewed
industry and regulatory officials in a sample of six states
selected on the basis of differences in size, industry practices,
regulatory environments, and number of investigations.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-401
ACCNO: A68165
TITLE: Title Insurance: Actions Needed to Improve Oversight of
the Title Industry and Better Protect Consumers
DATE: 04/13/2007
SUBJECT: Competition
Conflict of interests
Consumer protection
Cost analysis
Federal/state relations
Insurance
Insurance companies
Insurance premiums
Insurance regulation
Investigations by federal agencies
Kickbacks
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GAO-07-401
* [1]Results in Brief
* [2]Background
* [3]Title Insurance Market Is Highly Concentrated at the Insurer
* [4]Mix of Affiliated and Independent Agents Differs by State
* [5]Use of Affiliated Business Arrangements Appears to Be Increa
* [6]Agents Conduct the Title Search and Examination Process Diff
* [7]Title Agents' Responsibilities Also Differ across States
* [8]Premiums Are Difficult to Compare across Markets, but Appear
* [9]Multiple Factors Raise Questions about the Extent of Competi
* [10]Lack of Consumer Knowledge about Title Insurance Results in
* [11]Title Agents Market Not to Consumers, but to Those in a Posi
* [12]Alleged Illegal Activities Appear to Reduce Competition and
* [13]Allegedly Illegal Captive Reinsurance Arrangements Could
Ind
* [14]A Number of Investigations Found ABAs Allegedly Being
Used t
* [15]As Coverage Amounts Increase, Premiums Paid by Consumers App
* [16]Industry Officials Said That the Current Price Structure
Sub
* [17]Industry Officials Said That Recent Higher Profitability
Com
* [18]In States Where Agents Charge Separately for Search and Exam
* [19]Disagreement Exists among Industry and Regulatory Officials
* [20]Limited State and Federal Oversight of the Title Insurance I
* [21]Regulators Do Not Fully Assess Title Agents' Costs during Ra
* [22]States Conduct Only Limited Regulation and Oversight of Titl
* [23]States' Enforcement of Antikickback and Referral Fee Provisi
* [24]Limited Resources and Lack of Coordination among Regulators
* [25]HUD Officials Expressed Concern over Lack of Enforcement Aut
* [26]HUD, State Regulators, and Industry Stakeholders Have Develo
* [27]Conclusions
* [28]Matters for Congressional Consideration
* [29]Recommendations for Executive Action
* [30]Agency Comments and Our Evaluation
* [31]GAO Contact
* [32]Staff Acknowledgments
* [33]GAO's Mission
* [34]Obtaining Copies of GAO Reports and Testimony
* [35]Order by Mail or Phone
* [36]To Report Fraud, Waste, and Abuse in Federal Programs
* [37]Congressional Relations
* [38]Public Affairs
Report to the Ranking Member, Committee on Financial Services, House of
Representatives
United States Government Accountability Office
GAO
April 2007
TITLE INSURANCE
Actions Needed to Improve Oversight of the Title Industry and Better
Protect Consumers
GAO-07-401
Contents
Letter 1
Results in Brief 3
Background 7
Title Insurance Market Is Highly Concentrated at the Insurer Level, but
Otherwise Differs across States 11
Multiple Factors Raise Questions about the Extent of Competition and the
Reasonableness of Prices in the Title Insurance Industry 21
Limited State and Federal Oversight of the Title Insurance Industry Has
Resulted in Proposals for Change 41
Conclusions 53
Matters for Congressional Consideration 55
Recommendations for Executive Action 55
Agency Comments and Our Evaluation 56
Appendix I Objectives, Scope, and Methodology 59
Appendix II Potential Approach to Better Understand Title Agents' Costs
and How These Costs Relate to Insurance Premiums 62
Appendix III Comments from the Department of Housing and Urban Development
64
Appendix IV Comments from the National Association of Insurance
Commissioners 67
Appendix V GAO Contact and Staff Acknowledgments 68
Tables
Table 1: Information on Closed Cases and Settlements Involving Referral
Fees Resulting from Investigations by Insurance Regulators in Six Sample
States and HUD, 2003-2006 28
Table 2: Regulation of Title Insurance Agents in Six Sample States 44
Figures
Figure 1: Title Insurer National Market Share as a Percentage of Direct
Premiums Written, 2005 12
Figure 2: Title Insurance Premiums Written, by Source, 2005 14
Figure 3: Example of an Affiliated Business Arrangement 15
Figure 4: Common Elements of the Title Search and Examination Process 16
Figure 5: Title Insurance Premium Rates for a Basic Owner's Policy on
Median-Priced Homes in Selected Areas, 2005 19
Figure 6: Average Allocation of Closing Costs in California, 2005 24
Figure 7: Example of an Alleged Captive Reinsurance Arrangement 31
Figure 8: Combined Return on Equity for the Five Largest Title Insurers,
and the Property-Casualty Insurance Industry as a Whole, 1992-2005 36
Figure 9: Percentage Change in Premium Rates and Premiums Paid on
Median-Priced Homes in Selected Areas in Five Sample States, 2000-2005 37
Figure 10: Typical Premium Splits between Insurers and Agents in Six
Sample States 39
Figure 11: Title Industry Costs as a Percentage of Premiums Written, 2005
42
Abbreviations
ABA affiliated business arrangement
ALTA American Land Title Association
Fannie Mae Federal National Mortgage Association
Freddie Mac Federal Home Loan and Mortgage Corporation
HUD Department of Housing and Urban Development
NAIC National Association of Insurance Commissioners
RESPA Real Estate Settlement Procedures Act
RESPRO Real Estate Services Providers Council
SEC Securities and Exchange Commission
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
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.
United States Government Accountability Office
Washington, DC 20548
April 13, 2007
The Honorable Spencer Bachus
Ranking Member
Committee on Financial Services
House of Representatives
Dear Mr. Bachus:
Title insurance is designed to guarantee clear ownership of a property
that is being sold and is a required part of most real estate transactions
across the United States. Although home buyers pay for title insurance
premiums, they often know little about the insurers themselves or the
title insurance industry. Recent state and federal investigations into the
sale of title insurance have identified practices by some title insurers,
their agents, and others involved in the sale of title insurance, that
allegedly allowed these entities to make undue profits at consumers'
expense. At the same time, insurance regulators in at least four states
have concluded that consumers are being overcharged for title insurance,
and the California insurance regulator has recommended rate rollbacks--an
action that some in the title industry have strongly criticized. Because
virtually everyone who buys a home or refinances a home mortgage in the
United States typically must purchase title insurance, the potential
effects of such practices are enormous.
We previously provided a report and testimony identifying issues in the
title insurance market that merited further study because they could shed
light on competition and the prices consumers pay.^1 In response to the
former Chairman's request, we prepared this report to address and
elaborate on those issues. Specifically, we address (1) the
characteristics of title insurance markets and differences across states,
(2) prices and competition in the industry, and (3) the current regulatory
environment and planned regulatory changes.
^1GAO, Title Insurance: Preliminary Views and Issues for Further Study,
[39]GAO-06-568 (Washington, D.C.: Apr. 24, 2006); and Title Insurance:
Preliminary Views and Issues for Further Study, [40]GAO-06-569T
(Washington, D.C.: Apr. 26, 2006).
To do this work, we performed a detailed review of the laws, regulations,
and market practices in California, Colorado, Illinois, Iowa, New York,
and Texas.^2 We chose these six states on the basis of differences in the
size of their markets, title insurance practices and customs, the
rate-setting and regulatory environments, and the number of federal and
state investigative actions. In some of these states, we were able to tour
title plant facilities and observe the title search and examination
process. We reviewed available studies of the title insurance industry and
discussed their results with the authors.^3 We also gathered the views of
officials from a variety of national organizations whose members are
involved in the marketing or sale of title insurance or related
activities, and we spoke with insurers, agents, and title industry
associations. We asked for, but did not receive, cost data from agents and
insurers that would allow us to analyze agents' costs. We obtained and
analyzed data collected by the National Association of Insurance
Commissioners (NAIC), the Texas Department of Insurance, the California
Department of Insurance, and the American Land Title Association (ALTA).^4
We also consulted other publicly available financial information on title
insurers and agents and spoke with agents about costs, examined financial
data filed with the Securities and Exchange Commission (SEC), and spoke
with officials from three of the largest title insurance underwriters. We
interviewed key insurance, banking, mortgage, and real estate regulators
in each state about the regulatory environments, spoke to officials from
the Department of Housing and Urban Development (HUD), and reviewed
relevant federal laws and regulations. We also discussed these issues with
officials from the Federal National Mortgage Association and the Federal
Home Loan and Mortgage Corporation to better understand the relationship
between the secondary mortgage market and title insurance. Lastly, we
interviewed staff and state regulators working with NAIC to get their
views on the industry and to obtain information on the activities of their
Title Insurance Working Group.
^2Except where noted, our analysis is limited to these states.
^3Birny Birnbaum, Report to the California Insurance Commissioner: An
Analysis of Competition in the California Title Insurance and Escrow
Industry (Austin, TX: December 2005); Donald Martin, PhD, and Richard
Ludwick, Jr., PhD, Affiliated Business Arrangements and Their Effects on
Residential Real Estate Settlement Costs: An Economic Analysis
(Washington, D.C.: October 2006); and Gregory Vistnes, An Economic
Analysis of Competition in the Title Insurance Industry (Washington, D.C.:
March 2006).
^4NAIC is a voluntary organization of the chief insurance regulatory
officials of the 50 states, the District of Columbia, and the four U.S.
territories. NAIC assists state insurance regulators by providing
guidance, model (or recommended) laws and guidelines, and
information-sharing tools. ALTA is a national trade association for title
insurers and agents, but its members may also include attorneys, builders,
developers, lenders, and real estate brokers.
We performed our work in Washington, D.C.; Chicago, Illinois; and six
sample states between February 2006 and March 2007 in accordance with
generally accepted government auditing standards. Appendix I contains a
more detailed description of our objectives, scope, and methodology.
Results in Brief
In the United States, the title insurance market is highly concentrated at
the insurer (or underwriter) level, but market characteristics varied
across the states. In 2005, for example, five insurers accounted for 92
percent of the national market, and most states were dominated by two or
three large insurers. However, state markets differed in several ways. For
example, large insurers tended to use local or regional title agents to
conduct their business, and the mix of affiliated agents (those in which
the insurer has an ownership interest) and independent agents varied
across states. The extent of affiliated business arrangements
(ABA)--situations in which real estate or other professionals are part or
full owners of title agencies--also varied. In some states the number of
ABAs, which have been cited in many of the regulatory investigations into
industry practices, has grown substantially. Furthermore, title agents use
different processes to carry out title searches and examinations, largely
because of variations in the way the industry has developed across states.
Title agents in some states have automated "title plants" containing most
public records, while, in other states, title agents rely on the
less-efficient process of hiring people to search physical records. The
extent of agents' activities also varied widely across states, including
how they set prices for their services, the portion of claims they paid,
and the extent of their participation in the escrow and closing processes.
Finally, we found that premiums varied across states, due to cost and
market variations that can make understanding and overseeing title
insurance markets a challenge on the national level.
Several factors related to the way that title insurance is marketed and
priced raise questions about the extent of price competition in the title
insurance industry and the ability of consumers to affect market prices.
First, consumers find it difficult to shop for title insurance based on
price. Purchasing title insurance is a transaction that consumers are
unfamiliar with, and it can be difficult for them to gather information on
all title insurance-related costs. HUD provides educational information on
title insurance. However, the benefit of this information is limited
because consumers may receive it after a title agent and insurer have been
selected, and lenders are not required to provide it on mortgage refinance
transactions. In addition, purchasing title insurance is generally a small
part of a larger home purchase or mortgage refinancing process that most
consumers do not want to disrupt or delay for relatively small potential
savings. Second, consumers generally do not select their title agent or
insurer, and title agents do not market to consumers but rather compete
among themselves for referrals from those who do--that is, real estate and
mortgage professionals. This arrangement can create conflicts of interest
if professionals making the referrals have a financial interest in the
agent recommended. HUD and state insurance regulators have recently
identified instances of alleged illegal activities within the title
industry that appeared to compensate real estate agents, builders, and
others for referring consumers to particular title insurers or agents.
These alleged activities, which include referral fees, captive reinsurance
arrangements, and inappropriate ABAs, potentially reduce price competition
and, according to some insurance regulators, could indicate excessive
pricing by insurers.^5 Third, as property values or loan amounts increase,
prices that consumers paid for title insurance appeared to increase faster
than insurers' and agents' costs. Insurers we spoke with argued that such
a pricing structure reflected regulators' intent to subsidize consumers in
low-value transactions, but they could not provide data to support the
existence of such subsidization. Of the six regulators we spoke with, only
one said that such subsidization was intentional. Finally, in states where
agents' search and examination services are not included in the premium,
it is not clear that the underlying costs justify the additional amounts
consumers may pay to title agents. Insurers told us that they generally
shared the same portion of premiums with their agents, regardless of
whether agents' costs for search and examination services were to be
included in the premium. Ultimately, disagreement exists between title
industry officials and regulators over the actual extent of price
competition within title insurance markets. Industry officials generally
assert that price competition exists, while many regulators argue (1) that
it does not exist and (2) that consumers may be paying too much for title
insurance compared with the cost of providing the insurance.
^5In captive reinsurance 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. Sham ABA arrangements are those in which the affiliated entity
performs little or no actual settlement services and is allegedly being
used just to compensate ABA owners for consumer referrals. Other
arrangements include the use of inducements and incentives by title
companies to obtain title insurance business, especially when these
inducements were used to influence referrals by real estate agents, banks,
lenders, builders, developers, and others.
Data collection efforts and regulatory oversight, especially of title
agents, were limited across the states we reviewed. Given consumers'
apparently limited ability to exert pressure on title agents and insurers
to compete on price, the critical question is whether amounts paid by
consumers for title insurance reflect the actual underlying costs of
producing title insurance policies. Potentially understanding the
relationship between costs and the amounts consumers pay could help
regulators improve their ability to protect consumers. Yet, states rarely
audit agents; few require strong insurer oversight of agents; and, until
recently, state regulators had done little to oversee ABAs or enforce laws
intended to restrict business from affiliated sources. Also, because title
insurance is a relatively small line of insurance, title insurers and
agents get less than the usual limited market conduct scrutiny given other
types of insurers by state insurance regulators.^6 All of the regulators,
both state and federal, face a number of challenges. For example, varying
levels of cooperation exist within each state among the regulators who
oversee entities involved in the sale and marketing of title insurance,
with some states demonstrating little or no cooperation and others having
somewhat more structured arrangements. HUD--the primary federal agency
responsible for enforcing the Real Estate Settlement Procedures Act
(RESPA)--has taken a number of enforcement actions under RESPA recently,
but HUD officials told us that they face resource limitations and
difficulties in investigating increasingly complex ABA arrangements.
Furthermore, HUD is authorized to seek injunctions against alleged
violations of section 8 of RESPA's provisions on referral fees and
affiliated businesses, but HUD is not authorized to levy civil money
penalties. Moreover, a lack of formal coordination between HUD and state
regulators on referral fee cases may have hindered enforcement efforts. In
response to these and other concerns, several state regulators and HUD are
either planning or making changes to their regulatory regimes for the
marketing and sale of title insurance. These changes include potentially
reducing premium rates; collecting detailed cost data from title agents;
and seeking changes to RESPA, including enhancing HUD's enforcement
authority. Some industry stakeholders see the current model of selling and
marketing title insurance as irretrievably broken and have put forth the
following two alternatives: (1) requiring lenders to pay for title
insurance and (2) following the Iowa model of a state-run title insurer.
^6Market conduct examinations are performed by state insurance
commissioners, and they review agent-licensing issues, complaints, types
of products sold by the company and agents, agent sales practices, proper
rating, claims handling, and other market-related aspects of an insurer's
operation. See GAO, Insurance Regulation: Common Standards and Improved
Coordination Needed to Strengthen Market Regulation, [41]GAO-03-433
(Washington, D.C.: Sept. 30, 2003).
We are recommending that HUD take two actions to improve the functioning
of the title insurance market. Specifically, we are recommending that HUD
(1) improve consumers' ability to shop for title insurance based on price
and (2) improve its ability to detect and deter violations of section 8 of
RESPA. In taking these actions, we recommend that HUD consider expanding
the information in its home-buyer information booklet; evaluating the
costs and benefits to consumers from ABAs; clarifying regulations related
to referral fees and ABAs; and enhancing the agency's coordination with
state regulators. Likewise, we are recommending that state insurance
regulators, working through NAIC where appropriate, take two actions to
improve the functioning of the title insurance market. Specifically, we
are recommending that state regulators take action to (1) improve
consumers' ability to shop for title insurance and (2) improve their
oversight of title agents. As part of this process, we are recommending
that these regulators consider evaluating the competitive benefits of
publicizing complete title insurance cost information; strengthening their
regulation of title agents and ABAs, including the collection of data on
title agents' operations; and exploring ways to improve their cooperation
with other state regulators and HUD. We also suggest, as a matter for
congressional consideration, amending RESPA to give HUD increased
enforcement authority for violations of RESPA's section 8 prohibitions on
referral fees by granting the ability to levy civil money penalties and
enhance the information required to be provided to consumers.
We provided a draft copy of this report to HUD and NAIC. The Assistant
Secretary for Housing at HUD and the Executive Vice President of NAIC
provided written comments on the draft. Their comments are included in
appendixes III and IV, respectively, of this report. The Assistant
Secretary for HUD generally agreed with the recommendations in the report,
and also indicated that the report accurately assessed the issues that
adversely affect consumers in the title insurance market. In response to
our recommendation to better protect consumers and improve their ability
to shop for title insurance, he acknowledged the importance of these goals
and noted that HUD is taking several actions in these areas. Specifically,
he said that HUD is (1) considering ways to improve its home-buyer
information booklet; (2) evaluating whether various ABA structures, even
though they may be legal, are operating as Congress intended; and (3)
continuing its efforts to develop and clarify guidelines regarding
practices that negatively effect consumers. With respect to our
recommendation to consider improving regulatory coordination with state
regulator agencies, the Assistant Secretary agreed that such coordination
is necessary and pointed out past instances of successful cooperation
between HUD and state insurance regulators. Lastly, he emphasized the
ongoing challenge of RESPA enforcement without civil money penalty
authority, stating that consumers would benefit if such authority were
granted to HUD. The Executive Vice President of NAIC stated that the
recommendations in the report were worthy of exploration, and she noted
that the report recognizes that shortcomings exist in the area of consumer
protection. Both HUD and NAIC also offered clarifying remarks.
Background
In any real estate transaction, the lender providing the mortgage needs a
guarantee that the buyer will have clear ownership of the property. Title
insurance is designed to provide that guarantee by generally 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 also need title insurance if they want to sell
mortgages on the secondary market, since they are required to provide a
guarantee of ownership on the home used to secure the mortgage.^7 As a
result, lenders require borrowers to obtain title insurance for the lender
as a condition of granting the loan (although the buyer, the seller, or
some combination of both may actually pay for the lender's policy).
Lenders' policies are in force for as long as the loan is outstanding, but
end when the loan is paid off (e.g., through a refinancing transaction);
however, owners' policies remain in effect as long as the purchaser of the
policy owns the property.
Title insurance is sold primarily through title agents, although insurers
may also sell policies themselves. 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 reveals a problem, such as a tax lien that has not been
paid, the agent 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 generally insure against title
defects that arise after the date of sale.
^7Both the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation require a guarantee of title as a condition of
purchasing loans from mortgage lenders.
Title searches are generally carried out locally because the public
records to be searched are usually only available locally. Title agents or
their employees conduct the searches. The variety of sources that agents
must check during a title search 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, and
they index the copies by property address and update them regularly.
Insurers, title agents, or a combination of entities may own a title
plant. In some cases, owners allow other insurers and agents access to
their plants for a fee.
Title insurance premiums are paid only once, at the time of sale or
refinancing, to the title agent. In what is called a premium split, 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 even by areas within states. In many cases, 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. In most cases, the owner's and lender's policies are issued
simultaneously by the same insurer, so that the same title search can be
used for both policies. The price that the consumer pays for title
insurance is determined by applying a rate set by the underwriter or state
to the loan value (for the lender's policy) and home price (for the
owner's policy). In a recent nationwide survey, the average cost for
simultaneously issuing lender's and owner's policies on a $200,000 loan,
plus other associated title costs, was approximately $859, or
approximately 28 percent of the average total loan origination and closing
fees.^8
8Bankrate.com, Closing Costs Survey,
http://www.bankrate.com/brm/news/mortgages/ccmain2006a1.asp (North
Palm Beach, FL: August 2006). The survey was conducted by Bankrate.com in
2006 by obtaining online information where available. We did not assess
the validity of the data collected in the survey.
Title insurance differs from other types of insurance in key ways. First,
in most property and casualty lines, losses incurred by the underwriter
account for most of the premium. For example, property-casualty insurers'
losses and loss adjustment expenses accounted for approximately 73 percent
of written premiums in 2005.^9 In contrast, losses and loss adjustment
expenses incurred by title insurers as a whole were approximately 5
percent of the total premiums written, while the amount paid to or
retained by agents (primarily for work related to title searches and
examinations and for commissions) was approximately 70 percent.
Second, title agents' roles and responsibilities differ from those of
agents for other lines of insurance. Agents in lines of insurance other
than title insurance primarily serve as salespeople, while title agents'
work can be a labor-intensive process of searching, examining, and
clearing property titles as well as underwriting and traditional sales and
marketing. Title agents access and examine numerous public documents,
among them tax records, liens, judgments, property records, deeds,
encumbrances, and government documents, and then clear or exclude from
coverage any title problems that emerge. Depending on the level of
technology used, the accessibility of public documents, the relative
efficiency of local government recorders' offices, and other factors, this
process can take from a few minutes up to a few weeks or more. In some
states, title agents also are responsible for claims up to a specific
dollar amount. Most title agents also handle the escrow and closing
processes and document recordation after the closing. In general, title
agents issue the actual insurance policy and, after deducting expenses,
remit the title insurer's portion of the premium.
Third, unlike premiums for other types of insurance, title insurance
premiums are nonrecurring. That is, title insurers have only one chance to
capture the cost of the product from the consumer, unlike other types of
insurers that collect premiums at regular intervals for providing ongoing
coverage. The title insurance premium amount must cover losses for any
future problems that were either not uncovered in the title agent's search
or, for a small number of policies, problems that emerge after the day of
closing.
^9According to industry experts 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, and that most property-casualty insurance is
focused on compensating policyholders for losses.
Fourth, title insurance has a different coverage period than other types
of insurance. With title insurance, coverage begins on the day of closing
and goes back in time. Most policies cover events that occurred in the
past, including unpaid tax liens, judgments, issues with missing heirs,
and forgeries in the document chain of title. The purpose of the title
agent's search is to turn up these problems before closing so that they
can be cleared or excluded from coverage. However, if a problem occurred
in the past but only emerged after the day of closing and was not excluded
from coverage, then the policy would offer protection to the lender and
home owner. The comprehensiveness of the agent's search can be a factor in
minimizing such losses. For this reason, title insurance is often referred
to as loss prevention insurance, in contrast to other types of insurance
that attempt to prospectively minimize exposure to claims.
Finally, the title insurance market's business cycle is more closely
related to the real estate market and to interest rates than the business
cycle for other types of insurance. Typically, this relationship is
inverse, so that the revenues of title companies rise when interest rates
fall, largely because lower interest rates usually lead to a surge in home
buying and refinancing and thus increase demand for title services and
products.
Under current federal law, the regulation of insurance, including title
insurance, is primarily the responsibility of the states. However, title
insurance entities are also subject to RESPA, a federal law intended to
improve the settlement process for residential real estate. Section 8 of
RESPA generally prohibits the giving or accepting of kickbacks and
referral fees among persons involved in the real estate settlement
process. Section 8 also lays out the conditions under which ABAs are
permissible. First, the affiliation must be disclosed to the consumer,
along with a written estimate of charges. Second, ABA representatives may
not require consumers to use a particular settlement service provider.
Third, the only thing of value that ABA owners may receive, other than
payment for services rendered, is a return on their ownership interest. In
addition, HUD has issued policy statements that describe multiple factors,
including what it considers to be core title services, that HUD will use
in determining if an entity is a bona fide provider of settlement
services. HUD is responsible for administering section 8 of RESPA, but its
enforcement authority is limited to seeking injunctions against potential
violations. Unlike other sections of RESPA (e.g., section 10, which
authorizes HUD to assess civil money penalties for certain violations by
entities that fail to provide escrow account statements), section 8 of
RESPA does not authorize HUD to levy civil money penalties for violations.
Title Insurance Market Is Highly Concentrated at the Insurer Level, but
Otherwise Differs across States
Title insurance markets can be described by various characteristics, such
as the following:
o While high market concentration exists among national title
insurers, they market insurance through large numbers of
independent and affiliated agents, with the mix varying across
states.
o The use of ABAs--in which a real estate professional, such as a
real estate agent, owned a share of a title agency--varied.
o Processes used by agents to conduct searches and examinations in
some states were more efficient than others, and the
responsibilities of title agents also varied.
o Premiums across states are difficult to compare, but they
appeared to vary significantly.
Nationally, five title insurers, or underwriters, captured about
92 percent of the market in 2005 (see fig. 1). Most states were
dominated by a group of two or three insurers, sometimes including
a regional insurer. For example, in California, about 66 percent
of the market share in 2005 was split nearly evenly between the
largest two insurers--First American and Fidelity. The remaining
approximately 33 percent of the market was predominantly split
among the other three national insurers (25 percent) and five
regional independent insurers (8 percent). Although they are
national insurers, these five major underwriters sell and market
title insurance in local markets through networks of direct
operations, partial or full ownership of affiliates, and contracts
with independent agents. According to the annual reports of the
four largest title insurers, they each use between 8,000 and
11,000 agencies to sell their insurance nationwide.
Figure 1: Title Insurer National Market Share as a Percentage of
Direct Premiums Written, 2005
Note: Total may not add up to 100 percent due to rounding.
Mix of Affiliated and Independent Agents Differs by State
Most state markets have two types of title agents: affiliated and
independent. Title insurers use both types of agents, depending on
conditions in the local market, including local tax policies and
established market practices, as well as the level of service the
underwriter provides to the agents. Affiliated agents carry higher
fixed costs to the insurer as owner, and underwriters told us that
these costs were especially challenging when the market softened
and the insurer's tax liability for affiliated agents rose.
However, insurers also said that with affiliated agents they had
more control over the premium split and, because the agents were
closely aligned with the underwriter, did not have to provide as
much in services, such as training. Underwriters noted that they
also benefited from contracting with independent agents because
doing so kept their fixed costs low and allowed them to benefit
from some tax advantages. However, according to the insurers,
contracting has its disadvantages, by obliging the insurers to
negotiate a competitive premium split (in nonpromulgated states)
or risk having the agent establish a relationship with another
underwriter.^10 Independent agents, who work with several
underwriters, also may not provide the guaranteed flow of
business, and thus the same revenue stream, as affiliated agents.
Underwriters balance these benefits and risks when determining
which agents they will use in each state. Two underwriters told us
that they strive to maintain about an equal balance between
affiliated agents and independent agents. Other insurers told us
that, because their expenses can be higher by virtue of their
ownership interest in affiliated agents, they were reluctant to
take on too many affiliated agents and preferred to contract with
independent agents, especially when market conditions declined.
However, several industry participants told us that underwriters'
purchase and use of affiliated agents in some states had increased
significantly over the last 5 years. As shown in figure 2,
affiliated agents dominated the market in California, the state
with the largest total of premiums written, while independent
agents capture the majority of the markets in Colorado, Illinois,
and New York. Conversely, the Texas market was relatively more
evenly balanced, with insurers, affiliated agents, and independent
agents sharing the number of premiums written. In Iowa, the
state-run Title Guarantee Division of the Iowa Finance Authority
has a slight majority of the market and independent agents have
most of the remainder.
^10The term "nonpromulgated states" refers to those states where the title
rate is determined by a method other than a state regulatory body setting
it.
Figure 2: Title Insurance Premiums Written, by Source, 2005
aPremiums listed as being written directly by insurer are those written by
the state-run Title Guarantee Division of the Iowa Finance Authority.
Premiums written by affiliated or independent agents are premiums written
by out-of-state title insurers on properties in Iowa.
Use of Affiliated Business Arrangements Appears to Be Increasing
We found that the use of ABAs varied by insurer and location. ABAs
generally involved a referring entity, such as a real estate or mortgage
professional, or builder, having full or partial ownership of an agency
(see fig. 3). For example, a mortgage lender and a title agent might form
a new jointly owned title agency, or a builder might buy a portion of a
title agency. The owners of ABAs are to split the revenues in proportion
to their ownership shares to satisfy antirebating laws.
Figure 3: Example of an Affiliated Business Arrangement
Nationally, the use of ABAs appears to be growing. For example, according
to a study done for the Real Estate Services Providers Council (RESPRO),
affiliated title agents accounted for approximately 26 percent of
title-related closing costs in 2005, up from about 22 percent in 2003.^11
Although precise data showing state-by-state growth were not available,
industry participants in some states--especially Colorado, Illinois,
Minnesota, and Texas--told us that the number of ABAs in their states had
grown significantly.^12
11RESPRO is a national nonprofit trade association of settlement service
providers, including real estate broker-owners, real estate franchisers,
mortgage lenders/brokers, title insurers/agents, home builders, and home
warranty companies. Many of its members offer affiliated services through
subsidiaries, joint ventures, and partnerships.
^12Although Minnesota was not in our sample, we spoke to state insurance
regulators in the state.
Agents Conduct the Title Search and Examination Process Differently across
States
We found that while the basic title search and examination process shared
certain elements across states, the process was more efficient in some
states than in others. Figure 4 describes the common elements of the title
search and examination process, which begins with a request from the
consumer's representative and intake by the title agent. The agent then
performs the search, and a title examiner hired by the title agent
analyzes the collected documents to identify any potential problems to be
cleared. Once any identified problems are cleared, exempted from coverage,
or insured over, the title agent prepares the closing documents and
collects and disburses checks at the closing. Finally, the agent deposits
collected funds in escrow accounts, records the deed or title with the
relevant local government offices, and submits the title commitment to the
insurer for policy issuance.
Figure 4: Common Elements of the Title Search and Examination Process
Agents in some states use primarily automated processes, either owning or
purchasing access to a title plant.^13 Because of these plants, the title
search process in these states can be very efficient, which can decrease
the amount of time required to issue a title insurance policy. Some of the
most advanced of these title plants have documents scanned from local
government sources, indexed and cross-referenced by various types of
identifying information. Four of the title data centers we visited had
electronic records going back 20 years or more. During a tour of one title
plant in Texas, we observed a title examiner obtain nearly all documents
pertinent to the title search and examination in electronic format within
seconds. If the title examiner did not have immediate access to a
necessary document, she would e-mail the owner of that information and
have it sent electronically or through the mail from one of the search
services to which the plant subscribed, usually within 1 day or less. For
this plant, typical turnaround time for a completed title search,
examination, and commitment for a title examiner simultaneously working on
several titles was 2 to 3 days. In another highly automated plant located
in a large urban center, we were told that the typical title search and
examination took about 25 minutes. One of the nation's largest title
insurers, First American, recently announced that with new software
developments, its agents could produce a fully insured title commitment in
60 seconds for many refinance transactions.
^13Some state laws, such as those in Iowa and Texas, require title agents
or abstractors to have access to a title plant.
In contrast, in a less-efficient process, agents in some states must
physically search public records, which can add to the time required to
issue a policy. In New York, for example, title plants are rare, and title
agents commonly employ abstractors and independent examiners who must go
to various county offices and courthouses to manually conduct searches.
Including the process of clearing title problems and attorney review, one
underwriter told us that in New York, the typical title insurance issuance
took 90 to120 days for a purchase and 30 to 45 days for a refinance. Most
historical data are proprietary to each underwriter and are based on
previously insured titles. At an underwriter-owned title plant in an East
Coast city, described as typical for the region, we saw that although the
plant held approximately 1.5 million records of previously insured titles,
few records were updated when a new search came in on that same property.
Personnel at the plant said that it was too labor-intensive to consolidate
all of the files, although not updating the files resulted in a large
number of redundancies in records across the plant. Also, in some states,
industry participants told us that delays in recording and processing at
local government offices contributed greatly to inefficiencies in the
issuance process.
Title Agents' Responsibilities Also Differ across States
We found that the extent of title agents' responsibility for claims
losses, involvement in the closing process, and ability to set premiums
varied widely across states. For example, in some states, agents are
responsible for a specific portion of losses on claims. In California and
Colorado, the underwriter-agent agreement stipulates that title agents are
responsible for up to the first $5,000 of a title claim.^14 Underwriters
said that this deductible gave agents an incentive to conduct more
diligent searches and examinations. In other states, agents are not
responsible for a specific portion of a claim but may take responsibility
for some part or all of it, especially if the claim is small. According to
agents in New York and Minnesota, it is faster, more efficient, and more
customer-friendly for the agent to handle smaller claims rather than
passing them on to the underwriter. An industry organization said that
current, informal agent claims practices show that agents generally take
responsibility for claims under $2,500. Independent agents told us that
the industry is moving toward more risk borne by the agents. In fact,
agent application and review documents that we obtained from underwriters
showed that the number and amount of claims the agent was responsible for
were criteria insurers used when deciding whether to retain independent
agents. One underwriter told us that although their agents did not have
deductibles, the insurer was able to recover about $10 million in funds
from agents on claims the underwriter had already paid through aggressive
follow-up on and investigation into possible errors on previously paid
claims.
Some agents are also involved in more aspects of the closing process. We
found that some agents handled the entire closing process, including the
escrow, while others did not handle the escrow portion. These practices
varied within as well as across states. In California, for example, title
agencies have both underwriter and agent-controlled escrow companies that
handle the full escrow process and actively market those services. These
agencies offer a full package of closing services, from title search,
examination, and clearance to document preparation and disbursement of
funds at the closing. Other title agents were independent from escrow
companies. In some states, such as New York, where it is customary for the
home buyer and seller to have a lawyer present at the closing, title
agents employ closers, whose chief duty is to handle the checks for taxes
and escrow and to record the deed. Similarly, in Illinois, the lawyers
actually serve as attorney-agents and are prohibited by the underwriter
from handling the escrow.
Finally, in some states, title agents determine the amount to charge
consumers for the search and examination portion of the premium, while in
other states, they do not. The states where they do are referred to as
"risk-rate" states because only the insurance, or risk-based, portion of
the premium is regulated. In these states, state regulators review
underwriters' rates for the risk-based portion of the premium, but the
agents set the fees for search and examination services (generally the
larger part of the cost to consumers) without regulatory review. According
to ALTA, 30 states plus the District of Columbia are considered risk-rate
states. The rest of the states, excluding Iowa, are considered to be
all-inclusive because they incorporate charges for the risk-based portion
of title insurance and other fees, such as those for the search and
examination, in the regulated premium. The premium may or may not include
settlement and closing costs. In these all-inclusive states, agents are
not able to determine the price they will charge for searches and
examinations, because they are required to charge the rates set by the
state or the underwriter. Insurers set their premium rates based on their
own expected costs and how much of the premium they have agreed to split
with the agent.
^14California insurance department guidelines say that title agents cannot
pay more than $5,000 of a claim.
Premiums Are Difficult to Compare across Markets, but Appear to Vary
Significantly
Because title insurance premium rates depend on the amount of the loan or
value of the home being insured, premiums differ widely across states.
Figure 5 shows the premium rates for median-priced homes in major cities
in our sample states.
Figure 5: Title Insurance Premium Rates for a Basic Owner's Policy on
Median-Priced Homes in Selected Areas, 2005
Note: Rates are either from the largest underwriter or are promulgated
rates.
^aLender's policy rate used in the Iowa data because a rate was not given
for the owner's policy. Although the premium would be $146, according to
Iowa Title Guaranty officials, additional required services would add
approximately another $550, for a total of approximately $700.
One reason title insurance premium rate comparisons are difficult is
because, as we previously mentioned, items included in the premium varied
by state. A study from insurance regulators in Florida, where rates are
promulgated and include the risk portion only, noted that what
all-inclusive rates include varies even among the all-inclusive states.^15
According to the study, in Texas and Pennsylvania, the premium includes
the risk portion, search and examination costs, and settlement fees, while
in California, the all-inclusive rate does not include settlement and
closing costs. The Florida study also noted that one state (Utah) includes
closing costs but not searches and examinations, and another state
(Illinois) allows the entire rate to be determined competitively as either
risk-based or all-inclusive.
A national survey conducted by Bankrate.com in 2006 also showed
significant differences in title premiums across states.^16 This survey of
the 50 states and the District of Columbia compiled average mortgage
closing costs, including title insurance, search and examination and
settlement costs, and origination fees, using data obtained from as many
as 15 of the largest national lenders' online quote systems. The survey
calculated costs for a standard $200,000 loan in one Zip Code of the
largest urban center in each state. The data showed costs ranging from a
high of $3,887 to a low of $2,713, with a national average of $3,024.
Bankrate.com representatives attributed most of the difference across
states to wide disparities in the cost of title insurance, which they
found varied almost 64 percent, from a high of $1,164 to a low of $418.
The average was $663. However, these data must be viewed with caution
because they do not account for differences in what could be included in
the premium. Moreover, since these data came from only one Zip Code per
state, they may not be representative of other localities.
Industry officials said that rates vary because of differences in what was
included in the rate and in standard business costs in each area. Nearly
all of the industry participants we spoke with emphasized that title
insurance is a local business, varying both within and across states. They
said that state property, trustee, probate, and estate laws could
partially explain the rate differences. In some states, these requirements
make it much more expensive to do the search and examination work and
clear all of the risks through the examination process. Experts told us
that trying to compare rates across states would not be meaningful because
of the differences in the components of the premium.
^15Florida Office of Insurance Regulation, An Analysis of Florida's Title
Insurance Market: Three Studies That Provide a Comprehensive,
Multi-Faceted Review of the Florida Title Insurance Industry (Tallahassee,
FL: July 2006).
^16Closing Costs Survey,
http://www.bankrate.com/brm/news/mortgages/ccmain2006a1.asp .
Multiple Factors Raise Questions about the Extent of Competition and the
Reasonableness of Prices in the Title Insurance Industry
Among the factors raising questions about the existence of price
competition and the resulting prices paid by consumers within the title
insurance industry are the following:
o consumers find it difficult to shop for title insurance,
therefore, they put little pressure on insurers and agents to
compete based on price;
o title agents do not market to consumers, who pay for title
insurance, but to those in the position to refer consumers to
particular title agents, thus creating potential conflicts of
interest;
o a number of recent investigations by HUD and state regulatory
officials have identified instances of alleged illegal activities
within the title industry that appear to reduce price competition
and could indicate excessive prices;
o as property values or loan amounts increase, prices paid for
title insurance by consumers appear to increase faster than
insurers' and agents' costs; and
o in states where agents' search and examination services are not
included in the premium paid by consumers, it is not clear that
additional amounts paid to title agents are fully supported by
underlying costs.
Disagreement exists between title industry officials and
regulators over the actual extent of price competition within
title insurance markets, with industry officials asserting that
such competition exists and a number of regulators stating that a
lack of competition ultimately results in excessive prices paid by
consumers.
Lack of Consumer Knowledge about Title Insurance Results in Little \
Pressure on Insurers to Compete on Price
For several reasons, consumers find it difficult to shop for title
insurance based on price, raising questions about the existence of
price competition in title insurance markets. First, most
consumers buy real estate--and with it, title
insurance--infrequently. As a result, they are not familiar with
what title insurance is, what reasonable prices might be, or which
title agents might provide the best service. According to a study
commissioned by the Fidelity National Title Group, Inc., in
response to proposed regulatory changes in California, it is
typically not worth an individual's time to become more educated
about title insurance, because any resulting savings would likely
be relatively small.^17 That is, the cost to consumers of becoming
sufficiently educated to make an informed decision is potentially
higher than the risk of paying more to a title agent suggested by
a real estate or mortgage professional. However, one potential
consequence of a failure to shop around was noted by several of
the state insurance regulatory officials that we spoke with, who
expressed concern that consumers may not be getting the discounts
for which they are eligible. For instance, insurers may give (1)
discounts on mortgage refinance transactions because the previous
search and examination were fairly recent and (2) discounts to
first-time home buyers or senior citizens. Several title industry
officials agreed that consumers might not be aware of such
discounts and may, in some cases, not be receiving discounts to
which they are entitled.
Second, consumers may have difficulty comparing price information
from different title agents because many title agents also charge
for services that are not included in the premium rate, such as
fees related to real estate closing and other administrative fees.
In states where title agents charge separately for search and
examination services, such charges can be as large as the title
insurance premium itself. Thus, even if consumers collected and
compared premium rates, which are posted on some states' Web
sites, they might not get an accurate picture of all the
title-related costs they might pay when using a particular agent.
Third, title insurance is a smaller but required part of a larger
transaction that consumers are generally unwilling to disrupt or
delay. As we have seen, lenders generally require home buyers to
purchase title insurance as part of any real estate purchase or
mortgage refinancing transaction. However, purchasing title
insurance is a relatively small part of such transactions. For
example, according to an analysis by the Fidelity National Title
Group, Inc., in 2005 in California, on a transaction with a sales
price of $500,000 and a loan amount of $450,000, title insurance
costs, on average, amounted to only 4 percent of total closing
costs, including the real estate agent's commission (see fig. 6).
Even when the seller pays the real estate agent's commission,
title insurance costs are still small compared with the size of
the buyer's transaction. In addition, it appears that by the time
consumers receive an estimate from the lender of their title
insurance costs as part of the Good Faith Estimate, a title agent
has already been selected, and the title search has already been
requested or completed.^18 To shop around for another title
insurer at that point in the process could also threaten to delay
the scheduled closing. According to a number of title industry
officials and state insurance regulators we spoke with, most
consumers place a higher priority on completing their real estate
transaction than on disrupting or delaying that transaction to
shop around for potentially small savings.
^17Gregory Vistnes, An Economic Analysis of the California Department of
Insurance Proposal to Impose Rate Regulation in the California Title
Insurance Industry (Washington, D.C.: August 2006).
^18RESPA requires lenders to provide consumers with an estimate of the
costs a consumer will likely have to pay, called a Good Faith Estimate,
prior to the closing of a mortgage transaction.
Figure 6: Average Allocation of Closing Costs in California, 2005
Note: Calculations done using a $500,000 sales price and a
$450,000 loan amount. We did not verify the data supporting this
analysis.
HUD publishes an informational booklet designed to help fulfill
RESPA's goal of helping consumers become better shoppers for
mortgage settlement services, including title insurance. Although
this document provides much useful information, it is generally
distributed too late in the home-buying process to help consumers
with respect to title insurance, and it lacks some potentially
useful information. RESPA currently requires lenders to provide
the booklet to consumers within 3 days of the loan application.
HUD officials recognize the need to get this information to
consumers earlier and recommended in a 1998 study that real estate
agents, as well as lenders, provide the information at first
contact.^19 Furthermore, RESPA only requires the information to be
distributed in a transaction involving a real estate purchase, and
not in other transactions, such as mortgage refinances, where
title insurance is also required by lenders. The usefulness of the
informational booklet is further limited by the absence of
information on the discounts most title insurers provide and on
potentially illegal ABAs.
^19Board of Governors of the Federal Reserve System, Department of Housing
and Urban Development, Joint Report to the Congress Concerning Reform to
the Truth in Lending Act and the Real Estate Settlement Procedures Act
(Washington, D.C.: July 1998).
Because consumers may not have access to potentially useful
information when purchasing title insurance, they may not be able
to make well-informed decisions on the purchase of title
insurance. Specifically, consumers may face difficulty in
independently collecting information on all amounts charged by
title agents in order to comparison shop. In addition, the
limitations in the content of HUD's information booklet and when
consumers receive it can result in consumers' getting information
too late in the process, thereby hindering their ability to
influence the selection of a title agent or insurer. Moreover,
several state insurance regulators expressed concern that
consumers might not be getting all available discounts because
they do not know they are available or that they are entitled to
the discounts. In addition, HUD officials said that the use and
complexity of ABAs in the title industry has increased, and
consumers could benefit from additional information in this area.
Title Agents Market Not to Consumers, but to Those in a Position
to Make Referrals, Creating Potential Conflicts of Interest
Another factor that raises questions about the existence of price
competition is that title agents market to those from whom they
get consumer referrals, and not to consumers themselves, creating
potential conflicts of interest where the referrals could be made
in the best interest of the referrer and not the consumer. Because
of the difficulties faced by consumers in shopping for title
insurance, consumers almost always rely on a referral from a real
estate or mortgage professional. In fact, some insurance
regulatory officials we spoke with said they are concerned that
consumers may not even be aware they are able to choose their own
title agent and insurer. According to title industry officials,
because of consumers' unfamiliarity with and infrequent purchases
of title insurance, it is not cost-effective to market to them.
Rather, title agents market to and compete for referrals from real
estate and mortgage professionals.
According to title industry officials, competition among title
agents for consumer referrals is very intense and motivates them
to provide excellent service to real estate and mortgage
professionals. This is because if they do not provide good
service, those professionals will send their future referrals
elsewhere. Both title and real estate industry officials told us
that such professionals have a strong interest in customers'
having a good experience with respect to the portion of a closing
conducted by a title agent, because customers' experiences there
will reflect back on the professional. As a result, they said,
such competition on the basis of service benefits consumers.
However, this competition among title agents for consumer
referrals is also characterized by potential conflicts of
interest, since those making the referrals may have the motivation
to do so based on their own best interests rather than consumers'
best interests. Real estate and mortgage professionals interact
more regularly with title agents and insurers than do consumers
and, thus, are likely to have better information than consumers on
the prices and quality of work of particular title agents and
insurers. To the extent the interests of those professionals are
aligned with those of the consumers they are referring, the
knowledge and expertise of those professionals can benefit
consumers. However, conflicts of interest may arise when the
professional making the referral has a financial interest in
directing the consumer to a particular title agent. Under such
circumstances, the real estate or mortgage professional may be
motivated to make a consumer referral not based on the customer's
best interests but on the professional's best interests. For
example, a real estate professional may be a partial or full owner
of a title agency, such as through an ABA, and therefore receive a
share of the profits earned by that agency. As such, the
professional may have an incentive to refer customers to that
title agency.
Alleged Illegal Activities Appear to Reduce Competition and Could
Indicate Excessive Prices Paid by Consumers
In recent years, HUD and state insurance regulators have
identified a number of allegedly illegal activities related to the
marketing and sale of title insurance that appear to be designed
to obtain consumer referrals and, thus, raise questions about
competition and, in some cases, the prices paid by consumers (see
sidebar). In addition, several title insurers and agents told us
that they lost market share because they did not provide some
compensation for consumer referrals. The payment or receipt of
compensation for consumer referrals potentially reduces
competition because the selection of title insurer or agent might
not be based on the price or quality of service provided, but on
the benefit provided to the one making the referral. The giving or
receiving of anything of value in return for referral of
consumers' title insurance business is a potential violation of
RESPA and many state laws. For example, it might be illegal for a
title insurer to provide free business services to a realtor in
exchange for that realtor's referring consumers to the title
agent. It might also be illegal for the realtor to accept those
services.
Nonetheless, state and federal regulators have identified a number
of alleged instances of such payments, resulting in those involved
paying over $100 million in fines, penalties, or settlement
agreements. Table 1 summarizes these investigations. From 2003 to
2006, insurance regulators in three of our six sample states had
concluded at least 20 investigations related to the alleged
payment of referral fees, involving over 52 entities, including
title insurers, title agents, and builders.^20 As a result of
these investigations, the entities involved were ordered to pay or
agreed to pay approximately $90.6 million in the form of consumer
refunds, fines, and settlements. Over the same period, HUD
concluded at least 38 enforcement actions resulting in settlements
related to alleged referral fee violations. These actions involved
at least 62 entities and resulted in those entities' being ordered
to pay or agreeing to pay approximately $10.7 million.
^20Entities involved in multiple cases and settlements were counted once
for each case and settlement in which they were involved.
Table 1: Information on Closed Cases and Settlements Involving Referral
Fees Resulting from Investigations by Insurance Regulators in Six Sample
States and HUD, 2003-2006
Dollars in millions
Amount that
entities
Closed cases were Portion of
and ordered to total payments
settlements pay or involving
Investigating involving Entities agreed to captive
organization^a referral fees involved^b pay^c reinsurance^d
State insurance
regulators
California Department 12 26 $61.3 $37.9
of Insurance
Colorado Department of 6 24 25.3 25.3
Regulatory Agencies,
Division of Insurance
New York State 2 2 4.0 -
Insurance Department
Subtotal 20 52 $90.6 $63.2
HUD^e 38 62 10.7 3.6
Subtotal 38 62 $10.7 $3.6
Total 58 114 $101.3 $66.8
Source: GAO analysis of state and HUD data.
^aInsurance regulators in Illinois, Iowa, and Texas, our other sample
states, did not have any such closed cases or settlements.
^bEntities involved in multiple cases and settlements were counted once
for each case in which they were involved.
^cAmounts paid included any refunds to consumers, fines, or settlement
amounts.
^dIn captive reinsurance 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. Some investigations alleged that these arrangements were used as
a means of paying referral fees.
^eAmounts paid to HUD reflect only negotiated settlements, because HUD
cannot levy civil money penalties.
Several insurance regulators in states outside of our sample states, while
not completing enforcement actions or reaching settlement agreements,
expressed concerns over activities related to referral fees. For example,
in October 2006, the Washington State Office of the Insurance Commissioner
published the results of its investigations into referral practices in the
title industry in Washington.^21 According to the report, the use of
inducements and incentives by title companies to obtain title insurance
business appeared to be "widespread and pervasive," and these inducements
were used to influence referrals by real estate agents, banks, lenders,
builders, developers, and others. The inducements included, among other
things, the provision of advertising services, open houses, entertainment,
and educational classes. According to the report, the regulator decided
not to take any enforcement actions on the basis of the activities they
identified because of the expense of doing so and because the regulator
accepted some responsibility for allowing such a situation to develop.
However, the report also stated that the regulator would put the industry
on notice that there would be consequences for any future violations.
^21Washington State Office of the Insurance Commissioner, An Investigation
into the Use of Incentives and Inducements by Title Insurance Companies
(Olympia, WA: October 2006).
In Illinois, the state title insurance regulator issued a series of
bulletins and informational handouts in 2005 and 2006 that expressed
concerns over potentially illegal referral fees and inappropriate ABAs.^22
The regulator had found that some title agents were using title service
companies (owned by title insurers) that in some cases performed almost
all title-related work, such that all the title agent had to do was sign
and return some documents in exchange for receiving part of the premium.
According to the regulator, such arrangements would violate state law
requiring title agents to perform certain minimal activities in return for
fees received from consumers. The regulator told us that the companies
involved in these activities were cooperative in ceasing such activities
and, as a result, the regulator was not pursuing any enforcement actions.
Such arrangements, however, (1) may constitute an illegal referral fee
under RESPA and (2) appear to be very similar to activities that were the
subject in Illinois of state and HUD investigations in 1990 and 1991,
resulting in a $1 million settlement between HUD and the title insurer
involved.
Finally, in April 2006, the state title insurance regulator in Alaska
published a summary of title insurance examinations in which they
expressed concern that title agents and real estate service providers were
entering into business arrangements that blurred the line between
legitimate transactions and illegal kickbacks.^23 Such arrangements, the
report noted, may undermine competition and be an indication that premium
rates are excessively high. The report stated that the insurance regulator
is contemplating new regulations regarding the legality of these
arrangements, but the regulator will first obtain industry input through
public hearings. Overall, the alleged referral fee arrangements identified
in the state and HUD investigations could potentially indicate that those
making consumer referrals did so based on their own interests, and may not
have resulted in obtaining the best prices for consumers.
^22Title Insurance Section, Division of Financial Institutions, Illinois
Department of Financial and Professional Regulation, Bulletin 1-05: Title
Insurance Agent Requirements (Springfield, IL: July 2005); Title Insurance
Industry Meeting Informational Handout 1-06 (Springfield, IL: February
2006); and Title Insurance Industry Meeting Informational Handout 2-06
(Springfield, IL: February 2006).
^23Division of Insurance, Alaska Department of Commerce, Community, and
Economic Development, Summary of Title Insurance Examinations: Division of
Insurance (Juneau, AK: April 2006).
Allegedly Illegal Captive Reinsurance Arrangements Could Indicate Consumers
Were Paying Excessive Prices for Title Insurance
From 2003 through 2006, state and HUD investigations of captive
reinsurance arrangements, a potential form of referral fees, resulted in
payments by insurers and other entities of approximately $66.8 million, as
previously shown in table 1.^24 Specifically, we identified 13
investigations involving 37 entities that were related to captive
reinsurance arrangements, with 1 multistate settlement agreement involving
activities in 26 states. 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 (see sidebar). The insurer agrees to "reinsure" all or part
of the business it receives from the reinsurer's owners with the reinsurer
by paying the company a portion of the premium (and allegedly transferring
a portion of the risk) for each title transaction. Investigators alleged
that the amounts received by these reinsurers exceeded the risk they
assumed--particularly because virtually no claims were filed with either
the insurer or the reinsurer--and considered these arrangements as a way
to pay for referrals, allegedly violating RESPA's prohibitions on such
payments. In settlement agreements with a lender and several home builders
in 2006, HUD stated that there is almost never a bona fide need or
business purpose for title reinsurance on a single family residence,
especially from an entity or an affiliate of an entity that is in a
position to refer business to the title insurer. In addition, HUD stated
that when the payments to the captive reinsurer far exceed the risk borne
by the builders, lenders, or real estate brokers, there is strong evidence
that such an arrangement was created to pay referral fees and, therefore,
is illegal. Figure 7 provides an example of a captive reinsurance
arrangement described in a multistate settlement administered by the
Colorado Division of Insurance in 2005.
^24Reinsurance is a mechanism that insurance companies routinely use to
spread risk associated with insurance policies. Simply put, it is
insurance for insurance companies.
Figure 7: Example of an Alleged Captive Reinsurance Arrangement
According to several state insurance regulators, the activities involved
in such captive reinsurance arrangements suggest that title insurance
premiums paid by consumers may be substantially higher than the cost of
providing that insurance. The arrangements generally involved a title
insurer taking the premium from a consumer, subtracting a certain amount
to cover the cost of a title search and examination, then splitting the
remainder with the reinsurer. On the basis of details provided in a
multistate settlement, insurers were allegedly giving away as much as
one-third or more of the premiums consumers paid in order to obtain
consumer referrals. In 2005, industrywide loss and loss adjustment
expenses only totaled about 5 percent of the total premiums written. The
regulators stated that insurers' willingness to pay such a large portion
of the premium to obtain consumers' title insurance business suggested
that insurers overcharged consumers for this insurance.
A Number of Investigations Found ABAs Allegedly Being Used to Pay Referral
Fees, Raising Questions about the Cost and Benefits of ABAs to Consumers
A number of investigations found that ABAs were allegedly being used to
compensate ABA owners--often real estate or mortgage professionals--for
consumer referrals, raising additional questions about competition in the
title insurance industry. RESPA allows ABAs, provided that (1) a
disclosure is made to the consumer being referred that describes the
nature of the relationship, including financial interests, between the
real estate settlement service provider and the person making the
referral; (2) compensation for the referral is limited to a return on the
ownership interest; and (3) the consumer being referred is not required to
use a particular title agent. HUD has also issued a policy statement
setting forth factors it uses to determine whether an ABA is a sham under
RESPA or a bona fide provider of settlement services. These factors
include whether the entity actually performs substantial services in
return for fees received, the entity has its own employees to perform
these services, and the entity has a separate office. Nonetheless, federal
and state investigations identified a number of ABAs that were alleged to
be "shell" title agencies that either had no physical location, employees,
or assets or did not actually perform any title services. Regulators
alleged their primary purpose was to serve as 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. Over the past 4 years, HUD has completed at least 9
investigations of ABAs, involving at least 17 entities and resulting in
approximately $1.8 million being paid by those entities in settlements and
refunds. A Colorado investigation found that a single licensed title agent
was owner or part owner of 13 sham title agencies that were allegedly used
to pay referral fees to mortgage brokers.
A number of regulators and industry participants we spoke with expressed
concerns about the growing use of ABAs in the title industry. For example,
HUD officials have said that while properly structured ABAs may provide
some consumer benefits, they also create an inherent conflict of interest
as the owner of an ABA is in a position to refer a consumer to that same
ABA. They expressed concern that ABAs could be used as a means to mask
referral fees, which are generally illegal under RESPA, and that they were
seeing more complex arrangements in which it was becoming increasingly
difficult to trace the flow of money and to determine if the agents
involved in ABAs were actually performing core title services. Several
state insurance regulators we spoke with expressed similar concerns. For
example, Colorado insurance regulatory officials were concerned over the
extent of sham ABAs in Colorado that were potentially being used as a
means to pay referral fees. Those officials also said that, on the basis
of their work with NAIC's Title Insurance Working Group, other state
insurance regulators that had begun to examine ABAs were also finding
potentially illegal activities. For instance, in a September 2005
settlement in Florida, 60 sham title agencies affiliated with 1
underwriter were alleged to have been fronts for referral fees.
Some title industry participants expressed concern that ABAs might also
restrict competition. They said that when a real estate or mortgage
brokerage firm, for example, owns an ABA, other title agents are generally
barred from marketing their services to individuals working for that firm.
In addition, they said that most or all of the consumer referrals from a
brokerage that is an owner of an ABA generally go to that ABA. As a result
of this guaranteed order flow, they said, the title agents at that ABA
might not be as interested in competing on price or service.
In contrast, some title industry officials said ABAs can be beneficial
because they provide consumers with better service and potential cost
savings. According to an industry organization, ABAs can increase consumer
satisfaction through the convenience of one-stop shopping. Furthermore,
they benefit their owners and consumers by giving owners greater
accountability and control over quality. Industry participants also stated
that because of the ability to take advantage of efficiencies, ABAs can
result in potential cost savings for the consumer. A recent study
sponsored by RESPRO, an industry group that promotes ABAs, concluded that
title agents that are part of an ABA do not charge consumers any more than
title agents that are not part of an ABA.^25 ABA proponents, and others,
also stated that ABA owners, such as real estate or mortgage brokers,
often have little leverage in encouraging their real estate agents and
brokers to refer consumers to the ABA title agent. They said that these
individuals compete based on their reputation, and that recommending a
title agent that provided poor service would damage that reputation. As a
result, they will only refer consumers to an ABA title agent if it
provides good service. Industry organizations we spoke with said that they
did not collect data on the percentage of business ABA title agents get
from their owners' businesses.
Overall, the concerns expressed by regulators and some industry
participants over ABAs raise questions about the potential effects of some
ABAs on consumers. Specifically, concerns about some ABAs being used as a
means of paying illegal referral fees raise questions about whether
referrals are always being made in consumers' best interests. In addition,
concerns about some ABAs potentially restricting competition among title
agents raise questions about the extent of competition that is beneficial
to consumers.
^25Donald Martin and Richard Ludwick, Affiliated Business Arrangements and
Their Effects on Residential Real Estate Settlement Costs: An Economic
Analysis (October 2006).
As Coverage Amounts Increase, Premiums Paid by Consumers Appear to Increase
Faster Than Insurer and Agent Costs
Another factor that raises questions about the prices consumers pay for
title insurance is that as the purchase price or loan amount on which a
policy is issued increases, the amount paid by consumers appears to
increase faster than the costs incurred by insurers and agents in
producing that policy. A number of title insurers and agents we spoke with
said that they made more money on high-priced transactions than on
low-priced transactions because, while premiums increased with price,
insurers' losses rose only slightly and agents' search and examination
costs generally either did not increase or, in many cases, fell. In fact,
several title insurers and agents said that transactions involving
less-expensive properties often cost agents more to complete because they
required agents to correct more title defects than on more expensive
transactions. As a result of this pricing structure, writing title
insurance on higher-value purchases and mortgages can be quite profitable
for title insurers and agents.
Industry Officials Said That the Current Price Structure Subsidizes Consumers
in Lower-Value Transactions, but They Could Not Provide Supporting Data
Title industry officials told us that while high-value transactions could
be quite profitable for title insurers and agents, this profit was
necessary to subsidize the lower profits or even losses from smaller
transactions. These officials also told us that if insurers charged
consumers on the basis of the cost of the actual work done, consumers
buying relatively inexpensive properties would pay more than they
currently did. However, while we asked title industry officials for data
to support their assertion that they often lost money on low-priced
transactions, they said that they did not collect financial information
that would allow them to provide such data. Thus, we could not determine
whether insurers or agents were actually losing money on any transactions.
According to industry officials, insurers and regulators purposely
designed the current premium rate structures with an element of
subsidization built in--that is, premiums for high-priced transactions
were intended to subsidize the costs associated with lower-priced
transactions. Among the six state insurance regulators we spoke with,
although most agreed that insurers made more money on higher-priced
transactions, only one told us that subsidization of consumers on
lower-priced transactions was intentional on the part of the state. Among
the rest, three said that there was no intentional subsidization, and two
said that they did not know.
Industry Officials Said That Recent Higher Profitability Compensated for Years
of Lower Profitability, but Industry Return on Equity Has Been Relatively
Stable
Recent high profits within the title insurance industry have raised
additional questions about the prices being paid by consumers. Several
title insurance industry officials acknowledged that insurers' profits had
been good over the past several years as a result of increased home prices
and large numbers of consumers refinancing their home mortgages, but these
officials said that such profits made up for very low profits during
weaker markets. However, we found that title insurers' financial
performance, as measured by return on equity, has been positive since at
least 1992 and, in every year except one, has been above that of the
property-casualty insurance industry as a whole. As shown in figure 8, the
combined return on equity for the largest five title insurers has been at
or above 9 percent, in every year except one, over the period from 1992 to
2005, and in most years it was above 12 percent. Over that same period,
only one insurer had a year with a negative return on equity. In addition,
during 2006 public conference calls with financial analysts, several of
the largest insurers said that they expected business to be profitable
even during the weakest real estate markets.
Figure 8: Combined Return on Equity for the Five Largest Title Insurers,
and the Property-Casualty Insurance Industry as a Whole, 1992-2005
Note: The combined return on equity data for title insurers are based on
consolidated operating results, which for some title insurers may include
some services other than title insurance.
An industry-sponsored study stated that several insurers had reduced title
insurance rates in the last several years, and that such reductions
provided evidence of price competition, at least in California.^26 We were
able to obtain historical premium rate information in five of our six
sample states. Between 2000 and 2005, premium rates for the median-priced
home went down in three of those five states, stayed the same in one
state, and increased by only 2 percent in the other state (see fig. 9).
However, because total premiums are determined by applying that rate to
the home price or loan amount, and median home prices increased
substantially over that period, total premiums paid by consumers in most
of our sample states also increased substantially. For example, among
these five sample states, consumers' premiums fell in one state, but rose
in the remaining four states, sometimes dramatically. Specifically,
premiums decreased by 12 percent in one state but increased 93 percent in
another, and in one state where premium rates fell by 29 percent, actual
premiums paid rose by 75 percent. Historical information on possible
additional amounts charged by title agents in our sample states was not
available.
^26An Economic Analysis of the California Department of Insurance
Proposal.
Figure 9: Percentage Change in Premium Rates and Premiums Paid on
Median-Priced Homes in Selected Areas in Five Sample States, 2000-2005
Note: We were unable to obtain historical premium rate information in the
sixth sample state--Colorado.
^aPremium rates in California, Illinois, and Iowa are those for the
insurer writing the most premiums in 2005.
^bPremium rates in New York and Texas are those promulgated by the state
insurance regulator.
^cLender's policy rate was used in the Iowa data because a rate was not
given for the owner's policy.
^dPremium paid by consumer does not include any additional amounts that
may have been charged by title agents.
In States Where Agents Charge Separately for Search and Examination Services, It
Is Unclear Whether Those Charges Are Fully Supported by Underlying Costs
One more factor that raises questions concerning the prices consumers pay
for title insurance is that in states where agents' charges for their
search and examination services are not included in the premium paid by
the consumer (i.e., agents charge separately for these services), it is
unclear whether consumers may be overpaying for those services. The lack
of clarity stems from the way in which title insurers determine premium
rates that consumers will pay.
Officials from title insurance companies told us that they generally
determined their premium rates on the basis of their expected expenses,
which include losses from claims, as well as the amounts retained by the
title agents that write insurance for them. Title insurers know what share
of consumers' premiums the title agents that write policies for them will
retain--generally around 80 to 90 percent--and what share the insurer will
receive.^27 Insurers then set their premium rates at a level sufficient to
ensure that their share of the premiums will be enough to cover their
expected costs and earn them a reasonable profit. These calculations take
into account the portion of the premiums that title agents retain, but not
whether that amount reflects the agents' actual costs. Officials of
insurance companies and title agencies told us that the split was
negotiated between the insurer and agent on the basis of a number of
factors, including the agent's volume of business, the quality of the
agent's past work, and the insurer's desire to increase its share of
business in a certain geographic area. Among our sample states, the amount
retained by title agents ranged from around 80 percent in one state to 90
percent in another (see fig. 10). Some insurance company officials told us
that they had an idea of what agents' costs should be based on their
experience with their own direct agents, but these officials said that
they did not analyze how the amounts retained by agents compared with
those costs.
^27Title insurers also have direct operations where none of the premium is
retained by an agent. As a result, while title agents typically retain
from 80 to 90 percent of the premium paid by consumers, in 2005, agents
retained only 70 percent of total premiums written by insurers.
Figure 10: Typical Premium Splits between Insurers and Agents in Six
Sample States
Note: We did not independently verify the information in this figure.
^aThere is no premium split in Iowa on policies issued by the state-owned
Iowa Title Guaranty Division.
Insurers that we spoke with also told us that they generally share the
same percentage of the premium with their agents, around 80 to 90 percent,
regardless of whether those agents were in states where consumers were to
pay for agents' search and examination services within the premium
rate--known as all-inclusive states--or whether they were in states where
agents can charge consumers separately for those services--known as
risk-rate states. However, if title agents are charging separately for
their search and examination services, outside of the premium, you would
generally expect the percentage of the premium retained by agents to be
lower because they would not need to recover the costs for those services
from the premium. Because insurers told us that the percentage of the
premium given to the agent does not depend on whether the title agent is
in a risk-rate or all-inclusive state, this practice raises the
possibility that in some risk-rate states, title agents may be (1)
retaining 80 to 90 percent of the premium--a percentage meant to be
sufficient to cover agents' search and examination costs in all-inclusive
states--and (2) charging the consumer a separate, additional amount
intended to pay for those same services. According to HUD officials, in
risk-rate states, the amount consumers pay title agents for their search
and examination services, which is in addition to the title insurance
premium, can sometimes be as large as the premium itself. However,
reliable data did not exist to determine whether consumers in risk-rate
states consistently paid more, in total, than those in all-inclusive
states.
Disagreement Exists among Industry and Regulatory Officials over the Extent of
Price Competition and the Appropriateness of Title Insurance Prices
While many title industry officials acknowledge that competition in title
insurance markets is based primarily on service rather than price,
disagreement exists between the industry and regulators over the extent of
actual price competition. According to some of the title industry
officials we spoke with, price competition does exist within the title
insurance industry. While these officials acknowledged that consumers
generally rely on referrals from real estate and mortgage professionals,
they argued that these professionals could have an interest in obtaining
lower-priced title services for their customers and, thus, could exert
downward pressure on premium rates. Others cited various factors, such as
changes in premium rates and increased levels of coverage, as evidence of
price competition and have stressed the benefits for consumers of
competition that is based on service.
In contrast, insurance regulators in two of our sample states have
concluded that premium rates are too high relative to costs, potentially
due to a lack of price competition. In California, the state insurance
regulator concluded in 2006 that title insurance markets were lacking
competition, resulting in increased prices for consumers. The regulator
there has also proposed lowering current title rates. In Texas, where
title insurance premium rates are promulgated by the state insurance
regulator, in each of the last two rate hearings, the regulator has
proposed a premium rate reduction to account for a competitive structure
that inflates prices for consumers. That is, the regulator has requested
premium rate reductions to account for a market structure in which
consumers pay for title insurance but others generally choose the title
agent and insurer, which the Texas regulator says can result in
unnecessary and unreasonable expenses.
Limited State and Federal Oversight of the Title Insurance Industry Has Resulted
in Proposals for Change
In the states we visited, we found that regulators did not assess title
agents' costs to determine whether they were in line with premium rates;
had made only limited efforts to oversee title agents (including ABAs
involving insurers and agents); and, until recently, had taken few actions
against alleged violations of antikickback laws. In part, this situation
has resulted from a lack of resources and limited coordination among
different regulators within states. On the federal level, authority for
alleged violations of section 8 of RESPA, including those involving
increasingly complex ABAs, is limited to seeking injunctive relief.^28
Some state regulators expressed frustration with HUD's level of
responsiveness to their requests for help with enforcement, and some
industry officials said that RESPA rules regarding ABAs and referral fees
need to be clarified. Industry and government stakeholders have proposed
several regulatory changes, including RESPA reform, strengthened
regulation of agents, a competitor right of action with no monetary
penalty, and alternative title insurance models.^29
Regulators Do Not Fully Assess Title Agents' Costs during Rate Reviews
Because consumers can do little to influence the price of title insurance,
they depend on regulators to protect buyers from, for example, excessive
premium rates. As they do with most lines of insurance, such as
property-casualty coverage, regulators seek to ensure that title insurance
premium rates are representative of the underlying risks and costs
associated with the policies that are issued. In reviewing insurance
rates, regulators generally focus on confirming that insurers' projections
of their expected losses on claims are accurate, because for virtually all
lines of insurance, the majority of consumers' premiums go to pay such
losses. For property-casualty insurance in 2005, for example, 73 percent
of total premiums were used to cover losses. For title insurers, however,
only 5 percent of title insurance premiums went to cover losses (see fig.
11), while more than 70 percent went to title agents.
^28RESPA does provide criminal sanctions for violations of section 8, a
fine of up to $10,000 or up to 1 year in prison. However, according to HUD
officials, such sanctions are rarely used, in part because they require
prosecutions to be conducted by U.S. attorneys from the Department of
Justice.
^29A competitor right of action would allow industry participants to seek
to stop activities of their competitors that they think violate the law.
Figure 11: Title Industry Costs as a Percentage of Premiums Written, 2005
^aThe "Other expenses" category includes salaries, rent, and equipment
costs, among other things.
Despite this difference, few regulators review the costs that title agents
incur to determine whether they are in line with the prices charged. In
fact, in the majority of states, agents' costs for search and examination
services are not considered part of the premium and, thus, receive no
review by regulators. Therefore, title agents charge separately for their
search and examination services, yet they receive about the same
percentage of the premium as agents in states where these costs are
included in the premium. In our six sample states, one regulator did not
regulate premium rates for title insurance at all, and one state sold
title insurance through a state-run program that did not regulate title
search and examination costs. In the remaining four states, agents' search
and examination costs were considered part of the premium, but regulators
in only one of those states regularly reviewed title agents' costs as part
of the rate review process. The other three regulators saw the amount
retained by the agents as a cost to the insurer that they would review as
justification for insurers' premium rates. However, these states did not
go beyond the insurer to review the agents' costs.
Furthermore, only two of the six regulators we reviewed collected
financial and operational data on title agents, and regulatory officials
in both those states said that the data that they currently collect were
insufficient to analyze the appropriateness of current premium rates. For
example, while officials from the California insurance regulator have
concluded that a lack of competition exists and that premium rates are
excessive, they have determined that they would need to collect a
significant amount of additional information before they could assess the
extent of overpricing. In July 2006, the officials proposed an extensive
plan for collecting these data that involved gathering information at the
individual transaction level. Similarly, the Texas insurance regulator has
been collecting financial data on title agents, but officials there have
concluded that these data, which are not organized by functional
categories, are insufficient for determining the extent of potentially
excessive costs. Because costs incurred by title agents receive such
limited review, most state insurance regulators are limited in their
ability to assess whether the amounts that consumers are charged for title
insurance reflect the costs they are intended to cover. Appendix II
describes the types of information that would be helpful in assessing
title agents' costs and operations.
States Conduct Only Limited Regulation and Oversight of Title Agents
Some aspects of agent regulation, such as licensing, varied across our
sample states, while other aspects, such as capitalization and education
requirements, were minimal. Of our six sample states, four required agents
to register or obtain a license. Iowa had no title agents, and New York
had no licensing or registration requirements.^30 Furthermore, state
regulators rarely audited agents, and the audits that were done were
usually limited to examining only accounts that title agents use to hold
customers' money, known as escrow accounts. Audits of operating accounts
were uncommon, although some industry participants said that these
accounts were a source of agent defalcations.^31 Table 2 summarizes some
aspects of title agent regulation in our sample states.
^30Because the sale of title insurance within Iowa--one of our sample
states--is prohibited, attorneys and abstractors do title work.
^31Agent defalcation occurs when an agent misappropriates funds and fails
to pay off a prior mortgage.
Table 2: Regulation of Title Insurance Agents in Six Sample States
State Continuing Capitalization State Insurer Proposed
State licensing education requirements audits oversight regulations
California Yes No Net worth of Quarterly Oversees Yes
$75,000 to escrow
$400,000 financial procedures
statements and approves
agent bonding
Colorado Yes No $10,000 With cause Compliance Yes
with title
insurance
laws, report
fraud or late
premium
payments
Illinois Yes No No With cause Can withdraw No
(registration agent
only) registration.
Iowa Must have law No No Attorneys Participating N/A
license^a are attorneys are
subject to subject to
state relevant
audits. state law.
New York No No No No General Yes
Agency Law
governs
Texas Yes Yes No Annual Report Plans to
failure to call for
provide more agent
annual audit data
report
Source: GAO analysis of state insurance laws and regulations.
^aAttorneys and abstractors, rather than title agents, perform title work
in Iowa.
Moreover, few states we visited require strong insurer oversight of
agents. The nature of such oversight is usually negotiated between the
insurer and the agent and defined by contract. Typically, the insurers
sign up agents based on the quality of their service and their reputation
in a certain area and audit their escrow accounts every 18 to 36 months.
Industry participants told us that contractual stipulations and questions
of unfair competitive practices were among the reasons that prevented
insurers from looking into independent agents' operating accounts. When we
asked the major title insurers that we spoke with for information on title
agents' costs, they said that they did not collect data from title agents
in a manner that would allow for an analysis of costs and profitability
and, thus, could not provide us with such information For example, these
insurers said that while they reviewed the records of agencies that wrote
policies for them, contracts with the agencies generally limited such
reviews to escrow accounts and policy records--that is, only enough review
to ensure that the insurer had received its share of premiums for the
policies issued, but not enough review to evaluate the components of agent
costs.
Although insurers may not have access to all of the data they need from
independent title agents (1) that write for several companies and (2) that
do not want insurers to see financial information related to their entire
business, the situation with affiliated title agents is generally
different. In affiliated arrangements, the insurer has an ownership
interest in the title agent and seemingly would have access to the agent's
financial records--especially in cases where the insurer has a controlling
interest in the agent and may be required to consolidate its affiliated
agent's financial statements with its own. According to regulators,
however, the industry has been resistant to calls for more extensive data
collection because of the potential cost burden on the insurers and their
agents.
Regulators in California and Colorado have recently implemented or plan to
implement stronger regulations for title agents, including more stringent
qualifying examinations, higher capitalization requirements, criteria to
identify sham business arrangements, and more detailed data calls focusing
on the costs of providing title insurance. The regulators said that these
stronger regulations would be key to preventing illegal actions by agents
by eliminating both bad actors and questionable practices in the title
industry.
Until recently, state regulators had done little to oversee ABAs. Although
three of our six sample states have some type of restriction on the amount
of business a title company can get from an affiliated source, enforcement
of these laws appeared to be limited. In California, the laws specify that
a title company can get no more than 50 percent of its orders from a
controlled source. In Colorado, until recently, an insurance licensee was
prohibited from receiving more in aggregate premium from controlled
business sources than from noncontrolled sources.^32 However, one
regulator told us that, until recently, it had not rigorously examined
data from agents to verify their compliance with the percentage
restrictions.
Amid recent reports of enforcement actions taken by HUD and some states
against allegedly inappropriate ABAs, some state insurance regulators told
us that they had begun looking into these increasingly popular
arrangements. Regulatory officials told us that they had found various
problems, including the level of compliance with mandatory percentage
restrictions from controlled sources; the existence of potentially illegal
referral fees and kickbacks among ABA owners; and title work performed at
some agencies that might not qualify as "core" title work for which
liability arises (such as the evaluation of title to determine
insurability, clearance of underwriting objections, issuance of the title
commitment and policy, and conducting the title search and closing). In
Colorado and Minnesota, officials estimated that the number of ABAs had
doubled in the past few years. Colorado regulatory officials attributed
some of the growth to lax agent-licensing requirements, including low
capitalization requirements and minimal prelicense testing. In contrast,
California regulatory officials credited the relative lack of ABAs in
their state to more stringent licensing and capitalization requirements.
Agents in California, referred to as Underwritten Title Companies, must
raise between $75,000 and $400,000 in capital to conduct business,
depending on the number of documents recorded and filed with the local
recorder's office. Furthermore, California has an extensive licensing
process, including a review of the character, competency, and integrity of
prospective owners; a financial assessment; and a review of the
reasonableness of their business plan. As we previously noted, from 2003
to 2006, a growing number of federal and state investigations into ABAs
alleged that these arrangements were being used to provide illegal
referral fees and kickbacks. Colorado's regulator has implemented stronger
agent regulation, such as a stricter review of agents' applications,
mandated disclosure of any affiliated relationships, and higher
capitalization and testing requirements. Regulatory officials said that
these changes would help prevent future illegal actions by title agents,
especially through the improper use of questionable ABAs. However, the
more limited regulation and oversight of title agents and ABAs in other
states could provide greater opportunity for potentially illegal marketing
and sales practices.
^32Under Colorado's new law, ABAs are authorized provided that they meet
conditions similar to those in RESPA, and ABAs must be disclosed to the
state division of insurance or real estate in connection with license
applications. In addition, the divisions of insurance and real estate are
to consult with one another to promulgate ABA rules, and to share
information derived from investigations of ABAs. New Colorado regulations
include specific rate and fee rules; standards of conduct for title
insurance entities, including standards for ABAs; and rules regarding
consumer protections.
States' Enforcement of Antikickback and Referral Fee Provisions Was Uneven
Kickbacks are generally illegal under both RESPA and most state insurance
laws. Although the enforcement provisions of laws in five of the six
states in our sample included suspension or revocation of agents' licenses
and monetary penalties, state regulators and others did not see these
sanctions as effective deterrents against kickbacks. One state regulator
and some industry participants expressed concern that title insurers and
agents saw the fines simply as a cost of doing business, since these
businesses stood to gain much more in market share and revenue through
illegal kickbacks than they would lose in state-assessed monetary
penalties. From 2003 to 2006, officials in states we reviewed settled with
insurers for over $90 million in penalties for alleged referral fee
violations. In comparison, in 2005 alone net earnings for the five biggest
title insurers totaled almost $2 billion. In addition, at least one group
of industry participants told us they took the fact that regulators had
taken little action in the past to mean that they would not get caught if
they engaged in illegal activity.
RESPA specifies that states--through their attorneys general or insurance
commissioners--may bring actions to enjoin violations of section 8 of
RESPA. In nearly all of our sample states, title insurance laws contain
antikickback and referral fee provisions similar to those in RESPA. Also,
although RESPA provides for injunctive action by state regulators, they
have hesitated to use it and have only recently begun to look into RESPA
section 8 violations. In one state, regulators concluded that they were
prevented by state law from seeking injunctive relief under section 8 of
RESPA because their only available court for complaints was an
administrative one that did not satisfy RESPA requirements.^33 Moreover,
some state insurance regulators said that they had limited enforcement
options against those that they identified as the major contributors to
the kickback problem: real estate agents, mortgage brokers, and other real
estate professionals. Even though receiving kickbacks is generally illegal
under RESPA, some state regulators told us that they had no authority to
go after these entities, which were regulated by other state agencies.
Meanwhile, the regulators that oversee these real estate professionals
have shown little interest in or knowledge of potential violations of
their licensees. In California and, until recently, in Colorado,
regulators said that inconsistencies in laws governing kickbacks for title
insurers and other real estate professionals have made it difficult to
pursue recipients of illegal kickbacks. Furthermore, some state officials
told us that they received little response when they forwarded potential
kickback cases to HUD investigators. A lack of consistent enforcement of
antikickback and referral fee provisions by all relevant state regulators,
as well as HUD, could limit the effectiveness of enforcement efforts.
^33Actions pursuant to section 8 of RESPA may be brought in the United
States district court or in any other court of competent jurisdiction,
with certain other limitations. HUD officials disputed the regulators'
assertion.
Limited Resources and Lack of Coordination among Regulators within States May
Limit the Effectiveness of Enforcement Efforts
Regulators at the state and federal levels told us that limited resources
were available to address issues in title insurance markets. Title
insurance is a relatively small line of insurance, and title insurers and
agents often get even less than the usual limited market conduct scrutiny
that state insurance regulators give other types of insurers.^34 With
little ongoing monitoring, selected regulators told us that their
attention is drawn to problems largely through complaints from
competitors. Complaints from consumers have been rare because, as we have
discussed, they generally do not know enough about title insurance to know
that they have a problem.
Furthermore, the many entities besides title insurers and agents that are
involved in the marketing and sale of title insurance often have their own
regulators. These entities include real estate agents, mortgage brokers,
lenders, builders, and attorneys, all of which may be regulated by
different state departments. Our previous work has shown the benefits of
coordinated enforcement efforts between state insurance regulators and
other federal and state regulators in detecting and preventing illegal
activity.^35 According to some state officials' comments, varying levels
of cooperation exist among different state regulators, with some states
demonstrating little or no cooperation and other states having more
structured arrangements, such as a task force that might include the state
insurance regulator, mortgage lending department, real estate commission,
and law enforcement officials. Until a recent Colorado law was passed,
however, these arrangements stopped short of being codified in legislation
or regulation in any of our sample states. The previously mentioned task
force in Texas meets monthly to discuss current and potential fraud cases,
and the regulators involved noted that it has helped them identify and
investigate cases of which they would have otherwise been unaware.
In our discussions with some noninsurance regulators, we observed that
they had an apparently nominal understanding of violations of laws such as
RESPA, and that they had taken few actions against their licensees for
violations. Two of the state real estate regulators we spoke with, for
instance, said that they were not aware that referral fees were illegal
under their state laws or under RESPA.^36 Another real estate regulator
said that the department did not maintain a complaint category for RESPA
violations against licensees and, thus, could not provide us with the
number of RESPA-specific complaints the agency had received. In 3 years,
this department had not revoked any licenses and could only identify one
RESPA violation case in which licensees were publicly censured and fined.
All of these actions were less than what was allowed by state law.
^34Market conduct examinations are performed by state insurance
commissioners, and they review agent-licensing issues, complaints, types
of products sold by the company and agents, agent sales practices, proper
rating, claims handling, and other market-related aspects of an insurer's
operation. See [44]GAO-03-433 .
^35GAO, Insurance Regulation: Scandal Highlights Need for Strengthened
Regulatory Oversight, [45]GAO/GGD-00-198 (Washington, D.C.: Sept. 19,
2000).
One difficulty for state insurance regulators may be that the state laws
and regulations for mortgage brokers, real estate agents, and others may
differ from those for title insurers and agents, and these laws and
regulations may not view referral fees in the same way, thus making
interdepartmental enforcement difficult. For example, Illinois and New
York real estate law contains no reference to referral fees related to
settlement service providers, although the title insurance laws prohibit
these fees. However, given the lack of coordination we noted among
regulators in the same state, it is not surprising that different
regulatory agencies were not aware of differences in the way state laws
and regulations treat certain activities. Without greater communication
and coordination among the various state regulators, some potentially
illegal activities carried out by those involved in the sale and marketing
of title insurance could go undiscovered and uncorrected.
HUD Officials Expressed Concern over Lack of Enforcement Authority for
Violations of Section 8 of RESPA
The investigative actions HUD has taken have largely resulted in voluntary
settlements without admission of wrongdoing by the involved parties.
According to HUD officials, it is difficult to deter future violations
without stronger enforcement authority, such as civil money penalties,
because, as we previously mentioned, companies view small settlements as
simply a cost of doing business. While HUD has obtained a number of
voluntary settlements from 2003 to 2006, the average amount assessed by
the department was approximately $302,000. During the same period, the
combined net earnings of the five major national title insurers averaged
about $1.6 billion each year.
One particular area of possible section 8 violations about which HUD
officials expressed concern was the difficulty of investigating complex
ABA relationships. RESPA provides an exemption to the antikickback
provision for compensation for goods or services actually provided.
However, HUD officials told us that it was often difficult to establish
what type of and how much work an entity actually did. In the past, the
most common type of ABA was an entity, such as a real estate broker, that
owned another entity, such as a title agent. Recently, the arrangements
have begun to involve three or more entities, making it difficult to trace
the flow of money among entities and the responsibilities of each entity.
^36During the course of our communication with these regulators, we
informed them that referral fees were generally illegal under the state
law in question and under RESPA.
HUD's enforcement mechanism is also complaint-driven, but, as we
previously noted, most consumers are not well-informed enough to bring
complaints. Thus, violations could exist that HUD would not know about.
HUD has few staff focused on RESPA issues, although their number has
increased from 5 full-time employees in 2001 to more than 19 in 2006.
According to other regulators, these employees are generally limited to
responding to some complaints and pursuing a few large cases. Recently,
HUD officials responsible for enforcing RESPA have begun training
employees in HUD's Office of the Inspector General on RESPA issues. The
officials said that they have received some forwarded cases as a result of
the training. In addition to staff specifically assigned to RESPA issues,
resources in other parts of HUD, such as the Office of the General
Counsel, also provide support, according to HUD officials. HUD also spends
$500,000 per year on an investigative services contract to assist RESPA
enforcement efforts. HUD tracks cases of alleged RESPA violations along
with their disposition, staff assigned, closing date, and settlement, but
we did not obtain this information by the time this report went to print.
Some state regulators expressed frustration with HUD's level of
responsiveness, saying that the agency did not always follow up with them
on forwarded cases, potentially limiting the success of investigative
efforts. State regulators told us that they looked to HUD to enforce
kickback provisions beyond what they had concluded was allowed by state
insurance laws--for example, against mortgage brokers, real estate agents,
and others that state insurance regulators do not oversee. Yet HUD
officials and state regulators told us that there was no formal plan for
coordinating with states, and that cooperation, where it existed, relied
on requests and informal relationships.
HUD officials cited several possible reasons for not communicating the
results of forwarded cases to the states. Among these reasons were state
and federal jurisdictional issues, constrained resources, and
complaint-driven enforcement that limited HUD's scope. As we mentioned,
our previous work has shown the benefits of coordinated enforcement
efforts between state insurance regulators and other federal and state
regulators to detect and prevent illegal activity. A September 2000 report
recommended that state insurance regulators improve information sharing by
developing mechanisms for routinely obtaining data from other regulators
and implementing policies and procedures for sharing regulatory concerns
with other state insurance departments.^37
Some industry officials also said that the rules under RESPA were not
always clear and that HUD had not been responsive in answering their
inquiries, potentially resulting in activities that HUD later deemed to be
illegal. For example, in the case of captive reinsurance, two large
underwriters told us that they had never received clear answers from HUD
to inquiries about the legality of such arrangements, and that they
entered into them as a result of competitive pressures. Eventually, these
underwriters ended the arrangements after federal regulators investigated
and deemed them improper. As a result, these underwriters and other
entities paid over $66 million in settlements with states and HUD. Some
industry participants, including HUD's former general counsel, have
suggested that HUD clarify RESPA by instituting a no-action letter process
similar to the one that the SEC uses to address industry questions on
potential activities and to the process that HUD uses in its Interstate
Land Sales Program.^38 Although clarifying regulations can provide
benefits, without greater enforcement authority and more coordination with
state regulators, HUD's effectiveness at deterring, uncovering, and
stopping potentially illegal title insurance activities may be limited.
HUD, State Regulators, and Industry Stakeholders Have Developed Proposals for
Improving the Regulation and Sale of Title Insurance
With knowledge gained from their recent investigations into the title
insurance industry, and in line with their mission to increase access to
affordable housing, HUD has developed a two-pronged approach to regulatory
changes. First, HUD plans to propose reforms to the regulations that
govern RESPA. Agency officials said that the reforms will help consumers
shop for settlement services, and that, hopefully, consumer-driven
competition will put downward pressure on prices. However, agency
officials have not yet made public the specifics of these reforms. Second,
HUD plans to seek substantial authority to levy civil money penalties that
it expects will deter future violations of section 8 of RESPA. HUD
officials said that having the authority to levy civil money penalties
would greatly enhance their RESPA enforcement efforts. HUD's obtaining
civil money penalty authority in section 8 of RESPA, however, would
require a legislative change.
^37 [46]GAO/GGD-00-198 .
^38SEC's no-action letter process allows an individual or entity that is
not certain whether a particular product, service, or action would
constitute a violation of the federal securities law to request a
"no-action" letter from the SEC staff.
Some state regulators also have proposed changes in oversight of the title
insurance industry. Regulatory officials found that weak licensing
regulations may have contributed to problems in the industry, and that a
lack of data on title agents' costs hindered their ability to analyze
prices paid by consumers and to ensure such prices were not excessive. As
a result, regulators have proposed the following changes:
o In Colorado, state regulators have made changes that are
primarily aimed at making the identification and, thus, the
elimination of improper ABAs easier--for example, through
mandatory disclosure of ownership structures on agent applications
and higher capitalization requirements. At least one industry
participant has welcomed the changes, which it said will help
level the playing field for independent agents.
o In California, state regulators have concluded that premium
rates are excessive and have proposed premium rate rollbacks
derived from a detailed evaluation of costs.
o In Texas, state regulators are attempting to collect more
detailed information on agent costs, shifting their emphasis to
comprehensive data on functional categories that would allow them
to more easily identify excess costs and illegal kickbacks.
In addition, the NAIC Title Working Group is looking at
modifications to the model laws in an effort to align referral fee
provisions with those of RESPA and enhance state regulators'
enforcement authority.
Finally, some industry officials have said that state and federal
regulators either did not have the ability or lacked the will to
address violations, which the officials said was the fault of only
some in the industry. Other officials said that they had concluded
that the industry would be better off policing itself, and some
underwriters proposed giving insurers the right to seek private
injunctive relief against competitors suspected of engaging in
illegal activities, but with no monetary award. One underwriter
official said such self-policing by the industry would help
government enforcement and maintain honesty among industry
participants. However, it was not clear whether such actions could
be used punitively or as a way to stifle competition.
Some industry stakeholders, however, see the current model of
selling and marketing title insurance as irretrievably broken and
have put forth two alternative title insurance models designed to
benefit and protect consumers through lower prices and government
intervention. The first alternative model would require lenders to
pay for title insurance, on the theory that as regular purchasers
of title insurance, lenders would be better informed and could
potentially use their market power to obtain lower prices.
However, some fear that this model would make the process less
transparent, and that lenders would not pass on any cost savings.
The second alternative model would be a system like Iowa's, with
state-run title underwriters. But it is not clear that this system
would make the necessary changes to the current model or that it
would save consumers money. For example, although title
underwriters are barred from selling title insurance in Iowa,
nothing prevents consumers from choosing to purchase it from them
out of state, and the underwriters end up providing title
insurance to about half of the market. Furthermore, while premium
rates for Iowa Title Guaranty might be lower, although not the
lowest, than rates in many other states, the total costs that
consumers pay for title searches, examinations, and clearing of
any title problems might not differ substantially. In
Bankrate.com's survey of closing costs, Iowa's total costs were
about the same as those in Maryland, Nebraska, South Dakota,
Washington State, and West Virginia, where private title
underwriters are free to do business.
Conclusions
Title insurance can provide real benefits to consumers and lenders
by protecting them from undiscovered claims against property that
they are buying or selling. However, multiple characteristics of
current title insurance markets, as well as allegedly illegal
activities by a number of those involved in the marketing of title
insurance, suggest that normal competitive forces may not be
working properly, raising questions about the prices consumers are
paying. Compounding this concern is the apparently very limited
role that most consumers play in the selection of a title insurer
or agent, and the fact that consumers must purchase title
insurance to complete a real estate purchase or mortgage
transaction. This puts consumers in a potentially vulnerable
situation where, to a great extent, they have little or no
influence over the price of title insurance but, at the same time,
they have little choice but to purchase that insurance.
Furthermore, federal and state regulators have identified a number
of recent allegedly illegal activities related to the marketing
and sale of title insurance, which suggests that some in the title
insurance industry are taking advantage of consumers'
vulnerability. To begin to better protect consumers, improvements
need to be made in at least three different areas.
First, price competition between title insurers and between
agents, from which consumers would benefit, needs to be
encouraged. Educating consumers about title insurance is critical
to achieving this objective. Some state regulators have begun to
encourage competition by attempting to educate consumers and
improve transparency by publicizing premium rate information on
their Web sites. While HUD's existing home-buyer information
booklet also provides some useful information on buying a home,
the information on title agent ABAs and available title insurance
discounts is outdated and fails to provide sufficient detail. As a
result, home owners may not be making informed title insurance
purchases. Moreover, although some in the industry complain about
ambiguity in the regulations concerning referral fees associated
with ABAs, their use has continued to grow even while the extent
to which any realized benefits from such arrangements are passed
along to consumers is unknown. In addition, these arrangements can
create potential conflicts of interest for the real estate and
lending professionals involved that may disadvantage consumers.
Second, to ensure that consumers are paying reasonable prices for
title insurance, more detailed analysis is needed on the
relationship between the prices consumers pay and the underlying
costs incurred by title insurers and, especially, title agents.
Because of the key role played by title agents, such analysis will
not be possible until state regulators collect and analyze data on
those agents' costs and operations, including those operating as
ABAs.
Third, to ensure that consumers are not taken advantage of because
of their limited role in the selection of a title insurer or
agent, more needs to be done to detect and deter potentially
illegal practices in the marketing and sale of title insurance,
particularly among title agents. HUD and several state regulators
have already begun to take steps in this area, but these efforts
often face challenges, such as HUD's limited enforcement
authority, statutory limitations of RESPA, potentially confusing
regulations, and a lack of coordination among multiple regulators.
Increased regulatory scrutiny of the increasing number of complex
ABAs appears to be particularly important because although only a
few state regulators have looked at such arrangements in detail,
those that have looked at this issue have discovered potentially
illegal activities. Because entities other than insurance
companies are integrally involved in these transactions,
identifying approaches to increase cooperation among HUD, state
insurance, real estate, and other regulators in the oversight of
title insurance sales and marketing practices is also critical.
Ultimately, because of the involvement of both federal and state
regulators, including multiple regulators at the state-level,
effective regulatory improvements will be a challenge and will
require a coordinated effort among all involved.
Congress can also play a role in improving consumers' position in
the title insurance market by reevaluating certain aspects of
RESPA. For example, HUD currently lacks the authority to assess
civil money penalties for violations of section 8 of RESPA,
generally forcing HUD to rely on voluntary settlements, which can
be seen by some in the title insurance industry as simply a cost
of doing business. In addition, RESPA dictates when and under what
circumstances HUD's home-buyer information booklet is to be
distributed to prospective buyers and borrowers. Revisiting RESPA
to ensure that consumers receive this information as soon as
possible when they are considering any type of mortgage
transaction, not just when purchasing real estate, could be
beneficial.
Matters for Congressional Consideration
As part of congressional oversight of HUD's ability to effectively
deter violations of RESPA related to the marketing and sale of
title insurance, Congress should consider exploring whether
modifications are needed to RESPA, including providing HUD with
increased enforcement authority for section 8 RESPA violations,
such as the ability to levy civil money penalties. Congress also
should consider exploring the costs and benefits of other changes
to enhance consumers' ability to make informed decision, such as
earlier delivery of HUD's home-buyer information booklet--perhaps
at a real estate agent's first substantive contact with a
prospective home buyer--and a requirement that the booklet be
distributed with all types of consumer mortgage transactions,
including refinancings.
Recommendations for Executive Action
We are recommending that HUD take the following two actions, as
appropriate. The Secretary of HUD should take action to (1)
protect consumers from illegal title insurance marketing practices
and (2) improve consumers' ability to comparison shop for title
insurance. Among the actions they should consider are the
following:
o expanding the sections of the home-buyer information booklet on
title agent ABAs and available title insurance discounts;
o evaluating the costs and benefits to consumers of title agents'
operating as ABAs;
o clarifying regulations concerning referral fees and ABAs; and
o developing a more formalized coordination plan with state
insurance, real estate, and mortgage banking regulators on RESPA
enforcement efforts.
Likewise, we are recommending that state insurance regulators,
working through NAIC where appropriate, take the following two
actions. State regulators should take action to (1) detect and
deter inappropriate practices in the marketing and sale of title
insurance, particularly among title agents, and (2) increase
consumers' ability to shop for title insurance based on price.
Among the actions they should consider are the following:
o strengthening the regulation of title agents through means such
as establishing meaningful requirements for capitalization,
licensing, and continuing education;
o improving the oversight of title agents, including those
operating as ABAs, through means such as more detailed audits and
the collection of data that would allow in-depth analyses of
agents' costs and revenues;
o increasing the transparency of title insurance prices to
consumers, which could include evaluating the competitive benefits
of using state or industry Web sites to publicize complete title
insurance price information, including amounts charged by title
agents; and
o identifying approaches to increase cooperation among state
insurance, real estate, and other regulators in the oversight of
title insurance sales and marketing practices.
Agency Comments and Our Evaluation
We requested comments on a draft of this report from HUD and NAIC.
We received written comments from the Assistant Secretary for
Housing of HUD and the Executive Vice President of NAIC. Their
letters are summarized below and reprinted in appendixes III and
IV, respectively.
The Assistant Secretary for Housing at HUD generally agreed with
our findings, conclusions, and recommendations. Specifically, he
indicated that the report accurately assessed the issues that
adversely affect consumers in the title insurance market. He also
acknowledged the importance of protecting consumers and improving
their ability to shop for title insurance. In response to our
recommendation to expand the sections of the home-buyer
information booklet on ABAs and discounts, he noted the importance
of home-buyer education and amending the home-buyer's booklet to
include this information. Addressing our recommendation to
evaluate the costs and benefits of ABAs, he said that while ABAs
are currently legal, HUD is in the process of evaluating various
ABA structures to ensure they operate as Congress intended. We
also recommended that HUD clarify regulations about referral fees
and ABAs. The Assistant Secretary stated that HUD will continue
its efforts to clarify existing guidelines, as well as develop new
guidelines, to address practices that negatively impact consumers.
Furthermore, he generally agreed with our recommendation for
greater coordination with state regulators, noting that such
coordination is necessary and pointing out past instances of HUD
coordination with state regulators on RESPA enforcement that have
resulted in successful outcomes. Lastly, he emphasized the ongoing
challenge of RESPA enforcement without civil money penalty
authority, stating that consumers would benefit if such authority
were granted to HUD.
The Executive Vice President of NAIC agreed that our report
identified concerns in the area of consumer protection. She also
said that our recommendations are worthy of exploration, and that
NAIC would continue to work to improve consumer education,
consumer protections, and price transparency in the title
insurance market.
We also received separate technical comments from staff at HUD and
NAIC. We have incorporated their comments into the report, as
appropriate.
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 Chairman, House Committee on Financial Services, and
the Chairman and Ranking Member, Senate Committee on Banking,
Housing, and Urban Development. We will also send copies to the
Secretary of Housing and Urban Development, the President of the
National Association of Insurance Commissioners, and each of the
state insurance commissioners. 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 V.
Sincerely yours,
Orice M. Williams
Director, Financial Markets and Community Investment
Appendix I: Objectives, Scope, and Methodology
We previously provided a report and testimony identifying
characteristics of current title insurance markets that merited
additional study, including the extent to which title insurance
premium rates reflect underlying costs and the extent of state
oversight of title agents and other real estate professionals.^1
This report focuses on issues related to (1) the characteristics
of title insurance markets across states, (2) the factors that
raise questions about prices and competition in the industry, and
(3) the current regulatory environment and planned regulatory
changes.
Because of our awareness that title insurance regulation varies
considerably from state to state, we chose six states in which to
perform a detailed review of their laws, and regulatory and market
practices. These states were California, Colorado, Illinois, Iowa,
New York, and Texas. We chose these states to obtain a broad
variety of state title insurance activity across the following
dimensions:
o Proportion of the premiums written nationwide.
o Differences in the process of purchasing title insurance and the
real estate transaction, including the relative importance of
attorneys and alternative systems for title insurance.
o Domiciling of the largest national insurers and larger regional
insurers.
o Varying rate-setting regimes and total premiums.
o The existence of ongoing or past Department of Housing and Urban
Development (HUD) investigations in the state.
o Different combinations of premium rates, annual home sales, and
rate-setting regimes.
o The activity of known proactive regulators in some states.
Except where noted, our analysis is limited to these states. We
used the information obtained in the states to address each of our
objectives, in addition to other work detailed in the following
text.
^1GAO, Title Insurance: Preliminary Views and Issues for Further Study,
[56]GAO-06-568 (Washington, D.C.: Apr. 24, 2006); and Title Insurance:
Preliminary Views and Issues for Further Study, [57]GAO-06-569T
(Washington, D.C.: Apr. 24, 2006).
To gain an overall understanding of the characteristics of
national and local title insurance markets, we reviewed available
studies. These included the study on the California title
insurance market (as well as numerous criticisms of that study)
and recent studies conducted on behalf of the Fidelity National
Title Group, Inc., and the Real Estate Settlement Providers
Council (RESPRO).^2 We discussed the studies' results with the
authors and raised questions about their methodology and
conclusions to further broaden our knowledge of the varying
approaches in analyzing title insurance markets.
To better understand the effect consumers have on the price and
selection of title insurance, we obtained information from title
insurers, title agents, and state title industry associations
about typical consumer behavior in the title insurance
transaction. To deepen our understanding of the dynamics of the
industry and current practices and issues within the title
insurance industry that affect consumers, we gathered views from a
variety of national organizations whose members are involved in
the marketing or sale of title insurance or related activities.
These organizations included the American Land Title Association
(ALTA), RESPRO, the National Association of Realtors, the Mortgage
Bankers Association of America, the American Bar Association, the
National Association of Home Builders, and the National
Association of Mortgage Brokers.
To better understand the relationship between premium rates and
underlying costs, we discussed these issues with insurers, agents,
and title industry associations. We attempted to obtain cost data
from agents and insurers, but they were not able to provide us
with data that would allow analysis of agent costs. In some
states, we toured title plant facilities and observed the title
search and examination process to broaden our analysis of
underlying title insurance costs. To gain a better understanding
of how title insurance premiums are shared between insurance
companies and agents, we reviewed annual financial data collected
by the National Association of Insurance Commissioners (NAIC) from
title insurance companies and, to some extent, data collected by
the Texas Department of Insurance, the California Department of
Insurance, and ALTA.^3 We analyzed these data to deepen our
understanding of title insurer and agent costs and revenues. We
also consulted other publicly available financial information on
title insurers and agents and spoke with agents. To determine how
insurers account for premiums, we also looked at financial data
filed with the Securities and Exchange Commission and spoke with
officials from three of the largest title insurance underwriters.
^2Birny Birnbaum, Report to the California Insurance Commissioner: An
Analysis of Competition in the California Title Insurance and Escrow
Industry (Austin, TX: December 2005); Donald Martin, PhD, and Richard
Ludwick, Jr., PhD, Affiliated Business Arrangements and Their Effects on
Residential Real Estate Settlement Costs: An Economic Analysis
(Washington, D.C.: October 2006); and Gregory Vistnes, An Economic
Analysis of Competition in the Title Insurance Industry (Washington, D.C.:
March 2006).
To assess the current state and federal regulatory environment, we
reviewed laws and regulations, and interviewed key regulators. To
determine the role that states play in overseeing the various
parties involved in the title insurance industry, we reviewed laws
and regulations governing title insurance, real estate, and
mortgage banking in six selected states. We also spoke with
insurance, banking, mortgage, and real estate regulators in each
state. To obtain an understanding of the federal oversight role in
the title insurance market, we interviewed officials from HUD and
reviewed relevant laws and regulations. We also discussed these
issues with officials at the Federal National Mortgage Association
and the Federal Home Loan and Mortgage Corporation to better
understand the relationship between the secondary mortgage market
and title insurance. Furthermore, we interviewed staff and state
regulators working with NAIC to get their views on the industry
and to obtain information on the activities of their Title
Insurance Working Group.
We performed our work in Washington, D.C.; Chicago, Illinois; and
selected sample states between February 2006 and March 2007 in
accordance with generally accepted government auditing standards.
^3NAIC is a voluntary organization of the chief insurance regulatory
officials of the 50 states, the District of Columbia, and the four U.S.
territories. NAIC assists state insurance regulators by providing
guidance, model (or recommended) laws and guidelines, and
information-sharing tools. ALTA is a national trade association for title
insurers and agents, but its members also may include attorneys, builders,
developers, lenders, and real estate brokers.
Appendix II: Potential Approach to Better Understand Title Agents'
Costs and How These Costs Relate to Insurance Premiums
Understanding title agents' costs and how these costs relate to
title insurance premiums that consumers pay is important because
title agents do or coordinate most of the work necessary for
issuing title insurance policies, and they retain most of the
premium. Understanding these costs would require state insurance
regulators to gather and analyze financial data on title agents.
The list below illustrates the types of data that might be
gathered and analyzed. This would be a multistep process and could
involve detailed analysis of some title agents, such as those that
look quite different financially from group (such as county or
statewide) averages. Reasonable explanation for such differences
could be informative of agency costs, while the absence of
reasonable explanation could raise questions about the legitimacy
of such costs.
We identified the following information on affiliated agents and
direct operations that could be requested from insurers:
1. A complete list of underwriters' affiliated title
agents and title service companies that would include
the company name and address and the year acquired or
established by the underwriter.
2. Financial data on each affiliate that would
include balance sheets and statements of changes in
owners' equity.
3. Revenue data that would include title premium
revenues and production fees earned from others
(e.g., search and examination, closing, and
recording).
4. Title premium revenues and policies written that
would be broken out between residential and
commercial.
5. Personnel cost data that would include salaries,
commissions, bonuses, benefits, and full-time
equivalent employees, by function.
6. Other personnel data that would include average
salaries, bonuses and benefits, and brief
descriptions of any incentive pay systems, by job
type and function.
7. Five years of other expense data that would
include search and examination fees paid to
contractors, advertising, entertainment, plant
maintenance, rent, office supplies, and legal fees
and settlements.
8. Expenses allocated to and from the underwriter.
9. For each affiliated title service company, the
names of the 10 largest clients.
10. For each subsidiary of the underwriter, the names
of any other underwriters, escrow companies,
realtors, builders, developers, mortgage brokers,
lenders, or other entities in the title, real estate,
or mortgage industry
o that have ownership interests in the
subsidiary,
o in which the subsidiary has an
ownership interest, or
o that are vendors of the subsidiary and
owned by subsidiary management.
Likewise, we identified the following information on independent
title agents that could be requested from insurers:
1. The number of independent agents, by state.
2. The number of offices of each independent agent,
by state.
3. Each agent's title premiums written for the
underwriter as a percentage of the agent's total
title premiums written.
4. Premiums written by each agent for this
underwriter, by state.
5. Revenue data that would include title premium
revenues and production fees earned from others
(e.g., search and examination, closing, and
recording).
6. Expense data that would include employee and owner
salaries, commissions, bonuses, and benefits;
director fees; search and examination fees paid to
contractors; advertising; entertainment; plant
maintenance; rent; office supplies; legal fees and
settlements; and claim losses.
Appendix III: Comments from the Department of Housing and Urban
Development
Appendix IV: Comments from the National Association of Insurance
Commissioners
Appendix V: GAO Contact and Staff Acknowledgments
GAO Contact
Orice Williams, (202) 512-8678, [email protected]
Staff Acknowledgments
In addition to the contact person named above, Lawrence Cluff,
Assistant Director; Patrick Ward; Tania Calhoun; Emily Chalmers;
Jay Cherlow; Nina Horowitz; Thomas McCool; Marc Molino; Donald
Porteous; Carl Ramirez; and Melvin Thomas made key contributions
to this report.
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References
Visible links
39. http://www.gao.gov/cgi-bin/getrpt?GAO-06-568
40. http://www.gao.gov/cgi-bin/getrpt?GAO-06-569T
41. http://www.gao.gov/cgi-bin/getrpt?GAO-03-433
44. http://www.gao.gov/cgi-bin/getrpt?GAO-03-433
45. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-00-198
46. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-00-198
56. http://www.gao.gov/cgi-bin/getrpt?GAO-06-568
57. http://www.gao.gov/cgi-bin/getrpt?GAO-06-569T
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