Background

Title insurance is designed to guarantee clear ownership of a property that  is being sold. The policy is designed to compensate either the lender  (through a lender’s policy) or the buyer (through an owner’s policy) up to  the amount of the loan or the purchase price, respectively. Title insurance  is sold primarily through title agents who check the history of a title by  examining public records. The title policy insures the policyholder against  any claims that existed at the time of purchase but were not in the public  record.
Title insurance premiums are paid only once during a purchase,  refinancing, or, in some cases, home equity loan transaction. The title  agent receives a portion of the premium as a fee for the title search and  examination work and its commission. The party responsible for paying  for the title policies varies by state. In many areas, the seller pays for the  owner’s policy and the buyer pays for the lender’s policy, but the buyer  may also pay for both policies—or split some, or all, of the costs with the  seller. According to a recent nationwide survey, the average cost for  simultaneously issuing lender’s and owner’s policies on a $180,000 loan  (plus other associated title costs) was approximately $925, or about 34  percent of the average total loan origination and closing fees.

	Certain Aspects of the Title Insurance Market Merit Further Study

We identified several important items for further study, including the way  policy premiums are determined, the role played by title agents, the way  that title insurance is marketed, the growth of affiliated business  arrangements, and the involvement of and coordination among the  regulators of the multiple types of entities involved in the marketing and  sale of title insurance.

		The Extent to Which Premium Rates Reflect Underlying Costs Is Not Always Clear

For several reasons, the extent to which title insurance premium rates  reflect insurers’ underlying costs is not always clear. First, the largest cost  for title insurers is not losses from claims—as it is for most types of  insurers—but expenses related to title searches and agent commissions  (see fig. 1). However, most state regulators do not consider title search  expenses to be part of the premium, and do not include them in regulatory  reviews that seek to determine whether premium rates accurately reflect  insurers’ costs. Second, many insurers provide discounted premiums on  refinance transactions because the title search covers a relatively short  period, but the extent of such discounts and their use is unclear. Third, the  extent to which premium rates increase as loan amounts or purchase  prices increase is also unclear. Costs for title search and examination  work do not appear to rise as loan or purchase amounts increase, and  such costs are insurers’ largest expense. If premium rates reflected the  underlying costs, total premiums could reasonably be expected to increase  at a relatively slow rate as loan or purchase amounts increased, however,  it is not clear that they do so.

		The Extent of Regulatory Focus on Title Agents Merits Further Review

Title agents play a more significant role in the title insurance industry than  agents do in most other types of insurance, performing most underwriting  tasks as well as the title search and examination work. However, the  amount of attention they receive from state regulators is not clear. For  example, according to data compiled by the American Land Title  Association (ALTA), while most states require title agents to be licensed, 3  states plus the District of Columbia do not; 18 states and the District of  Columbia do not require agents to pass a licensing exam. Although NAIC  has produced model legislation that states can use in their regulatory  efforts, according to NAIC, as of October 2005 only three states had passed  the model law or similar legislation.

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

For several reasons, the competitiveness of the title insurance market has  been questioned. First, while consumers pay for title insurance, they  generally do not know how to “shop around” for the best deal and may not  even know that they can. Instead, they often rely on the advice of a real  estate or mortgage professional in choosing a title insurer. As a result, title  insurers and agents normally market their products exclusively to these  types of professionals, who in some cases may recommend not the least  expensive or most reputable title insurer or agent but the one that  represents the professional’s best interests. Second, the title industry is  highly concentrated. ATLA data show that in 2004 the five largest title  insurers and their subsidiary companies accounted for over 90 percent of  the total premiums written. Finally, the low level of losses title insurers  generally suffer—and large increases in operating revenue in recent  years—could create the impression of excessive profits, one potential sign  of a lack of competition.

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

The use of affiliated business arrangements involving title agents and  others, such as lenders, real estate brokers, or builders has grown over the  past several years. Within the title insurance industry, the term “affiliated  business arrangements” generally refers to some level of joint ownership  among a title insurer, title agent, real estate broker, mortgage broker,  lender, and builder (see fig. 2). For example, a mortgage lender and a title  agent might form a new jointly owned title agency, or a lender might buy a  portion of an existing title agency. Such arrangements, which may provide  consumers with “one-stop shopping” and lower costs, can also can also be  abused, presenting conflicts of interest when they are used as conduits for  giving referral fees back to the referring entity or when the profits from  the title agency are significant to the referring entity.

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

Several types of entities besides insurers and their agents are involved in  the sale of title insurance, and the degree of involvement of and the extent  of coordination among the regulators of these entities appears to vary.  These entities include real estate brokers and agents, mortgage brokers,  lenders, and builders, all of which may refer clients to particular agencies  and insurers. These entities are generally overseen by a variety of state  regulators, including insurance departments, real estate commissions, and  state banking regulators, that interact to varying degrees. For example,  one state insurance regulator with whom we spoke told us that the agency  coordinated to some extent with the state real estate commission and at  the federal level with HUD, but only informally. Another regulator said  that it had tried to coordinate its efforts with other regulators in the state,  but that the other regulators had generally not been interested. HUD,  which is responsible for implementing RESPA, has conducted some  investigations in conjunction with insurance regulators in some states.  Some of these investigations of the marketing of title insurance by title  insurers and agents, real estate brokers, and builders have turned up  allegedly illegal activities.

	Recent State and Federal Investigations Have Identified Areas of Potential Interest

Federal and state investigations have identified two primary types of  potentially illegal activities in the sale of title insurance, but the extent to  which such activities occur in the title insurance industry is unknown. The  first involves allegations of kickbacks–that is, fees that title agents or  insurers may give to home builders, real estate agents and brokers, or  lenders in return for referrals. Kickbacks are generally illegal. In several  states, state insurance regulators identified captive reinsurance  arrangements that title insurers and agents were allegedly using to  inappropriately compensate others, such as builders or lenders, for  referrals. State and federal investigators have also alleged the existence of  inappropriate or fraudulent affiliated business arrangements. These  involve a “shell” title agency that generally has no physical location,  employees, or assets, and does not actually perform title and settlement  business. Investigators alleged that the primary purpose of these shell  companies was to provide kickbacks for business referrals. Investigators  have also looked at the various types of alleged kickbacks that title agents  have provided, including gifts, entertainment, business support services,  training, and printing costs.
Second, investigators have uncovered instances of alleged  misappropriation or mishandling of customers’ premiums by title agents.  For example, one licensed title insurance agent who was the owner (or  partial owner) of more than 10 title agencies allegedly failed to remit  approximately $500,000 in premiums to the title insurer. As a result, the  insurer allegedly did not issue 6,400 title policies to consumers who had  paid for them.
In response to the investigations, insurers and industry associations say  they have begun to address some concerns raised by affiliated businesses,  but that clearer regulations and stronger enforcement are needed. One  title insurance industry association told us that recent federal and state  enforcement actions had motivated title insurers to address potential  kickbacks and rebates through, for example, increased oversight of title  agents. In addition, the insurers and associations said that competition  from companies that break the rules hurt companies that were operating  legally and that these businesses welcome greater enforcement efforts.  Several associations also told us that clearer regulations regarding referral  fees and affiliated business arrangements would aid the industry’s  compliance efforts. Specifically, we were told that regulations need to be  more transparent about the types of discounts and fees that are prohibited  and the types that are allowed.

	Proposed Regulatory Changes Raise a Number of Issues

Over the past several years, regulators and others have suggested changes  to regulations that would affect the way title insurance is sold, and further  study of the issues raised by these potential changes could be beneficial.  In 2002, in order to simplify and improve the process of obtaining a home  mortgage and to reduce settlement costs for consumers, HUD proposed  revisions to the regulations that implement RESPA. But HUD later  withdrew the proposal in response to considerable comments from the  title industry, consumers, and other federal agencies. In June 2005, HUD  announced that it was again considering revisions to the regulations. In  addition, NAIC officials told us that the organization was considering  changes to the model title insurance and agent laws to address current  issues such as the growth of affiliated business arrangements and to more  closely mirror RESPA’s provisions on referral fees and sanctions for  violators. Finally, some consumer advocates have suggested that requiring  lenders to pay for the title policies from which they benefit might increase  competition and ultimately lower costs for consumers, because lenders  could then use their market power to force title insurers to compete for  business based on price.
The issues identified today raise a number of questions that we plan to  address as part of our ongoing work. We look forward to the continued  cooperation of the title industry, state regulators, and HUD as we continue  this work.
Mr. Chairman, this completes my prepared statement. I would be pleased  to answer any questions that you or Members of the Subcommittee may  have.

	Contact and Acknowledgments

For further information about this testimony, please contact Orice  Williams on (202) 512-8678 or williamso@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this statement. Individuals making key contributors to this  testimony include Larry Cluff (Assistant Director), Tania Calhoun, Emily  Chalmers, Nina Horowitz, Marc Molino, Donald Porteous, Melvin Thomas,  and Patrick Ward.
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.

Summary:
Why GAO Did This Study

Title insurance is a required element of almost all real estate purchases and is not an insignificant cost for consumers. However, consumers generally do not have the knowledge needed to "shop around" for title insurance and usually rely on professionals involved in real estate--such as lenders, real estate agents, and attorneys--for advice in selecting a title insurer. Recent state and federal investigations into title insurance sales have identified practices that may have benefited these professionals and title insurance providers at the expense of consumers. At the request of the House Financial Services Committee, GAO currently has work under way studying the title insurance industry, including pricing, competition, the size of the market, the roles of the various participants in the market, and how the industry is regulated. This testimony discusses the preliminary results of GAO's work to date and identifies issues for further study. In so doing, this testimony focuses on: (1) the reasonableness of cost structures and agent practices common to the title insurance market that are not typical of other insurance markets; (2) the implications of activities identified in recent state and federal investigations that may have benefited real estate professionals rather than consumers; and (3) the potential need for regulatory changes that would affect the way that title insurance is sold.

What GAO Found

Some cost structures and agent practices that are common to the title insurance market are not typical of other lines of insurance and merit further study. First, the extent to which premium rates reflect underlying costs is not always clear. For example, most states do not consider title search and examination costs--insurers' largest expense--to be part of the premium, and do not review these costs. Second, while title agents play a key role in the underwriting process, the extent to which state insurance regulators review agents is not clear. Few states collect information on agents, and three states do not license them. Third, the extent to which a competitive environment exists within the title insurance market that benefits consumers is also not clear. Consumers generally lack the knowledge necessary to "shop around" for a title insurer and therefore often rely on the advice of real estate and mortgage professionals. As a result, title agents normally market their business to these professionals, creating a form of competition from which the benefit to consumers is not always clear. Fourth, real estate brokers and lenders are increasingly becoming full or part owners of title agencies, which may benefit consumers by allowing one-stop shopping, but may also create conflicts of interest. Finally, multiple regulators oversee the different entities involved in the title insurance industry, but the extent of involvement and coordination among these entities is not clear. Recent state and federal investigations have identified potentially illegal activities--mainly involving alleged kickbacks--that also merit further study. The investigations alleged instances of real estate agents, mortgage brokers, and lenders receiving referral fees or other inducements in return for steering business to title insurers or agents, activities that may have violated federal or state anti-kickback laws. Participants allegedly used several methods to convey the inducements, including captive reinsurance agreements, fraudulent business arrangements, and discounted business services. For example, investigators identified several "shell" title agencies created by a title agent and a real estate or mortgage broker that had no physical location or employees and did not perform any title business, allegedly serving only to obscure referral payments. Insurers and industry associations with whom we spoke said that they had begun to address such alleged activities but also said that current regulations needed clarification. In the past several years, regulators, industry groups, and others have suggested changes to the way title insurance is sold, and further study of these suggestions could be beneficial. For example, the Department of Housing and Urban Development announced in June 2005 that it was considering revisions to the regulations implementing the Real Estate Settlement Procedures Act. In addition, the National Association of Insurance Commissioners is considering changes to model laws for title insurers and title agents. Finally, at least one consumer advocate has suggested that requiring lenders to pay for the title policies from which they benefit might increase competition and ultimately lower consumers' costs.