Title Insurance: Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers
Published: 2007-04-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: The U.S. title insurance market is highly concentrated at the insurer level, but market characteristics varied across states. In 2005, for example, five insurers accounted for 92 percent of the national market, with most states dominated by two or three large insurers. Variations across states included the way title agents conducted their searches as well as the number of affiliated business arrangements (ABA) in which real estate agents, brokers, and others have a stake in a title agency. Finally, premiums varied across states due to cost and market variations that can also make understanding and overseeing title insurance markets a challenge on the national level. Certain factors raise questions about the extent of competition and the reasonableness of prices that consumers pay for title insurance. Consumers find it difficult to comparison shop for title insurance because it is an unfamiliar and small part of a larger transaction that most consumers do not want to disrupt or delay for comparatively small potential savings. In addition, because consumers generally do not pick their title agent or insurer, title agents do not market to them but to the real estate and mortgage professionals who generally make the decision. This can create conflicts of interest if those making the referrals have a financial interest in the agent. These and other factors put consumers in a potentially vulnerable situation where, to a great extent, they have little or no influence over the price of title insurance but have little choice but to purchase it. Furthermore, recent investigations by the Department of Housing and Urban Development (HUD) and state insurance regulators have identified instances of alleged illegal activities within the title industry that appeared to take advantage of consumers' vulnerability by compensating realtors, builders, and others for consumer referrals. Combined, these factors raise questions about whether consumers are overpaying for title insurance. Given consumers' weak position in the title insurance market, regulatory efforts to ensure reasonable prices and deter illegal marketing activities are critical. However, state regulators have not collected the type of data, primarily on title agents' costs and operations, needed to analyze premium prices and underlying costs. In addition, the efforts of HUD and state insurance regulators to identify inappropriate marketing and sales activities under the Real Estate Settlement Procedures Act (RESPA), have faced obstacles, including constrained resources, HUD's lack of statutory civil money penalty authority, some state regulators' minimal oversight of title agents, and the increasing number of complicated ABAs. Finally, given the variety of professionals involved in a real estate transaction, a lack of coordination among different regulators within states, and between HUD and the states, could potentially hinder enforcement efforts against compensation for consumer referrals. 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.

section_title: Letter
paragraphs: 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. 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.
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. 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. 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). 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.
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.
subsections: section_title: Background
paragraphs: 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. 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.
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.
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. 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.
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.
section_title: Title Insurance Market Is Highly Concentrated at the Insurer Level, but Otherwise Differs across States
paragraphs: Title insurance markets can be described by various characteristics, such  as the following:    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.
The use of ABAs—in which a real estate professional, such as a real estate  agent, owned a share of a title agency—varied.
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.
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.
subsections: section_title: Mix of Affiliated and Independent Agents Differs by State
paragraphs: 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. 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.
section_title: Use of Affiliated Business Arrangements Appears to Be Increasing
paragraphs: 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.
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.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.
section_title: Agents Conduct the Title Search and Examination Process Differently across States
paragraphs: 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.
Agents in some states use primarily automated processes, either owning or  purchasing access to a title plant. 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.
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.
section_title: Title Agents’ Responsibilities Also Differ across States
paragraphs: 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. 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.
section_title: Premiums Are Difficult to Compare across Markets, but Appear to Vary Significantly
paragraphs: 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.
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.  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. 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.
section_title: Multiple Factors Raise Questions about the Extent of Competition and the Reasonableness of Prices in the Title Insurance Industry
paragraphs: 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:    consumers find it difficult to shop for title insurance, therefore, they put  little pressure on insurers and agents to compete based on price; 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;   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;   as property values or loan amounts increase, prices paid for title insurance  by consumers appear to increase faster than insurers’ and agents’ costs;  and 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.
subsections: section_title: Lack of Consumer Knowledge about Title Insurance Results in Little Pressure on Insurers to Compete on Price
paragraphs: 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. 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. 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.
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.
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.
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.
section_title: Title Agents Market Not to Consumers, but to Those in a Position to Make Referrals, Creating Potential Conflicts of Interest
paragraphs: 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.
section_title: Alleged Illegal Activities Appear to Reduce Competition and Could Indicate Excessive Prices Paid by Consumers
paragraphs: Example of Alleedly Illeal Referral  Fee Decribed in Invetiation by HUD  and State Inurance Reulator  A title gent provided trip, entertinment,  nd ctering for entitie involved in rel  ete trsaction.
A title gent contributed to  pool of fnd  tht was given y in  drwing mong rel  ete gent.
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. 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.
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. 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.
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. 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. 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.
subsections: section_title: Allegedly Illegal Captive Reinsurance Arrangements Could Indicate Consumers Were Paying Excessive Prices for Title Insurance
paragraphs: In one mltite ettlement tht involved 26  te insunce regtor, regtor lleged  tht title insurer nd home builder creted  cptive reinsunce rrngement.  Under  therrngement, the insurer dedcted   processing fee of $350 from the premim,  then pid 50 percent of the reminder to   reinsurer for assuming 50 percent of the  policy rik.  The reinsurer, in trn, provided  referr to the title insurer.  For exmple, in  Colordo, rty to the ettlement, the  premim chrged y one of the compnie  involved for n owner’s nd lender’s policy on   $250,000 lond prchase price was  $1,614.  In 2005, the comined losstio for  ll insurer in Colordo was pproximtely 4.5  percent.  Under the rrngement decried y  regtor, on  hypotheticl $250,000  trsaction, the reinsurer wold collect  pproximtely $632 for assuming expected  loss of abt $36 (4.5 percent of the $1,614  premim), for  net profit of abt $596. In  other word, abt 37 percent of the $1,614  pid y the consumer wold llegedly go to  the reinsurer as compensation for it builder,  lender, or rel ete roker-owner llegedly  referring business to the insurer.
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. 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.
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.
section_title: A Number of Investigations Found ABAs Allegedly Being Used to Pay Referral Fees, Raising Questions about the Cost and Benefits of ABAs to Consumers
paragraphs: 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. 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.
section_title: As Coverage Amounts Increase, Premiums Paid by Consumers Appear to Increase Faster Than Insurer and Agent Costs
paragraphs: 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.
subsections: section_title: Industry Officials Said That the Current Price Structure Subsidizes Consumers in Lower-Value Transactions, but They Could Not Provide Supporting Data
paragraphs: 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.
section_title: Industry Officials Said That Recent Higher Profitability Compensated for Years of Lower Profitability, but Industry Return on Equity Has Been Relatively Stable
paragraphs: 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.
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. 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.
section_title: In States Where Agents Charge Separately for Search and Examination Services, It Is Unclear Whether Those Charges Are Fully Supported by Underlying Costs
paragraphs: 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. 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.
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.
section_title: Disagreement Exists among Industry and Regulatory Officials over the Extent of Price Competition and the Appropriateness of Title Insurance Prices
paragraphs: 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.
section_title: Limited State and Federal Oversight of the Title Insurance Industry Has Resulted in Proposals for Change
paragraphs: 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. 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.
subsections: section_title: Regulators Do Not Fully Assess Title Agents’ Costs during Rate Reviews
paragraphs: 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.
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.
section_title: States Conduct Only Limited Regulation and Oversight of Title Agents
paragraphs: 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. 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. Table 2 summarizes some aspects of  title agent regulation in our sample states.
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. 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.
section_title: States’ Enforcement of Antikickback and Referral Fee Provisions Was Uneven
paragraphs: 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. 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.
section_title: Limited Resources and Lack of Coordination among Regulators within States May Limit the Effectiveness of Enforcement Efforts
paragraphs: 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. 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. 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. 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.
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.
section_title: HUD Officials Expressed Concern over Lack of Enforcement Authority for Violations of Section 8 of RESPA
paragraphs: 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.
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.
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. 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.
section_title: HUD, State Regulators, and Industry Stakeholders Have Developed Proposals for Improving the Regulation and Sale of Title Insurance
paragraphs: 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.
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:  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.
In California, state regulators have concluded that premium rates are  excessive and have proposed premium rate rollbacks derived from a  detailed evaluation of costs.
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.
section_title: Conclusions
paragraphs: 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.
section_title: Matters for Congressional Consideration
paragraphs: 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.
section_title: Recommendations for Executive Action
paragraphs: 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:   expanding the sections of the home-buyer information booklet on title  agent ABAs and available title insurance discounts;   evaluating the costs and benefits to consumers of title agents’ operating as    clarifying regulations concerning referral fees and ABAs; and    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:    strengthening the regulation of title agents through means such as  establishing meaningful requirements for capitalization, licensing, and  continuing education; 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; 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  identifying approaches to increase cooperation among state insurance,  real estate, and other regulators in the oversight of title insurance sales  and marketing practices.
section_title: Agency Comments and Our Evaluation
paragraphs: 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 williamso@gao.gov 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.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: 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. 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:    Proportion of the premiums written nationwide.
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.
Domiciling of the largest national insurers and larger regional insurers.
Varying rate-setting regimes and total premiums.
The existence of ongoing or past Department of Housing and Urban  Development (HUD) investigations in the state.
Different combinations of premium rates, annual home sales, and rate- setting regimes.
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.
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). 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. 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.
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.
section_title: Appendix II: Potential Approach to Better Understand Title Agents’ Costs and How These Costs Relate to Insurance Premiums
paragraphs: 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  that have ownership interests in the subsidiary,  in which the subsidiary has an ownership interest, or 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.
section_title: Appendix III: Comments from the Department of Housing and Urban Development
section_title: Appendix IV: Comments from the National Association of Insurance Commissioners
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: 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.