Title Insurance: Preliminary Views and Issues for Further Study
Published: 2006-04-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Title insurance is a required element of almost all real estate purchases and is not an insignificant cost for consumers. However, consumers generally do not have the knowledge needed to "shop around" for title insurance and usually rely on professionals involved in real estate--such as lenders, real estate agents, and attorneys--for advice in selecting a title insurer. Recent state and federal investigations into title insurance sales have identified practices that may have benefited these professionals and title insurance providers at the expense of consumers. At your request, GAO currently has work under way studying the title insurance industry, including pricing, competition, the size of the market, the roles of the various participants in the market, and how they are regulated. You asked GAO to identify and report on preliminary issues for further study. In so doing, this report focuses on: (1) the reasonableness of cost structures and agent practices common to the title insurance market that are not typical of other insurance markets; (2) the implications of activities identified in recent state and federal investigations that may have benefited real estate professionals rather than consumers; and (3) the potential need for regulatory changes that would affect the way that title insurance is sold.
section_title: What GAO Found
paragraphs: Some cost structures and agent practices that are common to the title insurance market are not typical of other lines of insurance and merit further study. First, the extent to which premium rates reflect underlying costs is not always clear. For example, most states do not consider title search and examination costs--insurers' largest expense--to be part of the premium, and do not review them. Second, while title agents play a key role in the underwriting process, the extent to which state insurance regulators review them is not clear. Few states regularly collect information on agents, and three states do not license them. Third, the extent to which a competitive environment exists within the title insurance market that benefits consumers is also not clear. Consumers generally lack the knowledge necessary to "shop around" for a title insurer and therefore often rely on the advice of real estate and mortgage professionals. As a result, title agents normally market their business to these professionals, creating a form of competition from which the benefit to consumers is not always clear. Fourth, real estate brokers and lenders are increasingly becoming full or part owners of title agencies, which may benefit consumers by allowing one-stop shopping, but may also create conflicts of interest. Finally, multiple regulators oversee the different entities involved in the title insurance industry, but the extent of involvement and coordination among these entities is not clear. Recent state and federal investigations have identified potentially illegal activities--mainly involving alleged kickbacks--that also merit further study. The investigations alleged instances of real estate agents, mortgage brokers, and lenders receiving referral fees or other inducements in return for steering business to title insurers or agents, activities that may have violated federal or state anti-kickback laws. Participants allegedly used several methods to convey the inducements, including captive reinsurance agreements, fraudulent business arrangements, and discounted business services. For example, investigators identified several "shell" title agencies created by a title agent and a real estate or mortgage broker that had no physical location or employees and did not perform any title business, allegedly serving only to obscure referral payments. Insurers and industry associations with whom we spoke said that they had begun to address such alleged activities but also said that current regulations needed clarification. In the past several years, regulators, industry groups, and others have suggested changes to the way title insurance is sold, and further study of these suggestions could be beneficial. For example, the Department of Housing and Urban Development announced in June 2005 that it was considering revisions to the regulations implementing the Real Estate Settlement Procedures Act. In addition, the National Association of Insurance Commissioners is considering changes to model laws for title insurers and title agents. Finally, at least one consumer advocate has suggested that requiring lenders to pay for the title policies from which they benefit might increase competition and ultimately lower consumers' costs.

section_title: Letter
paragraphs: Title insurance guarantees clear ownership of a property that is being sold  and protects both buyers and lenders. Typically it is required in real estate  purchases and is not an insignificant cost for consumers, who may pay not  only for their own policies but also for the lenders’. However, consumers  are generally not knowledgeable of the costs and benefits of particular  title insurance services and usually rely on professionals involved in real  estate, such as lenders, real estate agents, or attorneys, for advice in  selecting a title insurer. Recent state and federal investigations into title  insurance sales have identified practices that may have benefited these  professionals and title insurance providers at the expense of consumers.  Similarly, a recent study on the competitiveness of the California title  insurance market concluded that the market was not competitive and that  consumers were being overcharged, provoking a strong and critical  response from various market participants.
In response to these concerns we have work under way, at your request,  on the title insurance market, including pricing, competition, the size of  the market, and the roles of the various participants in the market and  how they are regulated. You requested that we report on the preliminary  results of our work to date and identify issues for further study. This  report focuses on issues related to: (1) the reasonableness of cost  structures and agent practices common to the title insurance market that  are not typical of other insurance markets; (2) the implications of activities  identified in recent state and federal investigations that may have  benefited real estate or other professionals rather than consumers; and (3)  proposed regulatory changes that would affect the way in which title  insurance is sold.
For this work, we reviewed available studies of the title insurance  industry. These included the aforementioned study on the California title  insurance market (as well as numerous criticisms of that study) and a  recent study conducted on behalf of Fidelity National Title Group. To  determine what role states play in overseeing the various parties involved  in the title insurance industry, we reviewed title insurance regulations in  selected states and other publicly available financial information on title  insurers and agents. To gain a better understanding of how title insurance  premiums are shared between insurance companies and agents, we  reviewed data collected by the National Association of Insurance  Commissioners (NAIC) and the American Land Title Association (ALTA).  To determine how insurers account for premiums, we also looked at  financial data filed with the Securities and Exchange Commission. Finally,  to gain a better understanding of the dynamics of the industry and current  practices and issues within the title insurance industry, we interviewed  officials from a variety of national organizations whose members are  involved in the marketing or sale of title insurance, or related activities;  NAIC; the Department of Housing and Urban Development (HUD); several  state regulators, including insurance departments and, in one state, the  real estate commissioner; title insurers; title agents; and industry  consultants. We performed our work primarily in Chicago, Illinois, and  Washington, D.C., between February and April 2006. We performed our  work in accordance with generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: In any real estate transaction, the buyer and lender providing the mortgage  need a guarantee that the buyer will have clear ownership of the property.  Title insurance is designed to provide that guarantee by agreeing to  compensate the lender (through a lender’s policy) or the buyer (through  an owner’s policy) up to the amount of the loan or the purchase price,  respectively. Lenders’ policies are in force for as long as the original loan  is still outstanding, but end when the loan is paid off—for instance,  through a refinancing transaction—while owners’ policies remain in effect  as long as the purchaser of the policy owns the property.
Title insurance is sold primarily through title agents. Before issuing a  policy, a title agent checks the history of a title by examining public  records such as deeds, mortgages, wills, divorce decrees, court judgments,  and tax records. If the title search discovers a problem—such as a tax lien  that has not been paid—the agent either arranges to resolve the problem,  decides to provide coverage despite the problem, or excludes it from  coverage. The title policy insures the policyholder against any claims that  might have existed at the time of the purchase but were not identified in  the public record. The title policy does not require that title problems be  fixed but compensates policyholders if a covered problem arises. Except  in very limited instances, title insurance does not insure against title  defects that arise after the date of sale.
Title searches are generally carried out locally by title agents because the  public records to be searched are usually only available locally. In  addition, the variety of sources that agents must check has fostered the  development of privately owned, indexed databases called “title plants.”  These plants contain copies of the documents obtained through searches  of public records, indexed by property address, and must be regularly  updated. Title plants may be owned by insurers, title agents, or a  combination of entities. In some cases, the owner of a title plant sells  access to other insurers and agents, charging them to use the service.
Title insurance premiums are paid only once, at the time of sale or  refinancing, to the title agent. Agents retain or are paid a portion of the  premium amount as a fee for conducting the title search and related work,  and for their commission. Agents have a fiduciary duty to account for  premiums paid to them, and insurers generally have the right to audit the  agents’ relevant financial records. The party responsible for paying for the  title policies varies by state and can even vary by areas within states. In  many areas, the seller pays for the owner’s policy and the buyer for the  lender’s policy, but the buyer may also pay for both policies or split some  (or all) of the costs with the seller. In most cases, the policies are issued  simultaneously by the same insurer, so that the same title search can be  used for both policies. In a recent nationwide survey, the average cost for  simultaneously issuing lender’s and owner’s policies on a $180,000 loan,  plus other associated title costs, was approximately $925—or  approximately 34 percent of the average total loan origination and closing  fees.
In almost all states, title insurance is regulated by state insurance  departments; in all states, insurers selling title insurance in that state are  subject to the state’s regulations for their operations within that state.  State regulators are responsible for enforcing these regulations, primarily  through the licensing of agents, the approval of insurance rates and  products, and the examination of insurers’ financial solvency and conduct.  State regulators typically conduct financial solvency examinations every 3  to 5 years, while examinations reviewing insurers’ conduct are generally  done in response to specific complaints by consumers or concerns on the  part of the regulator.
Insurance regulations can vary across states, creating differences in the  way insurers are regulated. For example, most states require insurers to  submit proposed premium rates to the state regulator, and then perform  some level of review of those rates. In several states, however, the state  regulator sets the premium rate which all insurers must charge, and in at  least one state the regulator does not review rates at all. In addition, while  most states license title insurance agents, several do not. At the federal  level, HUD is responsible for enforcing RESPA, which regulates real estate  settlement practices. Among other things, RESPA requires that borrowers  receive certain information regarding closing costs, including title  insurance fees. RESPA also generally prohibits giving or accepting any  thing of value for the referral of settlement services, such as the referral of  business to a particular title agent. RESPA also allows state insurance  commissioners to take enforcement actions, under RESPA, against these  prohibited activities.
section_title: Certain Aspects of the Title Insurance Market Merit Further Study
paragraphs: Some aspects of the title insurance market that set it apart from other  lines of insurance merit further study, including:  the importance of title search costs, rather than losses, in setting  premium rates; the fact that title insurance agents play a more important role than  agents for other lines of insurance; the fact that title insurance is generally marketed not to consumers but  to professionals such as real estate agents or mortgage brokers; the proliferation of affiliated business arrangements between title  agents and these professionals; and the involvement and coordination among the regulators of multiple  types of entities involved in the marketing and sale of title insurance.
subsections: section_title: Extent to Which Premium Rates Reflect Underlying Costs Not Always Clear
paragraphs: The extent to which title insurance premium rates reflect insurers’  underlying costs is not always clear. Insurance rate regulation, among  other things, aims to protect consumers by ensuring that premium rates  accurately reflect insurers’ expected and actual costs, and that they are  not excessive. However, most state regulators do not appear to consider  title search expenses to be part of the premium. As a result, these  expenses are not included in regulatory reviews that seek to determine  whether premium rates accurately reflect insurers’ costs. To complicate  matters, it also appears that few state regulators collect financial data  from title agents, who generally conduct the title search and examination  work, so that examining such expenses would be difficult. Further, unlike  other lines of insurance, the largest costs for title insurers are expenses  related to title searches and agent commissions, not losses on policy  claims. In 2004, according to data compiled by ALTA, losses and loss  adjustment expenses incurred by title insurers as a whole were  approximately 5 percent of total premiums written, while the amount paid  to or retained by agents (primarily for work related to title searches and  examinations, and for agents’ commissions) was approximately 71 percent  of premiums written. In contrast, property casualty insurers’ losses and  loss adjustment expenses accounted for approximately 73 percent of total  premiums in 2004.
A related area worthy of further review is premium rate regulation for  mortgage refinance transactions. In these cases, a title search most likely  has been performed relatively recently, and the property is not changing  hands. If the same title insurer was conducting another title search for the  refinancing, that search would presumably need to cover a shorter period  of time. Because title search and examination costs are the largest  component of premium rates for title insurance, the premium rates for  refinance transactions could reasonably be expected to be lower than for  home purchases. While it appears that many insurers do provide  discounted premiums on refinance transactions, the extent of such  discounts and how widely they are used—that is, whether consumers  know about them and know how to take advantage of them—is unclear.
Finally, the extent to which premium rates increase as loan amounts or  purchase prices increase could also usefully be examined. Costs for title  search and examination work do not appear to rise as loan or purchase  amounts increase, and the portion of premiums that covers potential  losses is only about 5 percent of total premiums. If premium rates  reflected the underlying costs, premium rates could reasonably be  expected to increase at a relatively slow rate as loan or purchase amounts  increase. However, this does not always appear to be the case. For  example, using premium rates posted on the Internet by two state  regulators with whom we spoke, we found that when the purchase price  or loan amount doubled from $150,000 to $300,000, the increase in total  premium for an owner’s policy for selected insurers in the same county  ranged from approximately 27 to 57 percent. According to an industry  expert and officials from an industry association, allowing such pricing  reflects a policy decision by state regulators to have higher-income  purchasers subsidize the title insurance costs of lower-income purchasers.
How do title insurers determine premium rates, and how have these rates  changed in recent years?
How does the current rate review structure in most states examine the costs that  determine title insurance premium rates?
What data are collected that could be used to assess the extent to which title  insurance premium rates reflect the associated costs?
To what extent do title insurers offer discounted premium rates on mortgage  refinance transactions?
section_title: Extent of Regulatory Focus on Title Agents Merits Further Review
paragraphs: Title agents play a more significant role in the title insurance industry than  most other types of insurance agents. For most lines of insurance, an  agent’s role is primarily a marketing role. Title insurance agents not only  perform this task, but also carry out most underwriting tasks, including  title search and examination work. In many cases, title agents retain the  actual insurance policy and, after deducting expenses, remit the title  insurer’s portion of the premium. As we have seen, amounts paid to or  retained by title agents for this work in 2004 were around 71 percent of  total premiums written.
Despite title agents’ critical role, the amount of attention they receive from  state regulators is not clear. For example, according to data compiled by  ALTA, while most states require title agents to be licensed, three states  plus the District of Columbia do not. In addition, also according to the  same source, 18 states and the District of Columbia do not require agents  to pass a test to become licensed, and only 20 states require some form of  continuing education as a prerequisite for title agents. At least one state  does not regulate title agents. While NAIC has produced model legislation  that states can use as a basis for their own regulation of title agents,  according to NAIC, as of October 2005, only 3 states had passed the model  act or similar legislation.
The level of oversight of title agents by the state regulators that we spoke  with for this report varied. For example, one state regulator told us that  examiners conduct regular but informal visits to the title agents in their  state but do not track such contacts. Another regulator told us that the  agency’s review of title agents’ operations focused primarily on financial  condition, not on compliance with state laws. This regulator also collected  financial data from title agents, but had only recently begun systematically  analyzing that data and questioned its quality. Another regulator told us  that the agency had recently begun an intense examination of title agents’  activities and had taken a number of related enforcement actions.
The state insurance regulators with whom we spoke expected or required  insurers to oversee the operations of the title agents writing policies for  them. One regulator said that the state did not have specific regulations  requiring insurers to monitor title agents’ operations, but expected such  monitoring as a matter of course. This regulator also expected insurers to  resolve any problems the regulator might find with agents’ operations.  Another state regulator told us that, in light of activities identified in  recent investigations, their office recently revised its regulations to require  title insurers to monitor the activities of their agents and hold insurers  responsible for their agents’ actions.
To what extent do state insurance regulators review and collect information from  title agents operating in their state?
To what extent are title insurers required to oversee the agents who write  insurance for them?  To what extent have state insurers adopted model title  insurance and agent laws?
section_title: Extent of Competition in the Industry That Could Benefit Consumers Is Not Clear
paragraphs: For several reasons, the competitiveness of the title insurance market  merits further study. First, because the purchase of title insurance is an  infrequent and unfamiliar transaction for most people, consumers often  rely on the advice of a real estate or mortgage professional in choosing a  title insurer. As a result, title insurers and agents normally market their  product to such professionals rather than to consumers. Thus, while  consumers are the ones paying for title insurance, they generally do not  know how to “shop around” for the best deal, and may not even know that  they can. Meanwhile, the potential exists for real estate or mortgage  professionals to recommend—not the least expensive or most reputable  title insurer or agent—but the one that is most closely aligned with the  professional’s best interests. While RESPA generally prohibits the payment  of fees for such business referrals, as discussed later in this report, recent  federal and state investigations have alleged such arrangements. Some  industry officials pointed out that cost was not the only basis for selecting  a title insurer because service and speed were also important.
Second, concentration in the industry has raised further questions about  its competitiveness. In 2004, according to data compiled by ALTA, the five  largest title insurers and their subsidiary companies accounted for over 90  percent of the total premiums written. However, according to the annual  reports of several of these companies, a large number of local agents are  used to conduct their business—for example, one company noted in its  annual report that more than 9,500 agents sold the company’s insurance  nationwide. And while a recent analysis of competition in the California  title insurance market concluded that the market was overly concentrated,  some experts disagree with the study’s methodology and its conclusions.
Finally, certain aspects of the financial performance of title insurers and  agents have also caused some to question the competitiveness of the title  insurance market. For example, as previously discussed, losses on title  insurance claims accounted for only about 5 percent of total premiums  written in 2004—a very low percentage compared with most other lines. In  addition, according to data collected by ALTA, total operating revenue for  the industry as a whole rose approximately 68 percent between 2001 and  2004, from approximately $9.8 to $16.4 billion. Such conditions could  create the impression of excessive profits. The same study of competition  in the California market analyzed the profitability of insurers and agents in  that market and concluded that they were earning large profits at  consumers’ expense.
To what extent do aspects of competition beneficial to the consumer appear to  exist in the current title insurance market?
What has been the short- and long-term financial performance of title insurers and  agents, and what accounts for the dramatic increase in total operating revenue?
section_title: Further Study of the Effect of Affiliated Business Arrangements Could Be Beneficial
paragraphs: The use of affiliated business arrangements involving title agents and  others such as lenders, real estate brokers, and builders, appears to have  grown over the past several years, and further study of their effect could  be beneficial. Within the title insurance industry, the term “affiliated  business arrangements” generally refers to some level of joint ownership  among title insurers, title agents, real estate brokers, mortgage brokers,  lenders, and builders. For example, a mortgage lender and a title agent  might form a new jointly owned title agency, or a lender might buy a  portion of a title agency. According to some industry groups, consumers  can benefit from such arrangements, which may provide convenient, one- stop shopping and lower costs. But some consumer groups and state  insurance regulators point out that such arrangements can also be abused  and could present conflicts of interest. For example, a real estate broker  that is part owner of a title agency might be seen as unable to provide  objective advice on which title insurer a consumer should use. In addition,  some see such arrangements as a way to hide referral fees by allowing title  insurers or agents to mask such fees as a return on ownership interest. As  detailed later in this report, a number of recent investigations have alleged  improper use of affiliated business arrangements.
State regulation of affiliated business arrangements appears to vary. For  example, according to one industry association, a number of states limit  the amount of business title insurers and agents can receive from an  affiliate. In addition, among the state regulators with whom we spoke for  this review, one did not normally examine such arrangements, but the  others were beginning to conduct more extensive reviews. RESPA  regulations require disclosure of affiliated arrangements whenever a  settlement service provider refers a consumer to a business with which  the provider has an ownership or other beneficial interest. In addition,  while owners of affiliated business may be compensated for their  ownership interest in, for example, a title agent, RESPA regulations  prohibit compensation beyond that interest.
As noted above, the extent of information collected regarding the activities  of title agents appears to be limited. As a result, the extent of information  collected on affiliated business arrangements involving title agents is likely  similarly limited. The use of affiliated business arrangements, and the  potential benefits and concerns regarding their use, make this an issue on  which further study could be beneficial.
To what extent is information available on the growth and use of affiliated business  arrangements in the title insurance industry?
What are the potential benefits and concerns associated with the use of affiliated  business arrangements?
To what extent do state insurance and other regulators review affiliated business  arrangements?
How are RESPA disclosure requirements of affiliated business arrangements, and  the related prohibitions on referral fees, enforced?
section_title: Extent of Involvement and Coordination among Regulators of the Multiple Entities Involved in the Sale of Title Insurance Is Worthy of Further Study
paragraphs: Several types of entities (besides the insurers and their agents) are  involved in the sale of title insurance, and the degree of involvement and  the extent of coordination among the regulators of these entities appears  to vary, making this an area meriting further review. Multiple types of  entities are involved in the marketing of title insurance, including real  estate brokers and agents, mortgage brokers, lenders, and builders who  refer clients to the insurers and agents. These entities are generally  overseen at the state level by different regulators, and the extent of  regulation related to title insurance sales practices tends to vary across  states. One state insurance regulator with whom we spoke told us that  they informally coordinate with the state real estate commission as well as  HUD. Another regulator said that, while they have tried to coordinate their  efforts with the state regulators of real estate and mortgage brokers, those  regulators have generally not been interested in such coordination. The  apparent growth of affiliated business arrangements, which give some of  these entities an ownership interest in others, makes examining the  strengths of—and need for—such coordination even more important.  However, some coordinated regulatory efforts have taken place. At the  federal level, HUD, which is responsible for implementing RESPA, has  conducted some investigations with state insurance regulators. As we will  see, some of these investigations of the marketing of title insurance by title  insurers and agents, real estate brokers, and builders have turned up  allegedly illegal activities in the market. Oversight of this, and other areas,  is critical to ensure that title insurance markets are functioning fairly.
To what extent do regulatory differences among those involved in the sale of title  insurance create concerns, and to what extent is there regulatory coordination?
To what extent do current regulations address the potential concerns about affiliated  business arrangements?
What could state and federal regulators do to improve coordination?
section_title: Further Study of the Implications of Recent State and Federal Investigations Could Be Beneficial
paragraphs: Federal and state investigators have identified two primary types of  potentially illegal activities associated with the sale of title insurance. The  first involves providing home-builders, real estate agents, real estate  brokers, and lenders with potentially unlawful referral fees through  captive reinsurer agreements, allegedly inappropriate or fraudulent  business arrangements, and free or discounted business services and other  items of value. The second involves potential fraud committed by title  agents who allegedly misappropriate or mishandle customers’ premiums.  Industry representatives told us that title insurers have begun to address  these problems but that clearer regulations and more enforcement are  needed.
subsections: section_title: Investigations Have Alleged Existence of Kickback Schemes and Fraudulent Activities in the Title Insurance Industry
paragraphs: In several states, state insurance regulators identified captive reinsurance  arrangements that they alleged were being used by title insurers and  agents to inappropriately compensate others—such as builders or  lenders—for referrals. In such arrangements, a home-builder, real estate  broker, lender, title insurance company, or some combination of these  entities forms a reinsurance company that works in conjunction with a  title insurer. The title insurer agrees to “reinsure” all or part of its business  with the reinsurer by paying the company a portion of the premium (and  ostensibly transferring a portion of the risk) for each title transaction.  Investigators alleged that these reinsurance companies did not actually  provide reinsurance services in return for this compensation because the  amount the reinsurers received exceeded the risk they assumed. The  investigators considered these arrangements a way to pay for referrals, a  practice that is unlawful under some state anti-kickback and anti-rebating  laws as well as under RESPA. In one investigation, a reinsurer controlled  by three title insurance underwriters entered into agreements with  lenders, real estate brokerages, and builders to pay part of its premiums to  these entities. State investigators alleged that the reinsurer was transacting  reinsurance business without a required certificate from the state and that  the title insurers were using unfair practices. As part of the settlement,  state investigators demanded that the reinsurer cease operations in the  state and that the underwriters end their captive reinsurance  arrangements with unauthorized reinsurers but also reimburse affected  consumers and pay penalties to the state. In New York, regulators and the  attorney general confirmed that they are currently investigating alleged  illegal kickbacks in the title insurance industry.
State and federal investigators have also alleged the existence of  inappropriate or fraudulent business arrangements among title agencies,  title insurers, mortgage brokers, attorneys, and real estate brokers that  were allegedly being used to convey kickbacks and referral fees. Most of  the investigations we reviewed have examined activities by title agents  that involve affiliated business arrangements—that is, part or full  ownership of title agencies by real estate brokers, lenders, home-builders,  and mortgage brokers. A typical fraudulent business arrangement involves  a shell title agency that is set up by a title agent but that generally has no  physical location, employees, or assets, and does not actually perform title  and settlement business. In cases we examined, regulators alleged their  primary purpose is to serve as a vehicle to provide kickbacks by being a  pass-through for payments or preferential treatment given by the title  agent to real estate agents and brokers, home-builders, attorneys, or  mortgage brokers for business referrals. Investigations have alleged that  the arrangements in these cases violate RESPA. For example:  In one federal investigation, a title insurer and eight home-builders were  alleged to have formed shell agencies that performed little or no title work,  were not independent entities, and benefited financially from referrals.
In a multi-state federal investigation, a title agency and its affiliates were  found to have created “preferred” attorney lists for real estate closings.  Attorneys were allegedly placed on the list only if they agreed to refer their  clients to the title agency’s affiliated online title company. As part of the  settlement, the parties agreed to stop creating “preferred” attorney lists  and pay monetary penalties to the federal government.
State and federal investigators have also looked at other types of alleged  kickbacks that title agents have given real estate agents and brokers, and  attorneys involved in real estate transactions. In investigations we  reviewed, these alleged kickbacks included free or discounted business  services or other items of value and included gifts, entertainment, business  support services, training, and printing costs. One state investigation  identified items such as spa treatments, event tickets, electronics, and  trips to domestic and foreign vacation locations. Investigators alleged that  these inducements also violated federal and state anti-kickback and anti- rebating laws.
Finally, federal and state investigators have alleged that some title agents  have misappropriated or mishandled customers’ premiums. For example,  one licensed title insurance agent, who was an owner or partial owner of  more than 10 title agencies, allegedly failed to remit approximately  $500,000 in premiums to the title insurer. As a result, the insurer allegedly  did not issue 6,400 title policies to consumers who had paid for them. The  agent also had allegedly mixed funds from premiums with business assets  and allegedly misappropriated escrow funds for his personal use. The  investigators, who alleged that the agent had failed to perform his  fiduciary duty and had violated several state laws, subsequently suspended  his license and, pending the outcome of hearings, plan to shut down the  title agencies he owned or controlled. Some employees of title agencies  have also been alleged to have submitted fraudulent receipts, invoices, and  expense reports and then used the reimbursement money for personal  expenses or to pay for items on behalf of those who referred business to  them.
section_title: Some Industry Participants Say the Issues Raised by the Investigations Are Being Addressed, but Clearer Regulations Are Needed
paragraphs: In response to these and other investigations, insurers and industry  associations say they have addressed some concerns but that clearer  regulations and stronger enforcement regarding affiliated businesses are  needed. One title-insurance-industry association told us that some title  insurers have been motivated by recent federal and state enforcement  actions to increasingly address kickbacks and rebates through, for  example, increased oversight of title agents. In addition, they said that  companies operating legally are hurt by competition from those breaking  the rules and that these businesses welcome greater enforcement efforts.  Another industry association, however, told us that clearer regulations  regarding referral fees and affiliated business arrangements would aid the  industry’s compliance efforts. Specifically, regulations need to be more  transparent about what types of discounts and fees are prohibited and  what types are allowed.
How widespread are cited infractions associated with the sale of title insurance?
What are the implications of the findings of state and federal investigations for the title  insurance industry and consumers?
What actions have regulators and title industry participants taken to reduce the extent  of illegal activities?
section_title: Potential Regulatory Changes Raise a Number of Issues
paragraphs: Over the past several years, regulators, industry groups, and others have  suggested changes to regulations that would affect the way title insurance  is sold. In 2002, in order to simplify and improve the process of obtaining  home mortgages and to reduce settlement costs for consumers, HUD  proposed revisions to the regulations implementing RESPA. The proposed  revisions included the creation of a guaranteed mortgage package that  included guaranteed prices for loan origination and settlement services  and a guaranteed interest rate, as well as a revised good faith estimate that  would have required additional disclosures of settlement fees and limit fee  increases over the original estimates. In response to considerable  comment from the title industry, consumers, and other federal agencies,  HUD withdrew the proposal in 2004. Opponents argued that the revisions  would have given lenders too much leverage in putting together the  guaranteed mortgage packages and would have included title insurance— a product priced in part on risk—in a package that was priced based on  market forces. HUD announced in June of 2005 that it was again  considering revisions to the regulations, and has subsequently held a  number of industry roundtables to get input from industry and others.
NAIC officials told us that NAIC is considering changes to the model title  insurance act in order to address current issues such as the growth of  affiliated business arrangements. The model law for title insurers, among  other things, covers premium rate regulation and title insurers’ oversight  of title agents that write insurance for them. The model law for title agents  includes, among other things, agent licensing requirements and  prohibitions on referral fees. According to NAIC, they will likely change  the model title insurers act to more closely mirror RESPA’s provisions  regarding referral fees and available sanctions against violators. In  addition, they would like to revise the model title agents act by  strengthening the licensing requirements for title agents, because doing so  can discourage the formation of shell agencies as part of an improper  affiliated business arrangement.
Finally, at least one consumer advocate has suggested that requiring  lenders to pay for the title policies from which they benefit might increase  competition and ultimately lower costs for consumers. Lenders could then  use their market power to force title insurers to compete for lenders’  business based on price. Additional regulation, these advocates said, might  be necessary to require lenders to pass such cost savings on to consumers.  Some title industry officials have voiced concern with such an approach  because it would allow the lender to decide which title insurer the buyer  must use. That is, if the buyer wanted to get the cost savings associated  with simultaneously issued lender’s and owner’s policies, the buyer would  have to use the same insurer as the lender.
What benefits and concerns might arise from the implementation of potential regulatory  changes?
What barriers to implementation exist, and how serious are they?
What other regulatory alternatives exist?
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section_title: Appendix I: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Lawrence Cluff, Assistant  Director; Tania Calhoun, Emily Chalmers, Nina Horowitz, Marc Molino,  Donald Porteous, Melvin Thomas, and Patrick Ward made key  contributions to this report.