State probe propels federal inquiry
Title agency investigation reaches ears in Congress
By Michael Perrault
The Denver Business Journal
March 5, 2006
The investigative arm of Congress is being asked to probe the nation's title industry, largely due to a Colorado Division of Insurance investigation of title agencies here that has spawned similar probes nationwide.
U.S. Rep. Michael Oxley, chairman of the House Financial Services Committee, is calling for the Government Accountability Office to carefully examine and report on the title insurance industry.
"The Financial Services Committee is concerned about recent investigations by state regulators revealing that title companies have made payments for referrals to developers, mortgage lenders and real estate agents in violation of the Real Estate Settlement Procedures Act [RESPA]," Oxley wrote in a letter to GAO Comptroller General David Walker, a copy of which was obtained by The Denver Business Journal.
Oxley, a Republican from Ohio who co-authored the Sarbanes-Oxley Act, said he considers the investigations done by Erin Toll, deputy commissioner of compliance and market regulation for the Colorado Division of Insurance, and insurance divisions in California and several other states as a solid basis from which to launch the probe by the nonpartisan investigative arm of Congress.
The House Financial Services Committee is asking the GAO to analyze the title insurance market to determine relationships between title insurers, real estate agents, lenders and home builders, and to determine whether there are any anticompetitive practices.
The committee also is asking the congressional watchdog to determine the number of title insurers nationwide, their market share, how title policies are marketed and sold, and what factors affect the price of title policies.
Title insurance, which costs roughly $1,000 for a typical home in Colorado, is designed to protect property owners from problems ranging from legitimate claims to undiscovered liens, easements and flawed deeds.
An attorney representing Oxley informed Toll that investigators likely will travel to Colorado to examine title agency practices, and the GAO has set up a meeting with her.
Toll led an investigation last year into numerous title insurers for alleged kickbacks that ultimately prompted investigations in California, Florida, Hawaii and several other states.
Toll said she welcomes the federal investigation, because the Colorado Division of Insurance can regulate only title agencies, not mortgage brokers, lenders and others that may be operating outside RESPA guidelines.
"It is gratifying to know that the federal government is looking at this because we [the division] have no jurisdiction over the recipients of the kickbacks," Toll said. "It's been far too long that these guys have been able to take just a little bit of money from a lot of people and get away with it."
The Colorado Division of Insurance is working on numerous investigations of title agencies based on responses from more than 500 surveys that were sent out last year. Toll said Colorado's title insurance industry has tripled in the past four years, growing from about 200 agencies to about 600.
As a result of one of its first extensive investigations, the Colorado Division of Insurance recently shuttered 11 "sham" title insurance agencies that investigators allege were "created as vehicles to provide kickbacks to mortgage brokers." The division suspended owner Douglas P. Farr's license and determined that most of the agencies that he headed performed no title services, had few or no employees, or had no actual office.
"Sham agencies affect the ability of legitimate title agencies to complete fairly in the marketplace," said David Rivera, Colorado insurance commissioner. "It's our goal to take appropriate regulatory actions to level the playing field and ensure a competitive title insurance marketplace that will benefit Colorado consumers."
The division also led a multistate settlement agreement in which consumers nationwide received $2.6 million in title insurance premium refunds from Fidelity brand title companies.
The title industry investigations in Colorado have prompted numerous, similar actions by California Insurance Commissioner John Garamendi.
A study completed in December by the Austin, Texas-based Center of Economic Justice for the California Department of Insurance determined that unhealthy affiliated business relationships between title agencies and real estate agents and lenders inflated the price of title insurance and that "title insurers and underwriting companies realized excessive profits over an extended period of time."
In the California Insurance Department's most recent activity on Feb. 28, Garamendi said state officials had reached an agreement with LandAmerica Financial Corp. "for its part in illegal insurance rebating." LandAmerica agreed to a $4.5 million settlement, of which $2.6 million will be refunded to customers and $1.9 million will be paid in monetary penalties that include legal cost reimbursement.
LandAmerica Financial allegedly set up a "captive reinsurance company" to funnel illegal rebates to banks, builders and real estate agents in return for steering business back to the title company.
Last month, four title insurers in Michigan agreed to refund $27.5 million in fees to home buyers in that state.
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