GAO Report Scores Title Insurers

National Underwriter News
April 25, 2006
Posted May 9, 2006

WASHINGTON -- The General Accounting Office yesterday issued a scathing report on the title insurance industry detailing a lack of competitiveness, regulation and questionable costs.

The report sets the stage for a hearing tomorrow afternoon by the Housing Subcommittee of the House Financial Services Committee.

The hearing will deal with competition, pricing and recent state investigations of illegal activity in the title insurance marketplace, according to Rep. Robert Ney, R-Ohio, subcommittee chairman.

The GAO report said it found that the rates charged consumers for the service, and certain agent practices, are unique to the title insurance market and merit further study.

The study, titled "Title Insurance: Preliminary Views and Issues for Further Study", was released yesterday by the GAO through Rep. Mike Oxley, R-Ohio, House Financial Services Committee chairman. Rep. Oxley requested the inquiry in January.

One specific concern voiced in the GAO study is that title insurance agents generally get 71 percent of the money paid by homeowners for title search and examination costs, according to information provided the agency by the American Land Title Association, its Washington-based trade group. The statistics are for 2004, the GAO said.

Another concern is that title insurance is the only product in which state regulators don't require premiums to be supported by underlying costs, the GAO said.

"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," Rep. Oxley said in asking the GAO to look into the issue.

"Other investigations have revealed abuses of reinsurance agreements that have forced title companies to pay millions of dollars in settlement and have uncovered anti-competitive practices within the title industry," he said in letter to the insurance industry.

Those settlements came after insurance regulators in various states uncovered evidence of what they said were disguised kickbacks to have business steered their way.

In explaining the purpose of the hearing, Rep. Ney said: "In today's dynamic real estate market, title insurance plays an important role in the home buying process. For this hearing, we have brought together a balanced panel of witnesses that will focus on the title insurance marketplace and the need to create more competition and efficiency for consumers."

The GAO summarized its findings by saying that despite the high commissions, "most states do not appear to consider such costs to be part of the premium and thus do not include them in their premium rate reviews."

The GAO also found that:

  • Although title agents appear to play a very critical role in the underwriting process, "the extent to which state insurance regulators review their operations is unclear."

    The GAO said it "appears that few states regularly collect information on title agents' operations, and three states plus the District of Columbia do not even license title agents."

  • The extent to which a competitive environment that benefits consumers exists within the title insurance market is also not clear.

    Consumers, the GAO said, "generally lack the knowledge necessary to "shop around" for a title insurer and therefore often rely on the advice of professionals such as real estate agents and lenders. 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.

  • Entities such as real estate brokers, lenders and builders are increasingly becoming full or partial owners of title agencies in what are called "affiliated business arrangements," the GAO found.

    "Such arrangements may benefit consumers by facilitating "one-stop shopping" and lowering costs, but they can also create conflicts of interest and can be used in ways that do not benefit consumers," the GAO said.

    Multiple regulators oversee the different entities involved in the title insurance industry, including HUD and state insurance, real estate, and mortgage regulators, "but the degree of their involvement and the extent of coordination among them are also not clear," the GAO said.

    "Oversight of this, and other areas, is essential to ensuring title insurance markets are functioning fairly, and the extent of examination and oversight afforded this industry segment reportedly has varied significantly," the GAO concluded.

    Copyright © 2006 The National Underwriter Company

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