The U.S. Government Accountability Office (GAO) has issued a report that suggests normal competitive forces may not be working properly in title insurance markets and recommends several actions by federal and state regulators to enhance competition in these markets.
The report, “Title Insurance: Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers,”1 finds that several characteristics of title insurance markets, and allegedly illegal activities by some who market title insurance, raise questions about the prices consumers are paying for title insurance.
The report examines (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. It is based upon available industry data and the GAO’s detailed review of the laws, regulations, and market practices in California, Colorado, Illinois, Iowa, New York, and Texas. It includes specific recommendations to the U.S. Congress, the U.S. Department of Housing and Urban Development (HUD) and state insurance regulators.
Summary of Findings
Following is a brief overview of the major findings in the report:
- Title insurance markets are highly concentrated at the insurer level, as most states are dominated by two or three large title insurers, but otherwise differ in many aspects among states. For example, insurers’ use of affiliated agents as opposed to independent agents varied across states, as did the extent of affiliated business arrangements (ABAs), the processes used to carry out title searches and examinations, the extent of agents’ involvement in price-setting, claims-paying, and participation in the escrow and closing processes, and the cost of title insurance premiums.
- There are several factors related to the way title insurance is marketed and priced, which raise questions about the extent of price competition in the title insurance industry and the ability of consumers to affect market prices.
In general, the factors cited by the report include:
- A lack of consumer knowledge or initiative regarding the title insurance transaction results in little pressure on insurers to compete on price
- The fact that title agents and insurers generally are selected by real estate and mortgage professionals instead of consumers creates conflicts of interest where the professionals making the referrals have a financial interest in the recommended agent
- As property values or loan amounts increase, prices that consumers pay for title insurance appear to increase faster than insurers’ and agents’ costs
- In states where agents’ search and examination services are not included in the premium, it is not clear that underlying costs justify the additional amounts consumers pay to title agents
- In the states reviewed by the GAO, data collection efforts and regulatory oversight, especially of title agents, are limited. For example, states rarely audit agents; few require strong insurer oversight of agents; and, until recently, state regulators have done little to oversee ABAs or enforce laws intended to restrict business from affiliated sources. In addition, HUD officials indicated that they face resource limitations and difficulties in investigating increasingly complex ABAs.
The report contains the following recommendations:
- Matters for Congressional Consideration
The GAO suggests that Congress may wish to consider modifications to the Real Estate Settlement Procedures Act (RESPA), including an increase in HUD’s enforcement authority.
- Recommendations for HUD
The report recommends that HUD take action to improve consumers’ ability to comparison shop and to protect consumers from illegal title insurance marketing practices. To accomplish these goals, the GAO recommends four specific actions: (1) expand information in the HUD home-buyer information guide; (2) evaluate the costs and benefits to consumers from ABAs; (3) clarify regulations relating to referral fees and ABAs; and (4) enhance the agency’s coordination with state regulators.
- Recommendations for State Regulators
Similarly, the GAO recommends that state insurance regulators take action to improve consumers’ ability to shop for title insurance and to increase their ability to detect and deter inappropriate and illegal practices. To accomplish these goals, the GAO recommends four specific actions: (1) increase the transparency of title insurance prices to consumers; (2) strengthen the regulation of title agents; (3) improve the oversight of title agents; and (4) identify approaches to increase cooperation between state insurance, real estate, and other regulators.
As Congress, HUD, state regulators, and consumer groups consider the above recommendations, they also may want to consider the following related issues:
- If state regulators desire more price competition in title insurance, would it be appropriate to consider relaxing restrictions against discounting, discriminatory pricing, and rebating to purchasers (Florida permits the latter) and to eliminate the right to file rates on a collective basis?
- If consumers get title insurance through title agents, where the competition for business and service is very fierce, does it really matter that the concentration of title underwriters is high?
- It would seem that the real estate and mortgage professionals who choose title providers have a strong incentive to refer their customers (whom they look to for future referrals and repeat business) to the best title agents available to avoid running the risk of an unhappy customer or a transaction that does not close. Indeed, the NAIC Title Working Group currently is considering whether having lenders pay for title insurance would result in more competition and efficient pricing because they theoretically are knowledgeable and regular purchasers of title services.
- Are not disclosures of financial interest in a referred party the appropriate way to deal with any potential conflict of interest (just like the disclosures that physicians who own ancillary medical care facilities provide)?
FOCUS looks forward to monitoring the ensuing debate on these matters that, like the similar debate about RESPA reform, can be expected to rage for many years.
1 GAO-07-401, issued in April, 2007. This report follows previous reports issued in April 2006 (GAO-06-568 and GAO-06-569T), which provided an initial overview of competition and pricing in the title insurance industry and suggested areas for further study.
This article is a part of the FOCUS on the Insurance Industry Summer 2007 Newsletter.