GAO-07-401 Title Insurance: Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers

United States Government Accountabilit

Office

GAO

Report to the Ranking Member,

Committee on Financial Services,

House of Representatives

TITLE INSURANCE

Actions Needed to

Improve Oversight of

the Title Industry and

Better Protect

Consumers

April 2007

GAO-07-401

What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 2007

TITLE INSURANCE

Actions Needed to Improve Oversight of

the Title Industry and Better Protect

Consumers

Highlights of

GAO-07-401, a report to the

Ranking Member, Committee on Financial

Services, House of Representatives

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.

What GAO Recommends

GAO recommends that HUD and

state insurance regulators take

actions to improve consumers’

ability to comparison shop for title

insurance and strengthen the

regulation and oversight of the title

insurance market, including the

collection of data on title agents’

operations. Further, Congress may

want to consider, as part of its

oversight of HUD, exploring the

need for modifications to RESPA,

including increasing HUD’s

enforcement authority. HUD

generally agreed with these

recommendations, and NAIC

agreed they should be explored.

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.

www.gao.gov/cgi-bin/getrpt?GAO-07-401.

To view the full product, including the scope

and methodology, click on the link above.

For more information, contact Orice M.

Williams at (202) 512-8678 or

[email protected].

Contents

Letter 1

Results in Brief 3

Background 7

Title Insurance Market Is Highly Concentrated at the Insurer Level,

but Otherwise Differs across States 11

Multiple Factors Raise Questions about the Extent of Competition

and the Reasonableness of Prices in the Title Insurance Industry 21

Limited State and Federal Oversight of the Title Insurance Industry

Has Resulted in Proposals for Change 41

Conclusions 53

Matters for Congressional Consideration 55

Recommendations for Executive Action 55

Agency Comments and Our Evaluation 56

Appendix I Objectives, Scope, and Methodology 59

Appendix II Potential Approach to Better Understand Title Agents’

Costs and How These Costs Relate to Insurance

Premiums

Appendix III Comments from the Department of Housing and Urban

Development 64

Appendix IV Comments from the National Association of Insurance

Commissioners 67

Appendix V GAO Contact and Staff Acknowledgments 68

Tables

Table 1: Information on Closed Cases and Settlements Involving

Referral Fees Resulting from Investigations by Insurance

Regulators in Six Sample States and HUD, 2003-2006 28

Page i GAO-07-401 Title Insurance

Table 2: Regulation of Title Insurance Agents in Six Sample States 44

Figures

Figure 1: Title Insurer National Market Share as a Percentage of

Direct Premiums Written, 2005 12

Figure 2: Title Insurance Premiums Written, by Source, 2005 14

Figure 3: Example of an Affiliated Business Arrangement 15

Figure 4: Common Elements of the Title Search and Examination

Process 16

Figure 5: Title Insurance Premium Rates for a Basic Owner’s Policy

on Median-Priced Homes in Selected Areas, 2005 19

Figure 6: Average Allocation of Closing Costs in California, 2005 24

Figure 7: Example of an Alleged Captive Reinsurance Arrangement 31

Figure 8: Combined Return on Equity for the Five Largest Title

Insurers, and the Property-Casualty Insurance Industry as

a Whole, 1992-2005 36

Figure 9: Percentage Change in Premium Rates and Premiums Paid

on Median-Priced Homes in Selected Areas in Five Sample

States, 2000-2005 37

Figure 10: Typical Premium Splits between Insurers and Agents in

Six Sample States 39

Figure 11: Title Industry Costs as a Percentage of Premiums

Written, 2005 42

Page ii GAO-07-401 Title Insurance

Abbreviations

ABA affiliated business arrangement

ALTA American Land Title Association

Fannie Mae Federal National Mortgage Association

Freddie Mac Federal Home Loan and Mortgage Corporation

HUD Department of Housing and Urban Development

NAIC National Association of Insurance Commissioners

RESPA Real Estate Settlement Procedures Act

RESPRO Real Estate Services Providers Council

SEC Securities and Exchange Commission

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Page iii GAO-07-401 Title Insurance

United States Government Accountability Office

Washington, DC 20548

April 13, 2007

The Honorable Spencer Bachus

Ranking Member

Committee on Financial Services

House of Representatives

Dear Mr. Bachus:

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.

GAO, Title Insurance: Preliminary Views and Issues for Further Study, GAO-06-568

(Washington, D.C.: Apr. 24, 2006); and Title Insurance: Preliminary Views and Issues for

Further Study

, GAO-06-569T (Washington, D.C.: Apr. 26, 2006).

Page 1 GAO-07-401 Title Insurance

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

Except where noted, our analysis is limited to these states.

Birny Birnbaum, Report to the California Insurance Commissioner: An Analysis of

Competition in the California Title Insurance and Escrow Industry (Austin, TX:

December 2005); Donald Martin, PhD, and Richard Ludwick, Jr., PhD, Affiliated Business

Arrangements and Their Effects on Residential Real Estate Settlement Costs: An

Economic Analysis (Washington, D.C.: October 2006); and Gregory Vistnes, An Economic

Analysis of Competition in the Title Insurance Industry (Washington, D.C.: March 2006).

NAIC is a voluntary organization of the chief insurance regulatory officials of the 50 states,

the District of Columbia, and the four U.S. territories. NAIC assists state insurance

regulators by providing guidance, model (or recommended) laws and guidelines, and

information-sharing tools. ALTA is a national trade association for title insurers and agents,

but its members may also include attorneys, builders, developers, lenders, and real estate

brokers.

Page 2 GAO-07-401 Title Insurance

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.

In the United States, the title insurance market is highly concentrated at

the insurer (or underwriter) level, but market characteristics varied across

the states. In 2005, for example, five insurers accounted for 92 percent of

the national market, and most states were dominated by two or three large

insurers. However, state markets differed in several ways. For example,

large insurers tended to use local or regional title agents to conduct their

business, and the mix of affiliated agents (those in which the insurer has

an ownership interest) and independent agents varied across states. The

extent of affiliated business arrangements (ABA)—situations in which real

estate or other professionals are part or full owners of title agencies—also

varied. In some states the number of ABAs, which have been cited in many

of the regulatory investigations into industry practices, has grown

substantially. Furthermore, title agents use different processes to carry out

title searches and examinations, largely because of variations in the way

the industry has developed across states. Title agents in some states have

automated “title plants” containing most public records, while, in other

states, title agents rely on the less-efficient process of hiring people to

search physical records. The extent of agents’ activities also varied widely

across states, including how they set prices for their services, the portion

of claims they paid, and the extent of their participation in the escrow and

closing processes. Finally, we found that premiums varied across states,

due to cost and market variations that can make understanding and

overseeing title insurance markets a challenge on the national level.

Results in Brief

Several factors related to the way that title insurance is marketed and

priced raise questions about the extent of price competition in the title

insurance industry and the ability of consumers to affect market prices.

First, consumers find it difficult to shop for title insurance based on price.

Purchasing title insurance is a transaction that consumers are unfamiliar

with, and it can be difficult for them to gather information on all title

insurance-related costs. HUD provides educational information on title

insurance. However, the benefit of this information is limited because

consumers may receive it after a title agent and insurer have been

Page 3 GAO-07-401 Title Insurance

selected, and lenders are not required to provide it on mortgage refinance

transactions. In addition, purchasing title insurance is generally a small

part of a larger home purchase or mortgage refinancing process that most

consumers do not want to disrupt or delay for relatively small potential

savings. Second, consumers generally do not select their title agent or

insurer, and title agents do not market to consumers but rather compete

among themselves for referrals from those who do—that is, real estate and

mortgage professionals. This arrangement can create conflicts of interest

if professionals making the referrals have a financial interest in the agent

recommended. HUD and state insurance regulators have recently

identified instances of alleged illegal activities within the title industry that

appeared to compensate real estate agents, builders, and others for

referring consumers to particular title insurers or agents. These alleged

activities, which include referral fees, captive reinsurance arrangements,

and inappropriate ABAs, potentially reduce price competition and,

according to some insurance regulators, could indicate excessive pricing

by insurers.

Third, as property values or loan amounts increase, prices

that consumers paid for title insurance appeared to increase faster than

insurers’ and agents’ costs. Insurers we spoke with argued that such a

pricing structure reflected regulators’ intent to subsidize consumers in

low-value transactions, but they could not provide data to support the

existence of such subsidization. Of the six regulators we spoke with, only

one said that such subsidization was intentional. Finally, in states where

agents’ search and examination services are not included in the premium,

it is not clear that the underlying costs justify the additional amounts

consumers may pay to title agents. Insurers told us that they generally

shared the same portion of premiums with their agents, regardless of

whether agents’ costs for search and examination services were to be

included in the premium. Ultimately, disagreement exists between title

industry officials and regulators over the actual extent of price

competition within title insurance markets. Industry officials generally

assert that price competition exists, while many regulators argue (1) that it

does not exist and (2) that consumers may be paying too much for title

insurance compared with the cost of providing the insurance.

In captive reinsurance 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. Sham ABA arrangements are those in which

the affiliated entity performs little or no actual settlement services and is allegedly being

used just to compensate ABA owners for consumer referrals. Other arrangements include

the use of inducements and incentives by title companies to obtain title insurance business,

especially when these inducements were used to influence referrals by real estate agents,

banks, lenders, builders, developers, and others.

Page 4 GAO-07-401 Title Insurance

Data collection efforts and regulatory oversight, especially of title agents,

were limited across the states we reviewed. Given consumers’ apparently

limited ability to exert pressure on title agents and insurers to compete on

price, the critical question is whether amounts paid by consumers for title

insurance reflect the actual underlying costs of producing title insurance

policies. Potentially understanding the relationship between costs and the

amounts consumers pay could help regulators improve their ability to

protect consumers. Yet, states rarely audit agents; few require strong

insurer oversight of agents; and, until recently, state regulators had done

little to oversee ABAs or enforce laws intended to restrict business from

affiliated sources. Also, because title insurance is a relatively small line of

insurance, title insurers and agents get less than the usual limited market

conduct scrutiny given other types of insurers by state insurance

regulators.

All of the regulators, both state and federal, face a number of

challenges. For example, varying levels of cooperation exist within each

state among the regulators who oversee entities involved in the sale and

marketing of title insurance, with some states demonstrating little or no

cooperation and others having somewhat more structured arrangements.

HUD—the primary federal agency responsible for enforcing the Real

Estate Settlement Procedures Act (RESPA)—has taken a number of

enforcement actions under RESPA recently, but HUD officials told us that

they face resource limitations and difficulties in investigating increasingly

complex ABA arrangements. Furthermore, HUD is authorized to seek

injunctions against alleged violations of section 8 of RESPA’s provisions

on referral fees and affiliated businesses, but HUD is not authorized to

levy civil money penalties. Moreover, a lack of formal coordination

between HUD and state regulators on referral fee cases may have hindered

enforcement efforts. In response to these and other concerns, several state

regulators and HUD are either planning or making changes to their

regulatory regimes for the marketing and sale of title insurance. These

changes include potentially reducing premium rates; collecting detailed

cost data from title agents; and seeking changes to RESPA, including

enhancing HUD’s enforcement authority. Some industry stakeholders see

the current model of selling and marketing title insurance as irretrievably

broken and have put forth the following two alternatives: (1) requiring

Market conduct examinations are performed by state insurance commissioners, and they

review agent-licensing issues, complaints, types of products sold by the company and

agents, agent sales practices, proper rating, claims handling, and other market-related

aspects of an insurer’s operation. See GAO, Insurance Regulation: Common Standards

and Improved Coordination Needed to Strengthen Market Regulation,

GAO-03-433

(Washington, D.C.: Sept. 30, 2003).

Page 5 GAO-07-401 Title Insurance

lenders to pay for title insurance and (2) following the Iowa model of a

state-run title insurer.

We are recommending that HUD take two actions to improve the

functioning of the title insurance market. Specifically, we are

recommending that HUD (1) improve consumers’ ability to shop for title

insurance based on price and (2) improve its ability to detect and deter

violations of section 8 of RESPA. In taking these actions, we recommend

that HUD consider expanding the information in its home-buyer

information booklet; evaluating the costs and benefits to consumers from

ABAs; clarifying regulations related to referral fees and ABAs; and

enhancing the agency’s coordination with state regulators. Likewise, we

are recommending that state insurance regulators, working through NAIC

where appropriate, take two actions to improve the functioning of the title

insurance market. Specifically, we are recommending that state regulators

take action to (1) improve consumers’ ability to shop for title insurance

and (2) improve their oversight of title agents. As part of this process, we

are recommending that these regulators consider evaluating the

competitive benefits of publicizing complete title insurance cost

information; strengthening their regulation of title agents and ABAs,

including the collection of data on title agents’ operations; and exploring

ways to improve their cooperation with other state regulators and HUD.

We also suggest, as a matter for congressional consideration, amending

RESPA to give HUD increased enforcement authority for violations of

RESPA’s section 8 prohibitions on referral fees by granting the ability to

levy civil money penalties and enhance the information required to be

provided to consumers.

We provided a draft copy of this report to HUD and NAIC. The Assistant

Secretary for Housing at HUD and the Executive Vice President of NAIC

provided written comments on the draft. Their comments are included in

appendixes III and IV, respectively, of this report. The Assistant Secretary

for HUD generally agreed with the recommendations in the report, and

also indicated that the report accurately assessed the issues that adversely

affect consumers in the title insurance market. In response to our

recommendation to better protect consumers and improve their ability to

shop for title insurance, he acknowledged the importance of these goals

and noted that HUD is taking several actions in these areas. Specifically,

he said that HUD is (1) considering ways to improve its home-buyer

information booklet; (2) evaluating whether various ABA structures, even

though they may be legal, are operating as Congress intended; and

(3) continuing its efforts to develop and clarify guidelines regarding

practices that negatively effect consumers. With respect to our

Page 6 GAO-07-401 Title Insurance

recommendation to consider improving regulatory coordination with state

regulator agencies, the Assistant Secretary agreed that such coordination

is necessary and pointed out past instances of successful cooperation

between HUD and state insurance regulators. 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 stated that the

recommendations in the report were worthy of exploration, and she noted

that the report recognizes that shortcomings exist in the area of consumer

protection. Both HUD and NAIC also offered clarifying remarks.

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.

Background

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

Both the Federal National Mortgage Association and the Federal Home Loan Mortgage

Corporation require a guarantee of title as a condition of purchasing loans from mortgage

lenders.

Page 7 GAO-07-401 Title Insurance

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.

Bankrate.com, Closing Costs Survey,

http://www.bankrate.com/brm/news/mortgages/ccmain2006a1.asp (North Palm Beach, FL:

August 2006). The survey was conducted by Bankrate.com in 2006 by obtaining online

information where available. We did not assess the validity of the data collected in the

survey.

Page 8 GAO-07-401 Title Insurance

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.

According to industry experts and analysts, the different loss and expense structure of the

title insurance industry reflects the fact that title insurance is primarily focused on

preventing losses through title searches and examinations, and that most property-casualty

insurance is focused on compensating policyholders for losses.

Page 9 GAO-07-401 Title Insurance

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.

Page 10 GAO-07-401 Title Insurance

Title Insurance

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.

Title Insurance

Market Is Highly

Concentrated at the

Insurer Level, but

Otherwise Differs

across States

• 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.

Page 11 GAO-07-401

Figure 1: Title Insurer National Market Share as a Percentage of Direct Premiums

Written, 2005

Note: Total may not add up to 100 percent due to rounding.

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

Old Republic

11%

18%

27%

29%

Source: GAO analysis of industry data.

All other insurers

Stewart

Land America

First American

Fidelity

Mix of Affiliated and

Independent Agents

Differs by State

Page 12 GAO-07-401 Title Insurance

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.

The term “nonpromulgated states” refers to those states where the title rate is determined

by a method other than a state regulatory body setting it.

Page 13 GAO-07-401 Title Insurance

Figure 2: Title Insurance Premiums Written, by Source, 2005

Iowa

Total

Colorado

Illinois

New York

Texas

California

4.5

$980.9

35.5

71.5

301.9

459.2

$108.4

$6,608.7

8.5

343.2

350.7

1,220.6

1,487.5

$3,198.3

Premiums

Written directly

by insurer

$2,928.4

0.8

75.4

45.4

25.6

410.6

$2,370.7

Written by

affiliated

agents

3.2

232.3

233.8

893.1

617.7

$719.1

$2,699.3

Written by

independent

agents

Total

Percentage of premiums for the state, by writer

Source: GAO analysis of title industry data.

Dollars in millions

Premiums listed as being written directly by insurer are those written by the state-run Title Guarantee

Division of the Iowa Finance Authority. Premiums written by affiliated or independent agents are

premiums written by out-of-state title insurers on properties in Iowa.

Use of Affiliated Business

Arrangements Appears to

Be Increasing

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.

Page 14 GAO-07-401 Title Insurance

Figure 3: Example of an Affiliated Business Arrangement

Referring entity refers

customers to title agency

that is part of affiliated

business arrangement

Ownership interest

Title agency profits

and sends portion

to referring entity

Referring entity

Entity that refers customers

Title agency receiving referred business

Ownership interest

Path of referred customers

Profit made from referred customers

Customers

Source: GAO analysis of interviews with industry officials.

General structure and flow

Title agency

Partially owned by

the referring entity

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.

RESPRO is a national nonprofit trade association of settlement service providers,

including real estate broker-owners, real estate franchisers, mortgage lenders/brokers, title

insurers/agents, home builders, and home warranty companies. Many of its members offer

affiliated services through subsidiaries, joint ventures, and partnerships.

Although Minnesota was not in our sample, we spoke to state insurance regulators in the

state.

Page 15 GAO-07-401 Title Insurance

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 Conduct the Title

Search and Examination

Process Differently across

States

Figure 4: Common Elements of the Title Search and Examination Process

Deed

Title order received from

consumer representative

(real estate agent,

mortgage broker, attorney,

other representative).

Information about all

interested parties entered

into data system

and verified.

Property identified in

local government

records and search

performed for all

pertinent property

title documents.

Title agent deposits

collected funds,

takes deed for recording,

produces policy, and

submits risk portion of title

insurance premium

to underwriter.

Title examiner analyzes

all documents and identifies

problems. Problems are

cleared, exempted from

coverage, or insured over.

Title agent prepares title commitment and other

necessary closing documents and distributes them

to involved parties. Title agent, closer, or escrow

officer collects/disburses funds

with involved parties.

Intake/Request

Identification/

Analysis and repair Completion

Closing

Sources: GAO observation of title plant operations and analysis of comments made by title industry officials; Art Explosion (images).

Local government

records, hard and

electronic property

records, etc.

Buy

er:

Seller:

Property:

Incoming

title order

Title

documents

Pro

blem:

Cleared

Exempt from

coverage

Insured over

Commitment

letter

Closing

documents

Interested

parties

Underwriter

Policy

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

Some state laws, such as those in Iowa and Texas, require title agents or abstractors to

have access to a title plant.

Page 16 GAO-07-401 Title Insurance

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.

Title Agents’

Responsibilities Also

Differ across States

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

Page 17 GAO-07-401 Title Insurance

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

California insurance department guidelines say that title agents cannot pay more than

$5,000 of a claim.

Page 18 GAO-07-401 Title Insurance

“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.

Premiums Are Difficult to

Compare across Markets,

but Appear to Vary

Significantly

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.

Figure 5: Title Insurance Premium Rates for a Basic Owner’s Policy on Median-

Priced Homes in Selected Areas, 2005

Des Moines, IA

Dallas, TX

Denver, CO

Chicago, IL

New York, NY

Los Angeles, CA

145,500

147,600

247,100

264,200

445,200

$529,000

700

871

1,216

1,025

2,190

$1,587

Median-priced home loan or value Owner’s policy rate

Source: GAO analysis of National Association of Realtors’ and title industry data.

Note: Rates are either from the largest underwriter or are promulgated rates.

Lender’s policy rate used in the Iowa data because a rate was not given for the owner’s policy.

Although the premium would be $146, according to Iowa Title Guaranty officials, additional required

services would add approximately another $550, for a total of approximately $700.

Page 19 GAO-07-401 Title Insurance

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

Florida Office of Insurance Regulation, An Analysis of Florida’s Title Insurance Market:

Three Studies That Provide a Comprehensive, Multi-Faceted Review of the Florida Title

Insurance Industry (Tallahassee, FL: July 2006).

Closing Costs Survey, http://www.bankrate.com/brm/news/mortgages/ccmain2006a1.asp.

Page 20 GAO-07-401 Title Insurance

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.

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.

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

Multiple Factors

Raise Questions about

the Extent of

Competition and the

Reasonableness of

Prices in the Title

Insurance Industry

Lack of Consumer

Knowledge about Title

Insurance Results in Little

Pressure on Insurers to

Compete on Price

Page 21 GAO-07-401 Title Insurance

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

Gregory Vistnes, An Economic Analysis of the California Department of Insurance

Proposal to Impose Rate Regulation in the California Title Insurance Industry

(Washington, D.C.: August 2006).

Page 22 GAO-07-401 Title Insurance

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.

RESPA requires lenders to provide consumers with an estimate of the costs a consumer

will likely have to pay, called a Good Faith Estimate, prior to the closing of a mortgage

transaction.

Page 23 GAO-07-401 Title Insurance

Figure 6: Average Allocation of Closing Costs in California, 2005

Note: Calculations done using a $500,000 sales price and a $450,000 loan amount. We did not verify

the data supporting this analysis.

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.

P&C insurance

(including home warranty)

12%

13%

64%

Escrow fees

Other costs

Source: Fidelity National Title Group, Inc.

Title insurance

Government taxes/fees

Lender fees

Real estate commission

1,739

975

$331

2,088

5,846

6,150

30,000

Total $47,129

Closing costs

Amount

Board of Governors of the Federal Reserve System, Department of Housing and Urban

Development, Joint Report to the Congress Concerning Reform to the Truth in Lending

Act and the Real Estate Settlement Procedures Act (Washington, D.C.: July 1998).

Page 24 GAO-07-401 Title Insurance

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.

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

Title Agents Market Not to

Consumers, but to Those

in a Position to Make

Referrals, Creating

Potential Conflicts of

Interest

Page 25 GAO-07-401 Title Insurance

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.

Page 26 GAO-07-401 Title Insurance

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.

Alleged Illegal Activities

Appear to Reduce

Competition and Could

Indicate Excessive Prices

Paid by Consumers

Examples of Allegedly Illegal Referral

Fees Described in Investigations by HUD

and State Insurance Regulators

• A title agent paid real estate agents’

business training and printing expenses.

• A title agent provided trips, entertainment,

and catering for entities involved in real

estate transactions.

• A title agent contributed to a pool of funds

that was given away in a dr

awing among real

estate agents.

• A title agent paid an excessive rate to rent

a conference room from a real estate

company.

• Title agents provided free or below-cost

marketing services to real estate agents.

Entities involved in multiple cases and settlements were counted once for each case and

settlement in which they were involved.

Page 27 GAO-07-401 Title Insurance

Table 1: Information on Closed Cases and Settlements Involving Referral Fees Resulting from Investigations by Insurance

Regulators in Six Sample States and HUD, 2003-2006

Dollars in millions

Investigating

organization

Closed cases and

settlements

involving referral

fees

Entities

involved

Amount that

entities were

ordered to pay

or agreed to pay

Portion of total

payments

involving captive

reinsurance

State insurance regulators

California Department of Insurance 12 26 $61.3 $37.9

Colorado Department of Regulatory Agencies,

Division of Insurance 6 24

25.3 25.3

New York State Insurance Department 2 2 4.0 -

Subtotal 20 52 $90.6 $63.2

HUD

38 62 10.7 3.6

Subtotal 38 62 $10.7 $3.6

Total 58 114 $101.3 $66.8

Source: GAO analysis of state and HUD data.

Insurance regulators in Illinois, Iowa, and Texas, our other sample states, did not have any such

closed cases or settlements.

Entities involved in multiple cases and settlements were counted once for each case in which they

were involved.

Amounts paid included any refunds to consumers, fines, or settlement amounts.

In captive reinsurance 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. Some investigations alleged that these arrangements were used as a

means of paying referral fees.

Amounts paid to HUD reflect only negotiated settlements, because HUD cannot levy civil money

penalties.

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,

Washington State Office of the Insurance Commissioner, An Investigation into the Use of

Incentives and Inducements by Title Insurance Companies (Olympia, WA: October 2006).

Page 28 GAO-07-401 Title Insurance

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

Title Insurance Section, Division of Financial Institutions, Illinois Department of Financial

and Professional Regulation, Bulletin 1-05: Title Insurance Agent Requirements

(Springfield, IL: July 2005); Title Insurance Industry Meeting Informational Handout 1-

06 (Springfield, IL: February 2006); and Title Insurance Industry Meeting Informational

Handout 2-06 (Springfield, IL: February 2006).

Division of Insurance, Alaska Department of Commerce, Community, and Economic

Development, Summary of Title Insurance Examinations: Division of Insurance

(Juneau, AK: April 2006).

Page 29 GAO-07-401 Title 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.

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.

llegedly Illegal Captive

Reinsurance Arrangements

Could Indicate Consumers

Were Paying Excessive Prices

for Title Insurance

Example of a Captive Reinsurance

Arrangement

In one multistate settlement that involved 26

state insurance regulators, regulators alleged

that title insurers and home builders created

captive reinsurance arrangements. Under

these arrangements, the insurers deducted a

processing fee of $350 from the premium,

then paid 50 percent of the remainder to a

reinsurer for assuming 50 percent of the

policy risk. The reinsurers, in turn, provided

referrals to the title insurers. For example, in

Colorado, a party to the settlement, the

premium charged by one of the companies

involved for an owner’s and lender’s policy on

a $250,000 loan and purchase price was

$1,614. In 2005, the combined loss ratio for

all insurers in Colorado was approximately 4.5

percent. Under the arrangement described by

regulators, on a

hypothetical $250,000

transaction, the reinsurer would collect

approximately $632 for assuming expected

losses of about $36 (4.5 percent of the $1,614

premium), for a net profit of about $596. In

other words, about 37 percent of the $1,614

paid by the consumer would allegedly go to

the reinsurer as compensation for its builder,

lender, or real estate broker-owner allegedly

referring business to the insurer.

Reinsurance is a mechanism that insurance companies routinely use to spread risk

associated with insurance policies. Simply put, it is insurance for insurance companies.

Page 30 GAO-07-401 Title Insurance

Figure 7: Example of an Alleged Captive Reinsurance Arrangement

Consumer

Builder

Title insurer

Reinsurance

company

Consumer pays

premium to

title insurer

Consumer

purchases home

from builder

Insurer gives reinsurance

company 50% of premium

(after deduction for title search)

for assuming small amount of risk

As part owner, builder

shares in profits of

reinsurance company

Referral relationship (builder agrees to refer consumer to title insurer)

Owner relationship (builder owns reinsurance company)

Source: GAO.

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.

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

Number of Investigations

Found ABAs Allegedly Being

Used to Pay Referral Fees,

Raising Questions about the

Cost and Benefits of ABAs to

Consumers

Page 31 GAO-07-401 Title Insurance

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

Page 32 GAO-07-401 Title Insurance

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.

Donald Martin and Richard Ludwick, Affiliated Business Arrangements and Their

Effects on Residential Real Estate Settlement Costs: An Economic Analysis (October

2006).

Page 33 GAO-07-401 Title Insurance

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.

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.

As Coverage Amounts

Increase, Premiums Paid

by Consumers Appear to

Increase Faster Than

Insurer and Agent Costs

Industry Officials Said That the

Current Price Structure

Subsidizes Consumers in

Lower-Value Transactions, but

They Could Not Provide

Supporting Data

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.

Page 34 GAO-07-401 Title Insurance

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.

Industry Officials Said That

Recent Higher Profitability

Compensated for Years of

Lower Profitability, but

Industry Return on Equity Has

Been Relatively Stable

Page 35 GAO-07-401 Title Insurance

Figure 8: Combined Return on Equity for the Five Largest Title Insurers, and the Property-Casualty Insurance Industry as a

Whole, 1992-2005

20052004200320022001200019991998199719961995199419931992

Percentage

-5

Source: GAO analysis of insurer financial data submitted to SEC and Insurance Services Office

and Insurance Information Institute data.

Five largest title insurers

Property-Casualty insurance industry as a whole

Year

Note: The combined return on equity data for title insurers are based on consolidated operating

results, which for some title insurers may include some services other than title insurance.

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

An Economic Analysis of the California Department of Insurance Proposal.

Page 36 GAO-07-401 Title Insurance

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.

Figure 9: Percentage Change in Premium Rates and Premiums Paid on Median-

Priced Homes in Selected Areas in Five Sample States, 2000-2005

Dallas, TX

Des Moines, IA

Chicago, IL

New York, NY

Los Angeles, CA

-27

-3

-29

Premium rate per $1,000 Premium paid by consumer

Owner’s policy on median-priced home—change in:

Source: GAO analysis of data provided by the National Association of Realtors, state insurance regulators, and title insurers.

-12

Change in median

home price

145

Percentage change increase

Percentage change decrease

Note: We were unable to obtain historical premium rate information in the sixth sample state—

Colorado.

Premium rates in California, Illinois, and Iowa are those for the insurer writing the most premiums in

2005.

Premium rates in New York and Texas are those promulgated by the state insurance regulator.

Lender’s policy rate was used in the Iowa data because a rate was not given for the owner’s policy.

Premium paid by consumer does not include any additional amounts that may have been charged by

title agents.

In States Where Agents

Charge Separately for

Search and Examination

Services, It Is Unclear

Whether Those Charges

Are Fully Supported by

Underlying Costs

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.

Page 37 GAO-07-401 Title Insurance

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.

Title insurers also have direct operations where none of the premium is retained by an

agent. As a result, while title agents typically retain from 80 to 90 percent of the premium

paid by consumers, in 2005, agents retained only 70 percent of total premiums written by

insurers.

Page 38 GAO-07-401 Title Insurance

Figure 10: Typical Premium Splits between Insurers and Agents in Six Sample

States

Iowa

Illinois

Texas

New York

Colorado

California

Percentage premium split between title insurers and agents

Source: GAO analysis of interviews with title insurers, title agents, and state insurance regulators.

% %

Title agent

Title insurer

Note: We did not independently verify the information in this figure.

There is no premium split in Iowa on policies issued by the state-owned Iowa Title Guaranty Division.

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

Page 39 GAO-07-401 Title Insurance

determine whether consumers in risk-rate states consistently paid more, in

total, than those in all-inclusive states.

Disagreement Exists

among Industry and

Regulatory Officials over

the Extent of Price

Competition and the

Appropriateness of Title

Insurance Prices

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.

Page 40 GAO-07-401 Title Insurance

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.

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.

Limited State and

Federal Oversight of

the Title Insurance

Industry Has Resulted

in Proposals for

Change

Regulators Do Not Fully

Assess Title Agents’ Costs

during Rate Reviews

RESPA does provide criminal sanctions for violations of section 8, a fine of up to $10,000

or up to 1 year in prison. However, according to HUD officials, such sanctions are rarely

used, in part because they require prosecutions to be conducted by U.S. attorneys from the

Department of Justice.

A competitor right of action would allow industry participants to seek to stop activities of

their competitors that they think violate the law.

Page 41 GAO-07-401 Title Insurance

Figure 11: Title Industry Costs as a Percentage of Premiums Written, 2005

25%

Other expenses

70%

Source: GAO analysis of NAIC data.

Loss and loss adjustment expenses

Paid to or retained by agents

The “Other expenses” category includes salaries, rent, and equipment costs, among other things.

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

Page 42 GAO-07-401 Title Insurance

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.

States Conduct Only

Limited Regulation and

Oversight of Title Agents

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.

Because the sale of title insurance within Iowa—one of our sample states—is prohibited,

attorneys and abstractors do title work.

Agent defalcation occurs when an agent misappropriates funds and fails to pay off a prior

mortgage.

Page 43 GAO-07-401 Title Insurance

Table 2: Regulation of Title Insurance Agents in Six Sample States

State State licensing

Continuing

education

Capitalization

requirements

State audits Insurer oversight

Proposed

regulations

California Yes No Net worth of $75,000

to $400,000

Quarterly

financial

statements

Oversees escrow

procedures and

approves agent

bonding

Yes

Colorado Yes No $10,000 With cause Compliance with

title insurance laws,

report fraud or late

premium payments

Yes

Illinois Yes (registration

only)

No No With cause Can withdraw

agent registration.

Iowa Must have law

license

No No Attorneys are

subject to state

audits.

Participating

attorneys are

subject to relevant

state law.

N/A

New York No No No No General Agency

Law governs

Yes

Texas Yes Yes No Annual Report failure to

provide annual

audit report

Plans to call for

more agent data

Source: GAO analysis of state insurance laws and regulations.

Attorneys and abstractors, rather than title agents, perform title work in Iowa.

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.

Page 44 GAO-07-401 Title Insurance

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

Under Colorado’s new law, ABAs are authorized provided that they meet conditions

similar to those in RESPA, and ABAs must be disclosed to the state division of insurance or

real estate in connection with license applications. In addition, the divisions of insurance

and real estate are to consult with one another to promulgate ABA rules, and to share

information derived from investigations of ABAs. New Colorado regulations include

specific rate and fee rules; standards of conduct for title insurance entities, including

standards for ABAs; and rules regarding consumer protections.

Page 45 GAO-07-401 Title 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.

States’ Enforcement of

Antikickback and Referral

Fee Provisions Was

Uneven

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

Page 46 GAO-07-401 Title Insurance

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.

Actions pursuant to section 8 of RESPA may be brought in the United States district court

or in any other court of competent jurisdiction, with certain other limitations. HUD officials

disputed the regulators’ assertion.

Page 47 GAO-07-401 Title Insurance

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.

Limited Resources and

Lack of Coordination

among Regulators within

States May Limit the

Effectiveness of

Enforcement Efforts

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

Market conduct examinations are performed by state insurance commissioners, and they

review agent-licensing issues, complaints, types of products sold by the company and

agents, agent sales practices, proper rating, claims handling, and other market-related

aspects of an insurer’s operation. See

GAO-03-433.

GAO, Insurance Regulation: Scandal Highlights Need for Strengthened Regulatory

Oversight,

GAO/GGD-00-198 (Washington, D.C.: Sept. 19, 2000).

Page 48 GAO-07-401 Title Insurance

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.

HUD Officials Expressed

Concern over Lack of

Enforcement Authority for

Violations of Section 8 of

RESPA

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

During the course of our communication with these regulators, we informed them that

referral fees were generally illegal under the state law in question and under RESPA.

Page 49 GAO-07-401 Title Insurance

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

Page 50 GAO-07-401 Title Insurance

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.

HUD, State Regulators,

and Industry Stakeholders

Have Developed Proposals

for Improving the

Regulation and Sale of

Title Insurance

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.

GAO/GGD-00-198.

SEC’s no-action letter process allows an individual or entity that is not certain whether a

particular product, service, or action would constitute a violation of the federal securities

law to request a “no-action” letter from the SEC staff.

Page 51 GAO-07-401 Title Insurance

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,

Page 52 GAO-07-401 Title Insurance

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.

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

Conclusions

Page 53 GAO-07-401 Title Insurance

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

Page 54 GAO-07-401 Title Insurance

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.

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.

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:

Matters for

Congressional

Consideration

Recommendations for

Executive Action

Page 55 GAO-07-401 Title Insurance

• 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

ABAs;

• 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.

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

Agency Comments

and Our Evaluation

Page 56 GAO-07-401 Title Insurance

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.

Page 57 GAO-07-401 Title Insurance

Please contact me at (202) 512-8678 or [email protected] 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.

Sincerely yours,

Orice M. Williams

Director, Financial Markets

and Community Investment

Page 58 GAO-07-401 Title Insurance

Appendix I: Objectives, Scope, and

Methodology

Appendix I: Objectives, Scope, and

Methodology

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.

GAO, Title Insurance: Preliminary Views and Issues for Further Study, GAO-06-568

(Washington, D.C.: Apr. 24, 2006); and Title Insurance: Preliminary Views and Issues for

Further Study,

GAO-06-569T (Washington, D.C.: Apr. 24, 2006).

Page 59 GAO-07-401 Title Insurance

Appendix I: Objectives, Scope, and

Methodology

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

Birny Birnbaum, Report to the California Insurance Commissioner: An Analysis of

Competition in the California Title Insurance and Escrow Industry (Austin, TX:

December 2005); Donald Martin, PhD, and Richard Ludwick, Jr., PhD, Affiliated Business

Arrangements and Their Effects on Residential Real Estate Settlement Costs: An

Economic Analysis (Washington, D.C.: October 2006); and Gregory Vistnes, An Economic

Analysis of Competition in the Title Insurance Industry (Washington, D.C.: March 2006).

Page 60 GAO-07-401 Title Insurance

Appendix I: Objectives, Scope, and

Methodology

Insurance, the California Department of Insurance, and ALTA.

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.

NAIC is a voluntary organization of the chief insurance regulatory officials of the 50 states,

the District of Columbia, and the four U.S. territories. NAIC assists state insurance

regulators by providing guidance, model (or recommended) laws and guidelines, and

information-sharing tools. ALTA is a national trade association for title insurers and agents,

but its members also may include attorneys, builders, developers, lenders, and real estate

brokers.

Page 61 GAO-07-401 Title Insurance

Appendix II: Potential Approach to Better

Understand Title Agents’ Costs and How

These Costs Relate to Insurance Premiums

Appendix II: Potential Approach to Better

Understand Title Agents’ Costs and How

These Costs Relate to Insurance Premiums

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.

Page 62 GAO-07-401 Title Insurance

Appendix II: Potential Approach to Better

Understand Title Agents’ Costs and How

These Costs Relate to Insurance Premiums

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.

Page 63 GAO-07-401 Title Insurance

Appendix III: Comments from the Department

of Housing and Urban Development

Appendix III: Comments from the

Department of Housing and Urban

Development

Page 64 GAO-07-401 Title Insurance

Appendix III: Comments from the Department

of Housing and Urban Development

Page 65 GAO-07-401 Title Insurance

Appendix III: Comments from the Department

of Housing and Urban Development

Page 66 GAO-07-401 Title Insurance

Appendix IV: Comments from the National Association of

Insurance Commissioners

Appendix IV: Comments from the National

Association of Insurance Commissioners

Page 67 GAO-07-401 Title Insurance

Appendix V:

GAO Contact and Staff

cknowledgments

Page 68 GAO-07-401

Appendix V: GAO Contact and Staff

Acknowledgments

GAO Contact

Orice Williams, (202) 512-8678, [email protected]

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.

Title Insurance

Staff

Acknowledgments

(250298)

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