At the federal  level, HUD is responsible for enforcing RESPA, which regulates real estate  settlement practices. Certain Aspects of the Title Insurance Market Merit Further Study

Some aspects of the title insurance market that set it apart from other  lines of insurance merit further study, including:  the importance of title search costs, rather than losses, in setting  premium rates; the fact that title insurance agents play a more important role than  agents for other lines of insurance; the fact that title insurance is generally marketed not to consumers but  to professionals such as real estate agents or mortgage brokers; the proliferation of affiliated business arrangements between title  agents and these professionals; and the involvement and coordination among the regulators of multiple  types of entities involved in the marketing and sale of title insurance. Extent to Which Premium Rates Reflect Underlying Costs Not Always Clear

The extent to which title insurance premium rates reflect insurers’  underlying costs is not always clear. However, most state regulators do not appear to consider  title search expenses to be part of the premium. Extent of Competition in the Industry That Could Benefit Consumers Is Not Clear

For several reasons, the competitiveness of the title insurance market  merits further study. First, because the purchase of title insurance is an  infrequent and unfamiliar transaction for most people, consumers often  rely on the advice of a real estate or mortgage professional in choosing a  title insurer. As a result, title insurers and agents normally market their  product to such professionals rather than to consumers. Thus, while  consumers are the ones paying for title insurance, they generally do not  know how to “shop around” for the best deal, and may not even know that  they can. For example, a real estate broker  that is part owner of a title agency might be seen as unable to provide  objective advice on which title insurer a consumer should use. In addition, among the state regulators with whom we spoke for  this review, one did not normally examine such arrangements, but the  others were beginning to conduct more extensive reviews. Extent of Involvement and Coordination among Regulators of the Multiple Entities Involved in the Sale of Title Insurance Is Worthy of Further Study

Several types of entities (besides the insurers and their agents) are  involved in the sale of title insurance, and the degree of involvement and  the extent of coordination among the regulators of these entities appears  to vary, making this an area meriting further review. Further Study of the Implications of Recent State and Federal Investigations Could Be Beneficial

Federal and state investigators have identified two primary types of  potentially illegal activities associated with the sale of title insurance. Investigations Have Alleged Existence of Kickback Schemes and Fraudulent Activities in the Title Insurance Industry

In several states, state insurance regulators identified captive reinsurance  arrangements that they alleged were being used by title insurers and  agents to inappropriately compensate others—such as builders or  lenders—for referrals. State and federal investigators have also alleged the existence of  inappropriate or fraudulent business arrangements among title agencies,  title insurers, mortgage brokers, attorneys, and real estate brokers that  were allegedly being used to convey kickbacks and referral fees. A typical fraudulent business arrangement involves  a shell title agency that is set up by a title agent but that generally has no  physical location, employees, or assets, and does not actually perform title  and settlement business. State and federal investigators have also looked at other types of alleged  kickbacks that title agents have given real estate agents and brokers, and  attorneys involved in real estate transactions. Investigators alleged that  these inducements also violated federal and state anti-kickback and anti- rebating laws. Potential Regulatory Changes Raise a Number of Issues

Over the past several years, regulators, industry groups, and others have  suggested changes to regulations that would affect the way title insurance  is sold. HUD announced in June of 2005 that it was again  considering revisions to the regulations, and has subsequently held a  number of industry roundtables to get input from industry and others. The model law for title agents  includes, among other things, agent licensing requirements and  prohibitions on referral fees. Finally, at least one consumer advocate has suggested that requiring  lenders to pay for the title policies from which they benefit might increase  competition and ultimately lower costs for consumers.
Why GAO Did This Study

Title insurance is a required element of almost all real estate purchases and is not an insignificant cost for consumers. However, consumers generally do not have the knowledge needed to "shop around" for title insurance and usually rely on professionals involved in real estate--such as lenders, real estate agents, and attorneys--for advice in selecting a title insurer. Recent state and federal investigations into title insurance sales have identified practices that may have benefited these professionals and title insurance providers at the expense of consumers. At your request, GAO currently has work under way studying the title insurance industry, including pricing, competition, the size of the market, the roles of the various participants in the market, and how they are regulated. You asked GAO to identify and report on preliminary issues for further study. In so doing, this report focuses on: (1) the reasonableness of cost structures and agent practices common to the title insurance market that are not typical of other insurance markets; (2) the implications of activities identified in recent state and federal investigations that may have benefited real estate professionals rather than consumers; and (3) the potential need for regulatory changes that would affect the way that title insurance is sold.

What GAO Found

Some cost structures and agent practices that are common to the title insurance market are not typical of other lines of insurance and merit further study. First, the extent to which premium rates reflect underlying costs is not always clear. For example, most states do not consider title search and examination costs--insurers' largest expense--to be part of the premium, and do not review them. Second, while title agents play a key role in the underwriting process, the extent to which state insurance regulators review them is not clear. Few states regularly collect information on agents, and three states do not license them. Third, the extent to which a competitive environment exists within the title insurance market that benefits consumers is also not clear. Consumers generally lack the knowledge necessary to "shop around" for a title insurer and therefore often rely on the advice of real estate and mortgage professionals. As a result, title agents normally market their business to these professionals, creating a form of competition from which the benefit to consumers is not always clear. Fourth, real estate brokers and lenders are increasingly becoming full or part owners of title agencies, which may benefit consumers by allowing one-stop shopping, but may also create conflicts of interest. Finally, multiple regulators oversee the different entities involved in the title insurance industry, but the extent of involvement and coordination among these entities is not clear. Recent state and federal investigations have identified potentially illegal activities--mainly involving alleged kickbacks--that also merit further study. The investigations alleged instances of real estate agents, mortgage brokers, and lenders receiving referral fees or other inducements in return for steering business to title insurers or agents, activities that may have violated federal or state anti-kickback laws. Participants allegedly used several methods to convey the inducements, including captive reinsurance agreements, fraudulent business arrangements, and discounted business services. For example, investigators identified several "shell" title agencies created by a title agent and a real estate or mortgage broker that had no physical location or employees and did not perform any title business, allegedly serving only to obscure referral payments. Insurers and industry associations with whom we spoke said that they had begun to address such alleged activities but also said that current regulations needed clarification. In the past several years, regulators, industry groups, and others have suggested changes to the way title insurance is sold, and further study of these suggestions could be beneficial. For example, the Department of Housing and Urban Development announced in June 2005 that it was considering revisions to the regulations implementing the Real Estate Settlement Procedures Act. In addition, the National Association of Insurance Commissioners is considering changes to model laws for title insurers and title agents. Finally, at least one consumer advocate has suggested that requiring lenders to pay for the title policies from which they benefit might increase competition and ultimately lower consumers' costs.