Certain Aspects of the Title Insurance Market Merit Further Study

We identified several important items for further study, including the way  policy premiums are determined, the role played by title agents, the way  that title insurance is marketed, the growth of affiliated business  arrangements, and the involvement of and coordination among the  regulators of the multiple types of entities involved in the marketing and  sale of title insurance. The Extent to Which Premium Rates Reflect Underlying Costs Is Not Always Clear

For several reasons, the extent to which title insurance premium rates  reflect insurers’ underlying costs is not always clear. 1). However, most state regulators do not consider title search  expenses to be part of the premium, and do not include them in regulatory  reviews that seek to determine whether premium rates accurately reflect  insurers’ costs. Costs for title search and examination  work do not appear to rise as loan or purchase amounts increase, and  such costs are insurers’ largest expense. The Extent of Regulatory Focus on Title Agents Merits Further Review

Title agents play a more significant role in the title insurance industry than  agents do in most other types of insurance, performing most underwriting  tasks as well as the title search and examination work. However, the  amount of attention they receive from state regulators is not clear. The Extent of Competition in the Industry That Could Benefit Consumers Is Not Clear

For several reasons, the competitiveness of the title insurance market has  been questioned. First, while consumers pay for title insurance, they  generally do not know how to “shop around” for the best deal and may not  even know that they can. Instead, they 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 products exclusively to these  types of professionals, who in some cases may recommend not the least  expensive or most reputable title insurer or agent but the one that  represents the professional’s best interests. 2). These entities include real estate brokers and agents, mortgage brokers,  lenders, and builders, all of which may refer clients to particular agencies  and insurers. For example,  one state insurance regulator with whom we spoke told us that the agency  coordinated to some extent with the state real estate commission and at  the federal level with HUD, but only informally. Some of these investigations of the marketing of title insurance by title  insurers and agents, real estate brokers, and builders have turned up  allegedly illegal activities. Recent State and Federal Investigations Have Identified Areas of Potential Interest

Federal and state investigations have identified two primary types of  potentially illegal activities in the sale of title insurance, but the extent to  which such activities occur in the title insurance industry is unknown. The  first involves allegations of kickbacks–that is, fees that title agents or  insurers may give to home builders, real estate agents and brokers, or  lenders in return for referrals. State and federal investigators have also alleged the existence of  inappropriate or fraudulent affiliated business arrangements. These  involve a “shell” title agency that generally has no physical location,  employees, or assets, and does not actually perform title and settlement  business. Investigators  have also looked at the various types of alleged kickbacks that title agents  have provided, including gifts, entertainment, business support services,  training, and printing costs. Proposed Regulatory Changes Raise a Number of Issues

Over the past several years, regulators and others have suggested changes  to regulations that would affect the way title insurance is sold, and further  study of the issues raised by these potential changes could be beneficial. In June 2005, HUD  announced that it was again considering revisions to the regulations. In  addition, NAIC officials told us that the organization was considering  changes to the model title insurance and agent laws to address current  issues such as the growth of affiliated business arrangements and to more  closely mirror RESPA’s provisions on referral fees and sanctions for  violators. Finally, some consumer advocates have suggested that requiring  lenders to pay for the title policies from which they benefit might increase  competition and ultimately lower costs for consumers, because lenders  could then use their market power to force title insurers to compete for  business based on price.
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 the request of the House Financial Services Committee, 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 the industry is regulated. This testimony discusses the preliminary results of GAO's work to date and identifies issues for further study. In so doing, this testimony 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 these costs. Second, while title agents play a key role in the underwriting process, the extent to which state insurance regulators review agents is not clear. Few states 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.