WASHINGTON — State regulators from across the country have raised a red flag about a financial product used by millions of American home buyers and mortgage refinancers: title insurance.
After a 15-month study, a special task force of the National Assn. of Insurance Commissioners have released draft proposals to significantly increase governmental oversight of local title agents' business practices. They would also give closer scrutiny of individual title insurers' financial ability to pay homeowners' and mortgage lenders' claims.
The proposals include model legislation for all 50 states that would ban practices that experts say are rampant in many communities, such as under-the-table "rebates" and kickbacks from title agents to real estate brokers. The recommendations would not directly affect title insurance rates paid by home buyers and refinancers, but would require title insurers to assume full legal responsibility for thefts of homeowners' escrow funds and flagrant title-search errors committed by local title agents.
Title insurance is one of the most commonplace major expenses borne by home buyers, and possibly the least understood. Most mortgage lenders require it as a condition of making a home loan. Consumers pay a one-time premium at closing that protects the lender--and, for a higher premium, both the lender and the buyer--against financial loss should title "defects" later arise. Among the problems that affect legal title to a property are mechanic's liens and unpaid governmental assessments filed against it, undisclosed heirs claiming ownership of the real estate, marital disputes of prior owners, defective deeds and recordation botch-ups at county courthouses.
Although the premiums they pay at settlement often run to $500 or more, many consumers are surprised when they learn that only a small percentage of their dollars actually purchase insurance. Splits of premium payments commonly allot 75% to 90% of the consumer's dollar to the local title agency or settlement attorney who originated the business, with the balance going to the insurance company itself.
In California, according to industry sources, competition for title business is so intense among insurers that some local agents demand--and get--92% of every premium dollar paid for by home owners and refinancers. On a $500 premium that means just $40 goes for the insurance itself, $460 to the agent.
The title industry traditionally has defended its premium splits by arguing that compared with other insurance lines--like property and casualty--title insurers devote far greater expense to "risk elimination." These include extensive searches of title-related records at county courthouses on each property, underwriting the policy itself, plus the maintenance in some states of private "title plants" that keep computerized records on all real estate parcels within their jurisdictions.
The new proposals by the state insurance commissioners stop short of challenging the premium splits. But in the words of one top regulator, Bob Lange, Nebraska's deputy insurance director, any industry with such high splits "raises legitimate questions for consumers and regulators" alike. For example, he said, "when you're giving away 80 or 90 cents of every premium dollar, are you going to be able to pay your claims when they amount to 10 or 15 cents of every dollar? You don't have to be a rocket scientist to know there's a potential problem here."
For decades, according to title industry experts, loss ratios averaged 4% to 5% of premium and fee income. During recent years, however, according to Richard McCarthy, director of research for the American Land Title Assn., a trade group, loss ratios for title insurance have jumped to 10% and higher. Other industry sources say loss ratios experienced by some firms during the recent recession have hit 23% to 25%.
Regulators like Lange are worried that one or more title insurers could go belly-up without stricter financial oversight, and could leave banks and homeowners with huge, unprotected losses. To guard against this, the insurance commissioners have begun seeking more detailed disclosures about loss reserves, income and other financial data about title insurers operating within their borders.
Some title insurance executives agree with the push for higher loss reserves and disclosures. The president of Chicago-based Old Republic International Corp., Aldo C. Zucaro, has called publicly for higher reserve requirements to prevent financial crashes among undercapitalized, weaker firms.
McCarthy of the American Land Title Assn. says the industry is financially sound, despite the jitters of the state regulators. Last year title insurers wrote $5 billion in new policies, he said, while paying out $400 million in claims on policies written in earlier years.
"Everyone agrees that perhaps the industry needs some more reserves," McCarthy said, but the fact is "that every (title insurance firm) is stronger now than it was" during the recession years of 1990-1991.
The upshot of this for you as a consumer? For the time being, about all you can do is to be aware of the issues raised by the state commissioners. There is no current, readily available published data on the financial stability of title companies. Such information will be available in the future in states that adopt the draft recommendations of the title insurance task force.
Regarding premium splits: Ask your settlement lawyer, title or escrow agent for disclosure on who gets what percentage of your premium. You're always free to bargain. Or to go elsewhere if the cut sounds outrageously high.