The New York Department of Financial Services (DFS) questioned title insurers regarding their rates and expenses during a hearing on Dec. 10, in the department’s offices in Manhattan that, according to the notice on the DFS website, lasted from 10 a.m. to 5 p.m. In its notice of public hearing, issued on Dec. 6, the DFS stated the hearing was concerning “title insurance industry rates and other related matters.”
According to the Wall Street Journal, the DFS issued subpoenas to dozens of title insurance agents and sent information requests to title insurers, including First American Financial Corp., Fidelity National Financial Inc., Stewart Information Services Corp., and Old Republic International Corp. The information detailed the companies’ advertising, marketing and travel expenses. The inquiries revealed expenditures by the underwriters for gifts, lunches, sporting events, gentlemen’s clubs and rounds of golf, according to the Wall Street Journal.
During the hearing, representatives from First American and Fidelity defended their spending, arguing that the entertainment expenses are necessary to their marketing efforts. They reassured the DFS that sales personnel attended events with clients and played down the value of the expenses, saying most were for lunches.
The backlash
In addition to various title insurers and agents, consumer advocates also spoke at the hearing. In written testimony provided on behalf of the Consumer Federation of America, J. Robert Hunter, director of insurance for the CFA, said that title insurance facilitates homeownership by mitigating risks related to the transfer of ownership to real property.
“However, if there is a problem with the title, title insurance policies only reimburse the homeowner at the level of the purchase price, meaning that any market appreciation is lost,” Hunter said. “Title insurance is important because some titles may have problems that are not clearly discernable in the public records due to errors or omissions that have not yet been uncovered, such as earlier defective transfer due to fraud. However, the overwhelming majority of title problems are discoverable with a routine search of public records, including tax or mechanic’s liens, possible heirs, errors or omissions in deeds or possible forgery.”
He noted that the title insurance market is highly concentrated, with the top four companies capturing 90.6 percent of market share in New York.
Hunter argued that it is hard for consumers to understand what title insurance is, or have the ability to shop for it.
“Title insurance remains one of the most expensive items at closing, yet consumers poorly understand it and they have little ability to shop around for this product,” he said. “Title insurance costs are presented to homebuyers at the point of closing on real estate transactions along with many other closing costs. Purchasing a home is the largest and most complex financial transaction most households undertake. Many homebuyers, especially first time and financially unsophisticated buyers, are especially vulnerable during the closing process and are under the impression that the transaction terms and costs are fixed. If a consumer does question the title insurance charge, the threat of a delayed closing can be raised. Moreover, homebuyers assume that the transaction intermediaries (real estate agents, mortgage brokers and title agents) are acting in the buyers’ best interest, when in fact most intermediaries are acting in their own financial interest.”
Hunter said that although consumers can legally purchase title insurance on the open market, as a practical matter most homebuyers have title insurance chosen for them by their real estate agent or mortgage broker.
He proposed several different ways to reform the industry, the first being to make lenders pay for title insurance policies and include the cost in their APR.
“This would help to limit or even eliminate the current lack of incentive to hold down the cost of title insurance premium, since there would no longer be an ability to indirectly pass the cost through to the homebuyer,” Hunter said. “The direct pass-through as part of the APR will pressure the lenders to achieve low title insurance costs, squeezing out the excessive kickbacks from the title insurance product. Homeowners would be protected with lender purchased title insurance coverage for the borrower even after they pay off their mortgages. Title policies remain in force until the property is sold or the loan is repaid. When a consumer refinances, the old lender’s policy expires and a new lender’s policy is required. However, the owner’s policy remains in force with a refinance.”
He also called for the state’s rating bureau to be abolished, requiring title insurers to file their own rates.
“In order for real competition to flourish, insurers and agents must compete on price. Rate bureaus suffer from a fatal flaw, which is that they must produce a price that is sufficient for their least efficient/least effective member insurance company to flourish. Thus, the tendency for the bureau is to use actuarial rating factors to jack up the price to the level needed to satisfy the entire membership. The New York department recently demonstrated knowledge of the rate bureau’s overreaches, when the department disapproved an excessive TIRSA filing.”
Title agent licensure?
While the hearing did not paint the industry in a good light, it could lead to something the industry in New York has been wanting for years: title agent licensure. A bill requiring the DFS to regulate title agents in the state was introduced again in August. Robert Treuber, executive vice president of the New York State Land Title Association (NYSLTA), explained how the NYSLTA played a large part in the crafting of the bill (SB 5023/ AB 8202), working with agents, underwriters and other stakeholders to draft a bill focused on licensing, building it from their experience and previous bills that the association and the department of insurance had crafted over the years. He said this issue is very important for the industry and for consumers.
“Most states have agreed that in the conveyance of real property, title agents have a pivotal role,” Treuber said. “They cause government revenue to be collected; they maintain the accuracy of the land records system. There are a lot of things that [title agents] do from the private sector in the defense of the public wellbeing, as well as consumers’ well-being. Licensing is about a standard of competency and performance. The other side of that coin is there are penalties if you don’t meet those standards and if you don’t comply with the law. It’s a very important thing. It positions the title agent appropriately in the role they play in real estate finance and real property conveyance.
“I think the title industry in New York benefits when the real estate finance consumer has some assurance that the title agent that they are working with meets standards of competency and professionalism and constraints from irresponsible behavior,” he continued, noting that there are currently no external standards of performance for title agents in New York.
Treuber said the NYSLTA has provided educational programs and worked with its membership to continue to raise professional standards over the years, but that it became more and more imperative to address the issue of title agent licensing. The NYSLTA has made the bill one of its top priorities for the year. Both companion bills are currently in committee.