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entitled 'Title Insurance: Preliminary Views and Issues for Further 
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Report to the Chairman, Committee on Financial Services, House of 
Representatives: 

United States Government Accountability Office: 

GAO: 

April 2006: 

Title Insurance: 

Preliminary Views and Issues for Further Study: 

Title Insurance: 

GAO-06-568: 

GAO Highlights: 

Highlights of GAO-06-568, a report to the Chairman, Committee on 
Financial Services, House of Representatives. 

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. 

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 williamso@gao.gov. 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Certain Aspects of the Title Insurance Market Merit Further Study: 

Further Study of the Implications of Recent State and Federal 
Investigations Could Be Beneficial: 

Potential Regulatory Changes Raise a Number of Issues: 

Appendix IGAO Contact and Staff Acknowledgments: 

Abbreviations: 

ALTA: American Land Title Association: 

HUD: Department of Housing and Urban Development: 

NAIC: National Association of Insurance Commissioners: 

RESPA: Real Estate Settlement Procedures Act: 

United States Government Accountability Office: 
Washington, DC 20548: 

April 24, 2006: 

The Honorable Michael G. Oxley: 
Chairman: 
Committee on Financial Services: 
House of Representatives: 

Dear Mr. Chairman: 

Title insurance guarantees clear ownership of a property that is being 
sold and protects both buyers and lenders. Typically it is required in 
real estate purchases and is not an insignificant cost for consumers, 
who may pay not only for their own policies but also for the lenders'. 
However, consumers are generally not knowledgeable of the costs and 
benefits of particular title insurance services and usually rely on 
professionals involved in real estate, such as lenders, real estate 
agents, or attorneys, for advice in selecting a title insurer.[Footnote 
1] 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. Similarly, a 
recent study on the competitiveness of the California title insurance 
market concluded that the market was not competitive and that consumers 
were being overcharged, provoking a strong and critical response from 
various market participants.[Footnote 2] 

In response to these concerns we have work under way, at your request, 
on the title insurance market, including pricing, competition, the size 
of the market, and the roles of the various participants in the market 
and how they are regulated. You requested that we report on the 
preliminary results of our work to date and identify issues for further 
study. This report focuses on issues related to: (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 or other 
professionals rather than consumers; and (3) proposed regulatory 
changes that would affect the way in which title insurance is sold. 

For this work, we reviewed available studies of the title insurance 
industry. These included the aforementioned study on the California 
title insurance market (as well as numerous criticisms of that study) 
and a recent study conducted on behalf of Fidelity National Title 
Group.[Footnote 3] To determine what role states play in overseeing the 
various parties involved in the title insurance industry, we reviewed 
title insurance regulations in selected states and other publicly 
available financial information on title insurers and agents. To gain a 
better understanding of how title insurance premiums are shared between 
insurance companies and agents, we reviewed data collected by the 
National Association of Insurance Commissioners (NAIC) and the American 
Land Title Association (ALTA).[Footnote 4] To determine how insurers 
account for premiums, we also looked at financial data filed with the 
Securities and Exchange Commission. Finally, to gain a better 
understanding of the dynamics of the industry and current practices and 
issues within the title insurance industry, we interviewed officials 
from a variety of national organizations whose members are involved in 
the marketing or sale of title insurance, or related activities; NAIC; 
the Department of Housing and Urban Development (HUD); several state 
regulators, including insurance departments and, in one state, the real 
estate commissioner; title insurers; title agents; and industry 
consultants. We performed our work primarily in Chicago, Illinois, and 
Washington, D.C., between February and April 2006. We performed our 
work in accordance with generally accepted government auditing 
standards. 

Results in Brief: 

The reasonableness of cost structures and certain agent practices that 
are common to the title insurance market--but not to other lines of 
insurance--merit further study. First, while state regulations 
generally require premium rates to be supported by underlying costs, 
the extent to which title insurance premium rates reflect such costs is 
not always clear. For example, according to data compiled by ALTA, the 
amount of premium paid to or retained by title agents, generally to pay 
for title search and examination costs and agents' commissions, 
accounted for approximately 71 percent of title insurers' total 
premiums written in 2004. However, most states do not appear to 
consider such costs to be part of the premium, and thus do not include 
them in their premium rate reviews. Second, although title agents 
appear to play a very critical role in the underwriting process, the 
extent to which state insurance regulators review their operations is 
unclear. It appears that few states regularly collect information on 
title agents' operations, and three states plus the District of 
Columbia do not even license title agents. Third, the extent to which a 
competitive environment that benefits consumers exists within the title 
insurance market is also not clear. For example, consumers generally 
lack the knowledge necessary to "shop around" for a title insurer and 
therefore often rely on the advice of professionals, such as real 
estate agents and lenders. 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, 
entities such as real estate brokers, lenders, and builders are 
increasingly becoming full or partial owners of title agencies in what 
are called "affiliated business arrangements." Such arrangements may 
benefit consumers by facilitating "one-stop shopping" and lowering 
costs, but they can also create conflicts of interest and can be used 
in ways that do not benefit consumers. Finally, multiple regulators 
oversee the different entities involved in the title insurance 
industry, including HUD and state insurance, real estate, and mortgage 
regulators, but the degree of their involvement and the extent of 
coordination among them are also not clear. Oversight of this, and 
other areas, is essential to ensuring that title insurance markets are 
functioning fairly, and the extent of examination and oversight 
afforded this industry segment reportedly has varied significantly. 

Recent state and federal investigations into the sale of title 
insurance have identified potentially illegal activities--primarily 
involving alleged kickbacks--that also merit further study. The 
investigations alleged instances of real estate agents, mortgage 
brokers, lenders, and attorneys 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 fees or inducements, including captive reinsurance agreements, 
allegedly inappropriate or fraudulent business arrangements, and free 
or discounted business services or other things of value. For example, 
in one case, investigators alleged that a title agent created several 
"shell" title agencies, some of which had few or no employees and, at 
least in one case, no physical location. Investigators alleged that the 
agencies did not actually perform any business (including settlements) 
but were created as vehicles to provide kickbacks to mortgage brokers 
for referring business. The investigators also alleged that title 
agents mishandled or misappropriated customers' premium payments, so 
that customers did not get the insurance they paid for.[Footnote 5] 
Insurers and industry associations with whom we spoke told us that they 
had taken steps to address alleged illegal activities, but also said 
that current regulations did not clearly address some aspects of 
affiliated business relationships and that they would support greater 
enforcement. 

In the past several years, regulators, industry groups, and others have 
suggested several changes to regulations that would affect the way 
title insurance is sold, and further study of these suggestions could 
be beneficial. In 2002, HUD proposed revisions to the regulations that 
implement the Real Estate Settlement Procedures Act (RESPA) that were 
designed to increase competition in the real estate settlement 
industry. The proposed revisions included the development of guaranteed 
mortgage packages and a more binding good faith estimate, both of which 
could affect the pricing and sale of title insurance. Such revisions 
proved to be controversial, and in response to considerable comment 
from industry (including the title industry), consumers, and others, 
HUD withdrew the proposal in 2004. However, HUD announced in June of 
2005 that it was again considering revisions to the regulations 
implementing RESPA and was seeking input from the industry and others. 
In addition, NAIC, which among other things develops model insurance 
laws that states can adopt, is considering changes to the model laws 
for title insurers and title agents.[Footnote 6] 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. Further review of the effects of 
such potential changes on the title industry and the feasibility of 
making such changes could help Congress, HUD, and state regulatory 
agencies in their oversight and decision-making processes. 

This is a preliminary report based on information collected to date and 
does not include conclusions or recommendations. 

Background: 

In any real estate transaction, the buyer and lender providing the 
mortgage need a guarantee that the buyer will have clear ownership of 
the property. Title insurance is designed to provide that guarantee by 
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' policies are in force for as 
long as the original loan is still outstanding, but end when the loan 
is paid off--for instance, through a refinancing transaction--while 
owners' policies remain in effect as long as the purchaser of the 
policy owns the property. 

Title insurance is sold primarily through title agents. 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 discovers a problem-- 
such as a tax lien that has not been paid--the agent either 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 not 
require that title problems be fixed but compensates policyholders if a 
covered problem arises. Except in very limited instances, title 
insurance does not insure against title defects that arise after the 
date of sale. 

Title searches are generally carried out locally by title agents 
because the public records to be searched are usually only available 
locally. In addition, the variety of sources that agents must check 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, indexed by property address, and 
must be regularly updated. Title plants may be owned by insurers, title 
agents, or a combination of entities. In some cases, the owner of a 
title plant sells access to other insurers and agents, charging them to 
use the service. 

Title insurance premiums are paid only once, at the time of sale or 
refinancing, to the title agent. 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 can even vary by 
areas within states. In many areas, the seller pays for the owner's 
policy and the buyer 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 policies are issued simultaneously by the 
same insurer, so that the same title search can be used for both 
policies. In a recent nationwide survey, the average cost for 
simultaneously issuing lender's and owner's policies on a $180,000 
loan, plus other associated title costs, was approximately $925--or 
approximately 34 percent of the average total loan origination and 
closing fees.[Footnote 7] 

In almost all states, title insurance is regulated by state insurance 
departments; in all states, insurers selling title insurance in that 
state are subject to the state's regulations for their operations 
within that state. State regulators are responsible for enforcing these 
regulations, primarily through the licensing of agents, the approval of 
insurance rates and products, and the examination of insurers' 
financial solvency and conduct. State regulators typically conduct 
financial solvency examinations every 3 to 5 years, while examinations 
reviewing insurers' conduct are generally done in response to specific 
complaints by consumers or concerns on the part of the regulator. 

Insurance regulations can vary across states, creating differences in 
the way insurers are regulated. For example, most states require 
insurers to submit proposed premium rates to the state regulator, and 
then perform some level of review of those rates. In several states, 
however, the state regulator sets the premium rate which all insurers 
must charge, and in at least one state the regulator does not review 
rates at all. In addition, while most states license title insurance 
agents, several do not. At the federal level, HUD is responsible for 
enforcing RESPA, which regulates real estate settlement practices. 
Among other things, RESPA requires that borrowers receive certain 
information regarding closing costs, including title insurance fees. 
RESPA also generally prohibits giving or accepting any thing of value 
for the referral of settlement services, such as the referral of 
business to a particular title agent. RESPA also allows state insurance 
commissioners to take enforcement actions, under RESPA, against these 
prohibited activities. 

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. Insurance rate regulation, among 
other things, aims to protect consumers by ensuring that premium rates 
accurately reflect insurers' expected and actual costs, and that they 
are not excessive. However, most state regulators do not appear to 
consider title search expenses to be part of the premium. As a result, 
these expenses are not included in regulatory reviews that seek to 
determine whether premium rates accurately reflect insurers' costs. To 
complicate matters, it also appears that few state regulators collect 
financial data from title agents, who generally conduct the title 
search and examination work, so that examining such expenses would be 
difficult. Further, unlike other lines of insurance, the largest costs 
for title insurers are expenses related to title searches and agent 
commissions, not losses on policy claims. In 2004, according to data 
compiled by ALTA, losses and loss adjustment expenses incurred by title 
insurers as a whole were approximately 5 percent of total premiums 
written, while the amount paid to or retained by agents (primarily for 
work related to title searches and examinations, and for agents' 
commissions) was approximately 71 percent of premiums written. In 
contrast, property casualty insurers' losses and loss adjustment 
expenses accounted for approximately 73 percent of total premiums in 
2004.[Footnote 8] 

A related area worthy of further review is premium rate regulation for 
mortgage refinance transactions. In these cases, a title search most 
likely has been performed relatively recently, and the property is not 
changing hands. If the same title insurer was conducting another title 
search for the refinancing, that search would presumably need to cover 
a shorter period of time. Because title search and examination costs 
are the largest component of premium rates for title insurance, the 
premium rates for refinance transactions could reasonably be expected 
to be lower than for home purchases. While it appears that many 
insurers do provide discounted premiums on refinance transactions, the 
extent of such discounts and how widely they are used--that is, whether 
consumers know about them and know how to take advantage of them--is 
unclear. 

Finally, the extent to which premium rates increase as loan amounts or 
purchase prices increase could also usefully be examined. Costs for 
title search and examination work do not appear to rise as loan or 
purchase amounts increase, and the portion of premiums that covers 
potential losses is only about 5 percent of total premiums. If premium 
rates reflected the underlying costs, premium rates could reasonably be 
expected to increase at a relatively slow rate as loan or purchase 
amounts increase. However, this does not always appear to be the case. 
For example, using premium rates posted on the Internet by two state 
regulators with whom we spoke, we found that when the purchase price or 
loan amount doubled from $150,000 to $300,000, the increase in total 
premium for an owner's policy for selected insurers in the same county 
ranged from approximately 27 to 57 percent. According to an industry 
expert and officials from an industry association, allowing such 
pricing reflects a policy decision by state regulators to have higher- 
income purchasers subsidize the title insurance costs of lower-income 
purchasers. 

Preliminary Questions:

* How do title insurers determine premium rates, and how have these 
rates changed in recent years?

* How does the current rate review structure in most states examine the 
costs that determine title insurance premium rates? 

* What data are collected that could be used to assess the extent to 
which title insurance premium rates reflect the associated costs? 

* To what extent do title insurers offer discounted premium rates on 
mortgage refinance transactions?. 

Extent of Regulatory Focus on Title Agents Merits Further Review: 

Title agents play a more significant role in the title insurance 
industry than most other types of insurance agents. For most lines of 
insurance, an agent's role is primarily a marketing role. Title 
insurance agents not only perform this task, but also carry out most 
underwriting tasks, including title search and examination work. In 
many cases, title agents retain the actual insurance policy and, after 
deducting expenses, remit the title insurer's portion of the premium. 
As we have seen, amounts paid to or retained by title agents for this 
work in 2004 were around 71 percent of total premiums written. 

Despite title agents' critical role, the amount of attention they 
receive from state regulators is not clear. For example, according to 
data compiled by ALTA, while most states require title agents to be 
licensed, three states plus the District of Columbia do not.[Footnote 
9] In addition, also according to the same source, 18 states and the 
District of Columbia do not require agents to pass a test to become 
licensed, and only 20 states require some form of continuing education 
as a prerequisite for title agents. At least one state does not 
regulate title agents. While NAIC has produced model legislation that 
states can use as a basis for their own regulation of title agents, 
according to NAIC, as of October 2005, only 3 states had passed the 
model act or similar legislation.[Footnote 10] 

The level of oversight of title agents by the state regulators that we 
spoke with for this report varied. For example, one state regulator 
told us that examiners conduct regular but informal visits to the title 
agents in their state but do not track such contacts. Another regulator 
told us that the agency's review of title agents' operations focused 
primarily on financial condition, not on compliance with state laws. 
This regulator also collected financial data from title agents, but had 
only recently begun systematically analyzing that data and questioned 
its quality. Another regulator told us that the agency had recently 
begun an intense examination of title agents' activities and had taken 
a number of related enforcement actions. 

The state insurance regulators with whom we spoke expected or required 
insurers to oversee the operations of the title agents writing policies 
for them. One regulator said that the state did not have specific 
regulations requiring insurers to monitor title agents' operations, but 
expected such monitoring as a matter of course. This regulator also 
expected insurers to resolve any problems the regulator might find with 
agents' operations. Another state regulator told us that, in light of 
activities identified in recent investigations, their office recently 
revised its regulations to require title insurers to monitor the 
activities of their agents and hold insurers responsible for their 
agents' actions. 

Preliminary Questions:

* To what extent do state insurance regulators review and collect 
information from title agents operating in their state? 

* To what extent are title insurers required to oversee the agents who 
write insurance for them? To what extent have state insurers adopted 
model title insurance and agent laws?. 

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. Meanwhile, the potential 
exists for real estate or mortgage professionals to recommend--not the 
least expensive or most reputable title insurer or agent--but the one 
that is most closely aligned with the professional's best interests. 
While RESPA generally prohibits the payment of fees for such business 
referrals, as discussed later in this report, recent federal and state 
investigations have alleged such arrangements. Some industry officials 
pointed out that cost was not the only basis for selecting a title 
insurer because service and speed were also important. 

Second, concentration in the industry has raised further questions 
about its competitiveness. In 2004, according to data compiled by ALTA, 
the five largest title insurers and their subsidiary companies 
accounted for over 90 percent of the total premiums written. However, 
according to the annual reports of several of these companies, a large 
number of local agents are used to conduct their business--for example, 
one company noted in its annual report that more than 9,500 agents sold 
the company's insurance nationwide. And while a recent analysis of 
competition in the California title insurance market concluded that the 
market was overly concentrated, some experts disagree with the study's 
methodology and its conclusions.[Footnote 11] 

Finally, certain aspects of the financial performance of title insurers 
and agents have also caused some to question the competitiveness of the 
title insurance market. For example, as previously discussed, losses on 
title insurance claims accounted for only about 5 percent of total 
premiums written in 2004--a very low percentage compared with most 
other lines. In addition, according to data collected by ALTA, total 
operating revenue for the industry as a whole rose approximately 68 
percent between 2001 and 2004, from approximately $9.8 to $16.4 
billion. Such conditions could create the impression of excessive 
profits. The same study of competition in the California market 
analyzed the profitability of insurers and agents in that market and 
concluded that they were earning large profits at consumers' expense. 

Preliminary Questions:

* To what extent do aspects of competition beneficial to the consumer 
appear to exist in the current title insurance market? 

* What has been the short- and long-term financial performance of title 
insurers and agents, and what accounts for the dramatic increase in 
total operating revenue? 

Further Study of the Effect of Affiliated Business Arrangements Could 
Be Beneficial: 

The use of affiliated business arrangements involving title agents and 
others such as lenders, real estate brokers, and builders, appears to 
have grown over the past several years, and further study of their 
effect could be beneficial. Within the title insurance industry, the 
term "affiliated business arrangements" generally refers to some level 
of joint ownership among title insurers, title agents, real estate 
brokers, mortgage brokers, lenders, and builders. For example, a 
mortgage lender and a title agent might form a new jointly owned title 
agency, or a lender might buy a portion of a title agency. According to 
some industry groups, consumers can benefit from such arrangements, 
which may provide convenient, one-stop shopping and lower costs. But 
some consumer groups and state insurance regulators point out that such 
arrangements can also be abused and could present conflicts of 
interest. 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, some see such 
arrangements as a way to hide referral fees by allowing title insurers 
or agents to mask such fees as a return on ownership interest. As 
detailed later in this report, a number of recent investigations have 
alleged improper use of affiliated business arrangements. 

State regulation of affiliated business arrangements appears to vary. 
For example, according to one industry association, a number of states 
limit the amount of business title insurers and agents can receive from 
an affiliate. 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. RESPA 
regulations require disclosure of affiliated arrangements whenever a 
settlement service provider refers a consumer to a business with which 
the provider has an ownership or other beneficial interest. In 
addition, while owners of affiliated business may be compensated for 
their ownership interest in, for example, a title agent, RESPA 
regulations prohibit compensation beyond that interest. 

As noted above, the extent of information collected regarding the 
activities of title agents appears to be limited. As a result, the 
extent of information collected on affiliated business arrangements 
involving title agents is likely similarly limited. The use of 
affiliated business arrangements, and the potential benefits and 
concerns regarding their use, make this an issue on which further study 
could be beneficial. 

Preliminary Questions:

* To what extent is information available on the growth and use of 
affiliated business arrangements in the title insurance industry? 

* What are the potential benefits and concerns associated with the use 
of affiliated business arrangements? 

* To what extent do state insurance and other regulators review 
affiliated business arrangements? 

* How are RESPA disclosure requirements of affiliated business 
arrangements, and the related prohibitions on referral fees, enforced?. 

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. Multiple 
types of entities are involved in the marketing of title insurance, 
including real estate brokers and agents, mortgage brokers, lenders, 
and builders who refer clients to the insurers and agents. These 
entities are generally overseen at the state level by different 
regulators, and the extent of regulation related to title insurance 
sales practices tends to vary across states. One state insurance 
regulator with whom we spoke told us that they informally coordinate 
with the state real estate commission as well as HUD. Another regulator 
said that, while they have tried to coordinate their efforts with the 
state regulators of real estate and mortgage brokers, those regulators 
have generally not been interested in such coordination. The apparent 
growth of affiliated business arrangements, which give some of these 
entities an ownership interest in others, makes examining the strengths 
of--and need for--such coordination even more important. However, some 
coordinated regulatory efforts have taken place. At the federal level, 
HUD, which is responsible for implementing RESPA, has conducted some 
investigations with state insurance regulators. As we will see, 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 in the market. Oversight of this, and 
other areas, is critical to ensure that title insurance markets are 
functioning fairly. 

Preliminary Questions:

* To what extent do regulatory differences among those involved in the 
sale of title insurance create concerns, and to what extent is there 
regulatory coordination? 

* To what extent do current regulations address the potential concerns 
about affiliated business arrangements? 

* What could state and federal regulators do to improve coordination? 

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. The first involves providing home-builders, real estate 
agents, real estate brokers, and lenders with potentially unlawful 
referral fees through captive reinsurer agreements, allegedly 
inappropriate or fraudulent business arrangements, and free or 
discounted business services and other items of value. The second 
involves potential fraud committed by title agents who allegedly 
misappropriate or mishandle customers' premiums. Industry 
representatives told us that title insurers have begun to address these 
problems but that clearer regulations and more enforcement are needed. 

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.[Footnote 12] 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. The title insurer agrees to 
"reinsure" all or part of its business with the reinsurer by paying the 
company a portion of the premium (and ostensibly transferring a portion 
of the risk) for each title transaction. Investigators alleged that 
these reinsurance companies did not actually provide reinsurance 
services in return for this compensation because the amount the 
reinsurers received exceeded the risk they assumed. The investigators 
considered these arrangements a way to pay for referrals, a practice 
that is unlawful under some state anti-kickback and anti-rebating laws 
as well as under RESPA. In one investigation, a reinsurer controlled by 
three title insurance underwriters entered into agreements with 
lenders, real estate brokerages, and builders to pay part of its 
premiums to these entities. State investigators alleged that the 
reinsurer was transacting reinsurance business without a required 
certificate from the state and that the title insurers were using 
unfair practices. As part of the settlement, state investigators 
demanded that the reinsurer cease operations in the state and that the 
underwriters end their captive reinsurance arrangements with 
unauthorized reinsurers but also reimburse affected consumers and pay 
penalties to the state.[Footnote 13] In New York, regulators and the 
attorney general confirmed that they are currently investigating 
alleged illegal kickbacks in the title insurance industry. 

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. 
Most of the investigations we reviewed have examined activities by 
title agents that involve affiliated business arrangements--that is, 
part or full ownership of title agencies by real estate brokers, 
lenders, home-builders, and mortgage brokers. 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. In 
cases we examined, regulators alleged their primary purpose is to serve 
as a vehicle to provide kickbacks by being 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. Investigations have alleged that the arrangements 
in these cases violate RESPA. For example: 

* In one federal investigation, a title insurer and eight home-builders 
were alleged to have formed shell agencies that performed little or no 
title work, were not independent entities, and benefited financially 
from referrals.[Footnote 14] 

* In a multi-state federal investigation, a title agency and its 
affiliates were found to have created "preferred" attorney lists for 
real estate closings. Attorneys were allegedly placed on the list only 
if they agreed to refer their clients to the title agency's affiliated 
online title company. As part of the settlement, the parties agreed to 
stop creating "preferred" attorney lists and pay monetary penalties to 
the federal government.[Footnote 15] 

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. In 
investigations we reviewed, these alleged kickbacks included free or 
discounted business services or other items of value and included 
gifts, entertainment, business support services, training, and printing 
costs. One state investigation identified items such as spa treatments, 
event tickets, electronics, and trips to domestic and foreign vacation 
locations. Investigators alleged that these inducements also violated 
federal and state anti-kickback and anti-rebating laws.[Footnote 16] 

Finally, federal and state investigators have alleged that some title 
agents have misappropriated or mishandled customers' premiums. For 
example, one licensed title insurance agent, who was an owner or 
partial owner of more than 10 title agencies, allegedly failed to remit 
approximately $500,000 in premiums to the title insurer. As a result, 
the insurer allegedly did not issue 6,400 title policies to consumers 
who had paid for them. The agent also had allegedly mixed funds from 
premiums with business assets and allegedly misappropriated escrow 
funds for his personal use. The investigators, who alleged that the 
agent had failed to perform his fiduciary duty and had violated several 
state laws, subsequently suspended his license and, pending the outcome 
of hearings, plan to shut down the title agencies he owned or 
controlled.[Footnote 17] Some employees of title agencies have also 
been alleged to have submitted fraudulent receipts, invoices, and 
expense reports and then used the reimbursement money for personal 
expenses or to pay for items on behalf of those who referred business 
to them.[Footnote 18] 

Some Industry Participants Say the Issues Raised by the Investigations 
Are Being Addressed, but Clearer Regulations Are Needed: 

In response to these and other investigations, insurers and industry 
associations say they have addressed some concerns but that clearer 
regulations and stronger enforcement regarding affiliated businesses 
are needed. One title-insurance-industry association told us that some 
title insurers have been motivated by recent federal and state 
enforcement actions to increasingly address kickbacks and rebates 
through, for example, increased oversight of title agents. In addition, 
they said that companies operating legally are hurt by competition from 
those breaking the rules and that these businesses welcome greater 
enforcement efforts. Another industry association, however, told us 
that clearer regulations regarding referral fees and affiliated 
business arrangements would aid the industry's compliance efforts. 
Specifically, regulations need to be more transparent about what types 
of discounts and fees are prohibited and what types are allowed. 

Preliminary Questions:

* How widespread are cited infractions associated with the sale of 
title insurance? 

* What are the implications of the findings of state and federal 
investigations for the title insurance industry and consumers? 

* What actions have regulators and title industry participants taken to 
reduce the extent of illegal activities? 

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. In 2002, in order to simplify and improve the 
process of obtaining home mortgages and to reduce settlement costs for 
consumers, HUD proposed revisions to the regulations implementing 
RESPA. The proposed revisions included the creation of a guaranteed 
mortgage package that included guaranteed prices for loan origination 
and settlement services and a guaranteed interest rate, as well as a 
revised good faith estimate that would have required additional 
disclosures of settlement fees and limit fee increases over the 
original estimates. In response to considerable comment from the title 
industry, consumers, and other federal agencies, HUD withdrew the 
proposal in 2004. Opponents argued that the revisions would have given 
lenders too much leverage in putting together the guaranteed mortgage 
packages and would have included title insurance--a product priced in 
part on risk--in a package that was priced based on market forces. 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.[Footnote 19] 

NAIC officials told us that NAIC is considering changes to the model 
title insurance act in order to address current issues such as the 
growth of affiliated business arrangements. The model law for title 
insurers, among other things, covers premium rate regulation and title 
insurers' oversight of title agents that write insurance for them. The 
model law for title agents includes, among other things, agent 
licensing requirements and prohibitions on referral fees. According to 
NAIC, they will likely change the model title insurers act to more 
closely mirror RESPA's provisions regarding referral fees and available 
sanctions against violators. In addition, they would like to revise the 
model title agents act by strengthening the licensing requirements for 
title agents, because doing so can discourage the formation of shell 
agencies as part of an improper affiliated business arrangement. 

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. Lenders 
could then use their market power to force title insurers to compete 
for lenders' business based on price. Additional regulation, these 
advocates said, might be necessary to require lenders to pass such cost 
savings on to consumers. Some title industry officials have voiced 
concern with such an approach because it would allow the lender to 
decide which title insurer the buyer must use. That is, if the buyer 
wanted to get the cost savings associated with simultaneously issued 
lender's and owner's policies, the buyer would have to use the same 
insurer as the lender. 

Preliminary Questions: 

* What benefits and concerns might arise from the implementation of 
potential regulatory changes? 

* What barriers to implementation exist, and how serious are they? 

* What other regulatory alternatives exist?  

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 Senate 
Committee on Banking, Housing and Urban Affairs; the House Committee on 
Financial Services; the Secretary of Housing and Urban Development; and 
other interested parties. We will make copies available to others upon 
request. The report will also be available at no charge on our Web site 
at [Hyperlink, http://www.gao.gov]. 

Please contact me at (202) 512-8678 or williamso@gao.gov 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 I. 

Sincerely Yours, 

Signed by:

Orice M. Williams: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Orice Williams, (202) 512-8678, williamso@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Lawrence Cluff, Assistant 
Director; Tania Calhoun, Emily Chalmers, Nina Horowitz, Marc Molino, 
Donald Porteous, Melvin Thomas, and Patrick Ward made key contributions 
to this report. 

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FOOTNOTES 

[1] Individual states regulate real estate brokerage, establishing 
licensing and other requirements for brokers and agents. Of the two 
categories of state-licensed real estate practitioners, brokers 
generally manage their own offices, and agents (or salespeople) must 
work for licensed brokers. States generally require brokers to meet 
more educational requirements than agents, have more experience, or 
both. 

[2] B. Birnbaum, Report to the California Insurance Commissioner: An 
Analysis of Competition in the California Title Insurance and Escrow 
Industry, (Austin, TX: Dec. 2005). 

[3] G. Vistnes, An Economic Analysis of Competition in the Title 
Insurance Industry, (Washington, D.C.: Mar. 2006). 

[4] 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. 

[5] Colorado Division of Insurance Order No. 0-06-089 (Nov. 15, 2005). 

[6] NAIC is a voluntary organization of the chief insurance regulatory 
officials of the 50 states, the District of Columbia, and four U.S. 
territories. NAIC assists state insurance regulators by providing 
guidance, model (or recommended) laws and guidelines, and information- 
sharing tools. 

[7] The survey was conducted by Bankrate.com in 2005 by obtaining 
information online where available, and contacting title agents as 
necessary. We did not assess the validity of the data collected in the 
survey. 

[8] According to industry consultants 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; meanwhile, most property casualty 
insurance is focused on compensating policyholders for losses. 

[9] The District of Columbia does not require title agents based there 
to be licensed, but title agents based in Maryland or Virginia who 
conduct business in the District must be licensed by their respective 
states. 

[10] NAIC, among other things, develops model insurance laws that 
states can adopt, and has developed such laws for both title insurers 
and agents. NAIC also manages the accreditation process for state 
insurance regulators, requiring them to adopt certain key laws in order 
to take advantage of reciprocity arrangements between states. However, 
states do not need to adopt the model laws in order to be accredited. 

[11] Birnbaum, Report to the California Insurance Commissioner. 

[12] Reinsurance is a mechanism that insurance companies routinely use 
to spread risk associated with insurance policies. Simply put, it is 
insurance for insurance companies. 

[13] California Department of Insurance File No. DISP05046621, 
Accusation, Notice of Noncompliance, Demand for Monetary Penalty, and 
Right to Issue Order to Show Cause (July 18, 2005); and Order 
Restipulation and Waiver (Feb. 21, 2006). 

[14] HUD Settlement Agreement (Dec. 15, 2005). 

[15] HUD Settlement Agreement (July 10, 2003). 

[16] California Department of Insurance, File Nos. LA 15489-A and LA 
15516-A, Accusation, Notice of Noncompliance and Hearing, Demand for 
Monetary Penalty, and Right to Issue Order to Show Cause (Feb. 2, 
2006). 

[17] Colorado Division of Insurance Order No. 0-06-089 (Nov. 15, 2005). 

[18] California Department of Insurance, File No. VA 1012-A, 
Accusation, Notice of Noncompliance and Hearing, Demand for Monetary 
Penalty, and Right to Issue Order to Show Cause, Statement of Charges, 
and Notice of Hearing (June 10, 2002);Order of Restricted License and 
Payment of Monetary Penalty (2003). 

[19] Department of Housing and Urban Development, "Real Estate 
Settlement Procedures Act (RESPA); Simplifying and Improving the 
Process of Obtaining Mortgages to Reduce Settlement Costs to Consumers: 
Notice of Meetings-RESPA Reform Roundtables; Notice," 70 Fed. Reg. 
37646 (June 29, 2005). 

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