Title Insurance:

Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers

GAO-07-401: Published: Apr 13, 2007. Publicly Released: Apr 17, 2007.

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In a previous report and testimony, GAO identified issues related to title insurance markets, including questions about the extent to which premium rates reflect underlying costs, oversight of title agent practices, and the implications of recent state and federal investigations. This report addresses those issues by examining (1) the characteristics of title insurance markets across states, (2) factors influencing competition and prices within those markets, and (3) the current regulatory environment and planned regulatory changes. To conduct this review, GAO analyzed available industry data and studies, and interviewed industry and regulatory officials in a sample of six states selected on the basis of differences in size, industry practices, regulatory environments, and number of investigations.

The U.S. title insurance market is highly concentrated at the insurer level, but market characteristics varied across states. In 2005, for example, five insurers accounted for 92 percent of the national market, with most states dominated by two or three large insurers. Variations across states included the way title agents conducted their searches as well as the number of affiliated business arrangements (ABA) in which real estate agents, brokers, and others have a stake in a title agency. Finally, premiums varied across states due to cost and market variations that can also make understanding and overseeing title insurance markets a challenge on the national level. Certain factors raise questions about the extent of competition and the reasonableness of prices that consumers pay for title insurance. Consumers find it difficult to comparison shop for title insurance because it is an unfamiliar and small part of a larger transaction that most consumers do not want to disrupt or delay for comparatively small potential savings. In addition, because consumers generally do not pick their title agent or insurer, title agents do not market to them but to the real estate and mortgage professionals who generally make the decision. This can create conflicts of interest if those making the referrals have a financial interest in the agent. These and other factors put consumers in a potentially vulnerable situation where, to a great extent, they have little or no influence over the price of title insurance but have little choice but to purchase it. Furthermore, recent investigations by the Department of Housing and Urban Development (HUD) and state insurance regulators have identified instances of alleged illegal activities within the title industry that appeared to take advantage of consumers' vulnerability by compensating realtors, builders, and others for consumer referrals. Combined, these factors raise questions about whether consumers are overpaying for title insurance. Given consumers' weak position in the title insurance market, regulatory efforts to ensure reasonable prices and deter illegal marketing activities are critical. However, state regulators have not collected the type of data, primarily on title agents' costs and operations, needed to analyze premium prices and underlying costs. In addition, the efforts of HUD and state insurance regulators to identify inappropriate marketing and sales activities under the Real Estate Settlement Procedures Act (RESPA), have faced obstacles, including constrained resources, HUD's lack of statutory civil money penalty authority, some state regulators' minimal oversight of title agents, and the increasing number of complicated ABAs. Finally, given the variety of professionals involved in a real estate transaction, a lack of coordination among different regulators within states, and between HUD and the states, could potentially hinder enforcement efforts against compensation for consumer referrals. Because of the involvement of both federal and state regulators, including multiple regulators at the state level, effective regulatory improvements will be a challenge and will require a coordinated effort among all involved.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matters for Congressional Consideration

    Matter: Congress may wish to consider exploring the costs and benefits of other changes to enhance consumers' ability to make informed decision, such as earlier delivery of HUD's home-buyer information booklet--perhaps at a real estate agent's first substantive contact with a prospective home buyer--and a requirement that the booklet be distributed with all types of consumer mortgage transactions, including refinancings.

    Status: Closed - Not Implemented

    Comments: As of September 2011, Congress had taken no action regarding potential changes to the requirements for HUD's home-buyer information booklet. There was no indication that they might consider such changes in the future.

    Matter: As part of congressional oversight of HUD's ability to effectively deter violations of RESPA related to the marketing and sale of title insurance, Congress may wish to consider exploring whether modifications are needed to RESPA, including providing HUD with increased enforcement authority for section 8 RESPA violations, such as the ability to levy civil money penalties.

    Status: Closed - Not Implemented

    Comments: As of September 2011, Congress had not taken action toward providing HUD with increased enforcement authority under Section 8 of the Real Estate Settlement Procedures Act (RESPA). There was also no indication that they might consider granting such authority in the future.

    Recommendations for Executive Action

    Recommendation: State insurance regulators, working through the National Association of Insurance Commissioners where appropriate, should take action to detect and deter inappropriate practices in the marketing and sale of title insurance, particularly among title agents. Among the actions they should consider are: (1) strengthening the regulation of title agents through means such as establishing meaningful requirements for capitalization, licensing, and continuing education; (2) improving the oversight of title agents, including those operating as ABAs, through means such as more detailed audits and the collection of data that would allow in-depth analyses of agents' costs and revenues; (3) increasing the transparency of title insurance prices to consumers, which could include evaluating the competitive benefits of using state or industry Web sites to publicize complete title insurance price information, including amounts charged by title agents; and (4) identifying approaches to increase cooperation among state insurance, real estate, and other regulators in the oversight of title insurance sales and marketing practices.

    Agency Affected: National Association of Insurance Commissioners

    Status: Closed - Implemented

    Comments: The National Association of Insurance Commissioners (NAIC) has taken several actions to address GAO's recommendation to detect and deter inappropriate practices in the marketing and sale of title insurance, particularly among title agents. First, in 2008 NAIC and HUD formed a title insurance working group that meets several times a year to discuss ongoing enforcement actions as well as potential concerns related to the sale of title insurance. As of September 2011, NAIC's Title Insurance Task Force has taken over coordination and management of these enforcement calls, which allow state insurance regulators and HUD to discuss ongoing enforcement actions and issues. According to HUD and NAIC officials, the working group has resulted in more effective enforcement of state regulations as well as RESPA. NAIC has also been holding webinars specifically for title insurance regulators to provide guidance on carrying out effective market conduct exams. Second, to address the need to improve oversight of title agents, NAIC has developed and approved a nationwide title statistical plan, called the Title Insurance Agent Statistical report, comprising 60 data elements. The report targets data from title insurers, title agents and others involved in "the business of title insurance." It will help state regulators improve analysis of market conditions. The Task Force has also created a Title Agent Statistical Data Plan Implementation Guideline detailing how states can collect and maintain confidentiality of data related to the plan, and outlining strategies to assist the states in gaining legislative approval. Full approval of the guidelines is projected for November 2011. To address strengthening the regulation of title agents, the Task Force has been coordinating with the Financial Condition Committee to modernize the solvency regulation of title insurance. These efforts include: determining the attributes of recent title company financial failures; developing risk-based capital requirements, early warning tools, and risk-focused financial examination guidelines for title insurers; reconsidering existing accounting standards for title insurers' liabilities and assets; and requesting the NAIC to provide statistical compilations of Title Annual Statements. NAIC is also monitoring developments in some states, such as Washington, which is moving to a prior approval model where title insurers need to receive state approval before they change rates. Further, the Task Force has been examining ways to mitigate the impact of title insurer insolvencies on policyholders, such as reviving work on the Title Insurance Guaranty Fund Model Act; promoting the use of blanket lenders' policies and individual owners' policies to replace policies issued by insolvent insurers; and examining the financial failures of title agents. The Task Force is also combating fraudulent and unfair real estate settlement activities by working with the Antifraud Task Force and other NAIC bodies to combat mortgage fraud; and mitigating title agent defalcations through the promotion of closing protection letters and other remedies. NAIC is also considering drafting a white paper on the pros and cons of closing protection letters. To promote effective consumer shopping and to increase transparency of title insurance costs, the Task Force has been following activities in various jurisdictions, such as web-based title insurance quotations, cost comparison websites, and internet-based real estate closing services. The Task Force plans to have a presentation related to an interactive title insurance resource website at its fall meeting in November 2011. In addition, NAIC collaborated with HUD on a revision to the Good Faith Estimate that separated out the costs for title insurance. NAIC officials reported as of September 2011 they will not be changing the Title Insurance Agent Model Act. NAIC officials expect any ongoing actions will be completed by 2012.

    Recommendation: The Secretary of HUD should take action to improve consumers' ability to comparison shop for title insurance. Among the actions they should consider are (1) expanding the sections of the home-buyer information booklet on title agent ABAs and available title insurance discounts; (2) evaluating the costs and benefits to consumers of title agents' operating as ABAs; (3) clarifying regulations concerning referral fees and ABAs; and (4) developing a more formalized coordination plan with state insurance, real estate, and mortgage banking regulators on RESPA enforcement efforts.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: As of June 2010, HUD had taken steps to implement 3 of the 4 actions that GAO suggested they consider, and had begun to implement the fourth. Specifically, HUD 1) Updated the home-buyer information booklet to include information on affiliated business arrangements, to encourage home buyers to ask about discounts on refinancing transactions, and to encourage home buyers to shop around for title insurance services; 2) Amended RESPA rules and the HUD-1 form so that the total amount paid for title insurance is broken down into the portion retained by the title agent and the portion paid to the title insurer; 3) Created a title insurance working group where HUD officials and state insurance regulators meet quarterly to discuss ongoing investigations and potential future issues; and 4) Issued an advance notice of proposed rulemaking that would clarify rules related to referral fees and affiliated business arrangements.

    Recommendation: The Secretary of HUD should take action to protect consumers from illegal title insurance marketing practices. Among the actions they should consider are (1) expanding the sections of the home-buyer information booklet on title agent ABAs and available title insurance discounts; (2) evaluating the costs and benefits to consumers of title agents' operating as ABAs; (3) clarifying regulations concerning referral fees and ABAs; and (4) developing a more formalized coordination plan with state insurance, real estate, and mortgage banking regulators on RESPA enforcement efforts.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: HUD has taken at least one significant action to better protect consumers from illegal title insurance marketing practices. HUD has initiated an enforcement working group that brings together HUD enforcement staff with state insurance regulators and NAIC officials. The working group meets quarterly to discuss emerging enforcement issues related to title insurance as well as ongoing HUD and state enforcement actions. According to state insurance regulators from Florida and California, the working group has been valuable in pursuing several enforcement actions. According to HUD officials, they will also continue to consider other actions, including actions related to affiliated business arrangements.

    Recommendation: State insurance regulators, working through the National Association of Insurance Commissioners where appropriate, should take action to increase consumers' ability to shop for title insurance based on price. Among the actions they should consider are: (1) strengthening the regulation of title agents through means such as establishing meaningful requirements for capitalization, licensing, and continuing education; (2) improving the oversight of title agents, including those operating as ABAs, through means such as more detailed audits and the collection of data that would allow in-depth analyses of agents' costs and revenues; (3) increasing the transparency of title insurance prices to consumers, which could include evaluating the competitive benefits of using state or industry Web sites to publicize complete title insurance price information, including amounts charged by title agents; and (4) identifying approaches to increase cooperation among state insurance, real estate, and other regulators in the oversight of title insurance sales and marketing practices.

    Agency Affected: National Association of Insurance Commissioners

    Status: Closed - Implemented

    Comments: The National Association of Insurance Commissioners (NAIC) has taken several actions to address GAO's recommendation to increase consumers' ability to shop for title insurance based on price. First, in 2008 NAIC and HUD formed a title insurance working group that meets several times a year to discuss ongoing enforcement actions as well as potential concerns related to the sale of title insurance. As of September 2011, NAIC?s Title Insurance Task Force has taken over coordination and management of these enforcement calls, which allow state insurance regulators and HUD to discuss ongoing enforcement actions and issues. According to HUD and NAIC officials, the working group has resulted in more effective enforcement of state regulations as well as RESPA. NAIC has also been holding webinars specifically for title insurance regulators to provide guidance on carrying out effective market conduct exams. Second, to address the need to improve oversight of title agents, NAIC has developed and approved a nationwide title statistical plan, called the Title Insurance Agent Statistical report, comprising 60 data elements. The report targets data from title insurers, title agents and others involved in "the business of title insurance." It will help state regulators improve analysis of market conditions. The Task Force has also created a Title Agent Statistical Data Plan Implementation Guideline detailing how states can collect and maintain confidentiality of data related to the plan, and outlining strategies to assist the states in gaining legislative approval. Full approval of the guidelines is projected for November 2011. To address strengthening the regulation of title agents, the Task Force has been coordinating with the Financial Condition Committee to modernize the solvency regulation of title insurance. These efforts include: determining the attributes of recent title company financial failures; developing risk-based capital requirements, early warning tools, and risk-focused financial examination guidelines for title insurers; reconsidering existing accounting standards for title insurers? liabilities and assets; and requesting the NAIC to provide statistical compilations of Title Annual Statements. NAIC is also monitoring developments in some states, such as Washington, which is moving to a prior approval model where title insurers need to receive state approval before they change rates. Further, the Task Force has been examining ways to mitigate the impact of title insurer insolvencies on policyholders, such as reviving work on the Title Insurance Guaranty Fund Model Act; promoting the use of blanket lenders? policies and individual owners? policies to replace policies issued by insolvent insurers; and examining the financial failures of title agents. The Task Force is also combating fraudulent and unfair real estate settlement activities by working with the Antifraud Task Force and other NAIC bodies to combat mortgage fraud; and mitigating title agent defalcations through the promotion of closing protection letters and other remedies. NAIC is also considering drafting a white paper on the pros and cons of closing protection letters. To promote effective consumer shopping and to increase transparency of title insurance costs, the Task Force has been following activities in various jurisdictions, such as web-based title insurance quotations, cost comparison websites, and internet-based real estate closing services. The Task Force plans to have a presentation related to an interactive title insurance resource website at its fall meeting in November 2011. In addition, NAIC collaborated with HUD on a revision to the Good Faith Estimate that separated out the costs for title insurance. NAIC officials reported as of September 2011 they will not be changing the Title Insurance Agent Model Act. NAIC officials expect any ongoing actions will be completed by 2012.

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