The American Title Insurance Industry: How a Cartel Fleeces the American Consumer

5. Title: The Administrative Dimension

5 Title: The Administrative Dimension As noted in the introduction, title insurance is administered through a two-tier system of title agents and insurers. Title and escrow agents solicit customers from an attorney, realtor, or mortgage agent. The actual insurance coverage is handled by a separate entity, a direct title insurance provider. This chapter describes how the two-tier system of administering title insurance has developed and is changing in response to technological innovation. There are five major stakeholders in the title business: • Consumers or clients, the investors who generally borrow some of the capital needed to purchase real estate property. They want an insurance policy that protects them against the risks that a title may turn out to be defective. They also prefer a policy with few exemption clauses. But they also want to minimize the insurance premium. • Title abstract and settlement agents handle the entire process of producing a title insurance policy after a title search and serve as the point of contact with both the lender and the owner. They transfer the risk coverage function to a direct title insurance carrier. Title abstract and settlement agents want to keep a maximum share of the insurance premium; they prefer to transmit only a minimum to the direct title insurance carrier for assuming the risk of the insured title. • Direct title insurance companies expect to maximize profits by securing a generous fraction of the insurance premium. They prefer to issue a policy with legal clauses that protect the company from having to cover expensive risks, unless an extra premium can be charged to cover the added cost of insuring each additional risk contingency. • Lenders are the firms that provide mortgage money. They require that a title insurance policy be provided to them free of 97 charge. The cost of title insurance does not matter to them; they do not pay the premium. • States and to a lesser degree the federal government regulate the title industry. Their civil service employees and the politically appointed insurance commissioners are inclined to avoid addressing their responsibility to mediate between competing interests in how the title industry operates. By law, they are expected to decide how mandatory premiums are set, low enough to be fair to the general public and high enough to cover the administrative costs of issuing a title insurance policy , to maintain reserve funds, and to make a reasonable profit. This is a complex judicial, diplomatic, and political function in which elected officials in the state legislature and executive branch officials are active participants. In most states, the deliberations for balancing competing interest in the title insurance industry are not on public view. Lobbyists approach decision makers behind the scenes, except in states where public hearings precede rate setting, as in Texas, New Mexico, Florida, and New Jersey. In all states, lobbyists are active in seeking to influence the decision-making process. Many lobbyists represent the insurance industry. Consumer representatives tend to be poorly funded or entirely absent. As a practical matter, the title insurance business has managed for the most part to evade the capitalist “survival of the fittest” test. The industry has borrowed from a now discredited system of socialist economics —state price determination based on political considerations not necessarily related to the actual cost of doing business. Figure 5.1 illustrates, as an example, the approximate allocation of fees in Texas in 1999. The title industry has streamlined much of its work because firms tend to use the standard title insurance contract forms provided by the American Land Title Association (ALTA), which can be printed out in seconds or modified to meet special circumstances. This procedure reduces the cost of attorney services. Technology has reduced the labor and time investment in many additional ways. The Electronic Signatures in Global National Commerce Act of June 2000 can save much time and mailing costs by endowing documents sent by electronic means with standards for validity.1 98 Title: The Administrative Dimension A reasonable case can be made that the incidence of title defects has declined over the decades for the following reasons: reduced error rates, more rapid turnover of property, and electronic title databases. County registrars of deeds and their staffs are increasingly well-educated and experienced professionals. Clerical mistakes are probably declining. Within a twenty-year period, the average American home is sold, remortgaged, or resold several times. Recorded evidence of chains of transactions are becoming increasingly...