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

8. Title Reform Is a Definite Maybe

8 Title Reform Is a Definite Maybe If It Works,Why Fix It? More than two-thirds of the U.S. population own the home in which they live. They have valid title, often with a mortgage that has to be paid off. In the United States, the quality of most real estate titles is enhanced through no-fault insurance against recording errors and omissions that may have escaped the attention of abstractors. The insurance policy is valuable, but there is a great deal of evidence that its cost is excessive. Lenders probably know that premium rates are excessive , but reform is not part of their agenda. Changing the way title insurance or other real estate transaction costs are priced, marketed, and regulated has never been a significant issue in any election for the presidency, governorships, U.S. Congress, or even state legislatures. Few business leaders question the status quo, except for the occasional insurance executive, such as officers of the American Council of Life Insurers who proposed a program of regulator efficiency and modernization that includes an option for a national title insurance plan.1 It would give insurance companies a choice to replace the more than fifty different state and territorial programs under which they are now being regulated with a single federal program. Multiple regulatory bodies generate added costs, with insufficient benefits to justify the costs of complying state-by-state with flawed regulatory practices. There are other price-fixed U.S. consumer products, such as many prescription drugs and public utilities including water, electricity, gas, and cable services. All are sold in near-monopoly markets, as is title insurance. They also are regulated by state and federal agencies, in which industry lobbies exercise a good deal of influence. Title insurance , however, is a commercial service with a number of competing service providers. Each tries to gain more market share by offering incentives to referral agents. None of the benefits of these incentives are 181 shared with the general public—industry premiums are fixed by law in most parts of the United States. The status quo works well for the industry and their customers seem to tolerate it. Why change it? The industry displays only occasional worry about its negative public image. The industry consultant Nelson Lipshutz often asserts that “everybody hates the title company: the homebuyer, the refinance borrower, the lender, the builder, the realtor, and the government.”2 We have observed widespread criticism of how the industry operates . We found little evidence of hatred but a good deal of interest in reforming the way the industry operates. This will not be easy, as the status quo, with its excessive costs, may not be equitable but it is legal. Table 8.1 lists a number of reform proposals to reduce the conflict between legality and equity. They include ways to reduce consumer costs and to give consumers more control over what possible title flaws may be covered in their policies. They are intended to reduce the system pathology that allows the industry to function free from consumer market power. 182 Title Reform Is a Definite Maybe Table 8.1 Title Industry Reform Options • Negotiated reform by regulators and the industry • Legal challenges in federal and state courts of governmental support of the title insurance cartel • Proconsumer reform legislation • Encouragement of market competition • A single inclusive closing-cost estimate, communicated early in the real estate transfer process • Reissue rate discounts or abolition of this inequitable double insurance requirement • Reduction of the high title agency commissions, now much above the level of earnings of other insurance services • Establishment of a well-organized and financially solid homeowners consumer lobby • Subjecting title defects to a statute of limitations if not discovered during a given number of years • Commercialization of the Registry of Deeds in cooperation with industry-owned title banks • Establishment of a fraud-reduction task force • Legalization of referral fees with prior notice to both the seller and the buyer • Enhanced reliance on title insurance rating bureaus • Claim settlement monitoring by state or federal agencies Source: Joseph W. Eaton and David J. Eaton. Negotiated Reform The nation’s five biggest title insurance firms and many smaller title industry-related corporations have repeatedly pleaded nolo contendere to violating the RESPA prohibition against payments to referral agents. These organizations have employed a variety of techniques— ruled to be illegal in close to a dozen states—to share as much...