Title Insurance Industry Under Investigation

Title Insurers Face Heat

Title insurers deny wrong doing, insist they aren't exploiting loopholes and blame their woes on misunderstood and misinterpreted regulations, over zealous regulatory enforcement and even uninformed consumers.

However, the title insurance industry is generally swift to pony up fines and institute policy reversals in response to investigations about questionable practices, but after decades of investigative scrutiny, the industry's reputation may be at stake.

Repeatedly slammed against the wall for infractions, the title industry is leaving an impression that recurrent fines and orders to return money to consumers amount to little more than "the cost of doing business" -- a small drop in a $17 billion bucket of revenues the industry fills nationwide very year.

Most recently, California Insurance Commissioner John Garamendi signed an order April 19, fining San Diego-based Stewart Title of California, Inc. $750,000 and ordering it to pay $160,000 in costs for alleged illegal rebating activity discovered during a 30-month investigation.

The state's insurance commission also ordered the company to cease use of inducements allegedly given or paid to real estate agents in exchange for referrals, an activity that amounts to kickbacks. Kickbacks are illegal in California and under federal law known as RESPA (Real Estate Settlement Procedures Act).

The investigation found that Stewart gave agents nearly $600,000 in payments for business support services, gift certificates, door prizes, rent payments, special event funding, and sponsorships in Los Angeles, Orange, Riverside, San Bernardino and San Diego Counties.

"Time and again we have caught the title insurance industry breaking the law in order to line its pockets at the expense of consumers. Let this latest fine be a warning" said Mr. Garamendi.

Stewart's parent company Houston, TX-based Stewart Information Services Corp. says it's already paid the fine, but does not consider the activities illegal.

"We wouldn't have done these things if we thought they were kickbacks. For example, one of the marketing people took to a reception for a real estate company some flowers for $4.95. We will respect the commission. Now that they have ruled it is illegal it is not going to happen again," said Ted C. Jones, director of Stewart's investor relations.

'Baloney'

Regulators aren't buying it.

"Baloney," says Norman Williams, a spokesman for California's Department of Insurance.

"They will tell you 'they didn't know'. My response is 'baloney'. It's the cost of doing business. They enjoy enormous profit. A nearly $1 million fine is a big fine, but when they are fined it's a cost of doing business. They want to increase their referrals, so they have been paying inducements, funding parties and paying office help. It's the cost of doing business and it's minuscule compared to what they bring in," said Mr. Williams.

California's Stewart Title investigation precedes a separate, more recent and widespread investigation this spring into alleged title industry kickbacks paid to captive reinsurance companies controlled by developers, lenders, builders and real estate firms.

The state's investigation claims half of the premium consumers pay for title insurance is, in turn, paid by the title insurer to the captive reinsurance entity, ostensibly to induce referrals.

California thus far has subpoenaed the Richmond, VA-based Land America Group (including Commonwealth Title, Lawyers Title and Transnation Title); the Jacksonvill, FL-based Fidelity National Financial (including Ticor Title, Security Union Title, Chicago Title and National Title Insurance of New York); as well as RE/MAX offices in Danville, Palm Desert, and Sherman Oaks, CA; Young Realtors, Westlake, CA; United Home Mortgage Corp., Walnut Creek, CA; Wells Fargo Home Mortgage; William Lyon Homes, KB Home, John Laing Homes and Shea Financial Services, a division of Shea Homes.

Compliance

The title industry and others subpoenaed say they are innocent and that payments are not kickbacks but the cost of real risk.

"Wells Fargo does not participate in the activities alleged by California's Insurance Commissioner. We do not use any title underwriter on an exclusive basis nor do we have any contractual provisions guaranteeing any future business for any title underwriter. We believe the title reinsurance agreements we have in place comply with state law and with the Real Estate Settlement Procedures Act (RESPA)," said a Wells Fargo statement issued in response to the allegations.

The statement also said the company is in full compliance with federal and state laws and that the bank fully discloses all terms and conditions to consumers.

Likewise, John Morrissey, a Shea vice president, said during April 4 testimony that Shea Financial entered a captive reinsurance arrangement with Fidelity in response to competition by other home builders who had already set up such agreements. Morrissey said Shea Financial took half the risk and half the premiums and if there was ever a claim Shea was prepared to share an equal loss with Fidelity. Morrissey also said Shea Homes, a Shea Financial affiliate, paid half the cost of consumers premiums.

"We make clear to our home buyers -- in writing -- that they have a choice. We never require our buyers to use a particular title insurer, and we explicitly tell them so. They are under no obligation to use any of our services. They remained free to shop around, to compare prices and services, and to use a different title insurer, just as they could obtain a mortgage or home owners insurance from us or someone else," Mr. Morrissey testified.

Williams said he does not know how long the investigation will continue or what fines or pay-back orders will ensue.

The two subpoenaed title companies have since ceased the practice.

"While we absolutely believed when we put these arrangements in place they were compliant with all rules and regulations, and we believe that today, I made the decision that what we believed doesn't matter. So, we stopped. And, I can pledge to you that we have no intention to engage in captive reinsurance in California or Colorado again unless and until we get clear, unambiguous rules on how they should operate," said Theodore L. Chandler, Jr. President and CEO, LandAmerica Financial Group, Inc. testifying April 4 before a hearing for the investigation.

The state questions if the premium payments to reinsurers covers real risk because of the low loss-ratio for title insurance policies, which the state says is about 3 percent to 5 percent for single-family properties.

Industry trade group, California Land Title Association puts the ratio at 4 to 7 percent, but says the ratio isn't the point.

"The whole point is to make the claims zero. The whole point is to search and clear the title which chews up 80 to 90 percent of the dollar, the rest is put back into the policy that protects the consumer," said Mark Bogetich, spokesman for the Sacramento-based trade group.

The association also says with the increasing costs of homes comes an increase in the cost of title insurance because with a more valuable home, there's an increased risk in a higher payout and the reinsurance activity spreads that risk.

"Real estate agents are still making 6 percent. I don't say that means the current real estate customer is getting screwed, it's just that there is more money in play. If you are a home owner and buy house and have a title policy and 10 years later discover the county has an easement and you want to build pool, the title company has to come in to fix the problem, to pay court costs," Mr. Bogetich added.

Confused consumers

The title industry also argues they disclose to consumers the fact that consumers aren't forced into a specific title insurance office, but consumers often don't read disclosures and are otherwise uninformed about their choices.

"The typical consumer, when they get into a real estate transaction, is overwhelmed with information and, I believe, underwhelmed with understanding that they have ability to control transaction," Mr. Bogetich said.

What further clouds the issue, are so-called "affiliated business arrangements," perfectly legitimate partnerships between, say, title insurance companies, mortgage lenders and real estate brokers and others all designed to create one-stop-shopping convenience.

"Our concern is that sometimes the issue could become mistakenly merged and confuse the two issues by assuming any marketing arrangement including title companies is automatically suspect," said Susan Johnson, executive director of RESPRO (Real Estate Services Providers Council), a group of real estate service providers engaged in the special business arrangements.

Clarity shouldn't be a problem, says Williams.

"This (what constitutes a kickback) has been made clear by the commission all over the state and in hundreds of news outlets," said Williams.

Title insurance investigations rarely occur in a vacuum.

The current investigation was spawned by a similar investigation in Colorado's Division of Insurance which found none of the reinsurers it investigated had paid a claim in more than several years giving the appearance the reinsurance companies were simply a ruse for kickbacks.

After Colorado began its investigation, title industry scrutiny spread to virtually every state in the nation.

In California, Williams also said, while California's investigation has not found a connection between alleged kickbacks and competition, there is also concern about how title insurance companies may be affecting competition. Only three companies -- LandAmerica, Fidelity and First American -- control 75 percent of the title insurance business in California, Williams said.

Fines cost of doing business?

First American agreed in February to give back $24 million to consumers nationwide while denying any wrongdoing after it was charged in Colorado and elsewhere with alleged kickbacks to real estate agents, lenders and developers. First American has also rolled back title and escrow services for refinancing consumers by 30 percent and partnered with AmeriDream's affordable-housing program to educate consumers on home ownership.

First American has not been asked to testify in the current California investigation, it says, because it is cooperating with California and other states where it had, but terminated captive reinsurance agreements.

When asked if the frequency and focus of title insurance investigations gives the appearance the industry purposely pushes the limits of the law to pad its bottom line, David Schulz, senior media relations manager at First American, echoed sentiments of other industry officials.

" 'Seeing what they can get away with?' It would be speculative on my part to talk on the whole industry, but for our company, we try to do the best we can to operate with a degree of integrity that goes beyond that idea of getting away with it," Mr. Schulz said.

Long History of Infractions

• In 1999, in the nation's largest ever action against the title and escrow industry, a class-action suit by California's Controller at the time, Kathleen Connell, sought a half billion dollars in escrow funds which the suit said some 200 title and escrow companies had wrongfully withheld from the state's consumers since 1970. The state collected at least $20 million.

• Also in 1999, First American agreed to pay California and Utah a total of $2.6 million in fines and to stop engaging in unlawful rebate activities investigators considered kickbacks.

• In 2003, Garamendi ordered an investigation of the title and escrow rates of five of California's largest title insurance sellers after Consumers Union found that major title insurance companies were quoting title insurance rates averaging twice what title industry representatives themselves said where available.

The industry said, in the fast-paced refinance market of that era, consumers simply weren't aware of certain discounts and the industry later took steps to make them more aware.

• In March this year Chicago-based Old Republic Title Company agreed to finish paying $50 million to the City and County of San Francisco -- including $14.8 million in restitutions and interest to consumers -- in a settlement agreement stemming from a 1998 civil suit charging the company with withholding escrow funds unclaimed by consumers and charging fees for services not performed.

• Broderick Perkins, executive editor of DeadlineNews.Com, has been a consumer and real estate journalist for more than 25 years. His award-winning work has appeared in major-market newspapers and leading realty Web sites.

Giving Title Insurers Only Their Due

In March 2005 Chicago-based Old Republic Title Company agreed to finish paying $50 million to the City and County of San Francisco -- including $14.8 million in restitutions and interest to consumers -- in a settlement agreement stemming from a 1998 civil suit charging the company with withholding escrow funds unclaimed by consumers and charging fees for services not performed.

First American Title, also in early 2005 agreed to give back $24 million to consumers nationwide while denying any wrongdoing after it was charged in Colorado and elsewhere with alleged kickbacks to real estate agents, lenders and developers.

Chicago Title has agreed to pay $6.2 million in civil penalties to the U.S. Treasury and the Texas Department of Insurance and it agreed to clean up settlement service practices after federal investigators found that settlement statements failed to accurately reflect the actual settlement costs for home loans and that the company violated federal anti-kickback provisions.

Other title insurance companies voluntarily stopped questionable practices and settlements are in the works after regulators in Alaska, California, Colorado, Florida, Minnesota and Washington looked into alleged kickback practices involving the title companies, real estate agents, lenders and developers.

Virtually every state in the nation was investigating title insurance industry behavior in 2005.

Deja vu

The title industry is in hot water again -- for at least the third time in the last half decade -- and the investigations and settlements underscore the continued diligence necessary from consumers who don't want to pay more than necessary for title services.

Title companies are hired, in part, to issue title insurance protection for home buyers and lenders. No matter the policy, the home buyer or seller typically pays for the coverage, after the company has investigated a title to make sure it is clear of any encumbrances, such as liens or judgments; forgeries or fraud and any other title anomalies.

Also, when you "open escrow" and later "close escrow" when the deal (home purchase or refinance) is done, you typically do so with a title or escrow company.

Such companies act as escrow agents -- the neutral third party through which is funneled the paperwork, money, transaction instructions and other details of a home purchase or mortgage refinance. The companies, hold onto, and then exchange, disburse and transfer deeds, other documents and monies related to the transaction.

The disbursements pay off existing loans and the title and escrow companies record deeds, prorate property tax payments and interest as it helps with the transaction's other transfer details.

Most of the monies associated with the home purchase are funneled through the escrow account including the buyer's deposit, money for the escrow account itself as well as related services, title insurance and title search fees, the purchase or refinance mortgage money and associated fees, the real estate agent's commission, recording fees, filing fees, transfer fees, notary fees, courier fees and a host of other fees -- some that recent law enforcement action have proven are at least questionable and, in some cases, illegal.

All these costs become "settlement costs" recorded on the U.S. Department of Housing and Urban Development's HUD-1 "Settlement Statement" or a reasonable facsimile, which eventually discloses all of a housing transaction's costs for both the buyer and the seller.

If you want to pay title and escrow companies only what they are due, experts suggest following these guidelines.

• Educate yourself. The title industry's American Land Title Association and state affiliates, provide consumer information, but if you seek more independent insight, consider purchasing Sandy Gadow's mother of all title and escrow books "Your Real Estate Closing" (McGraw Hill $19.95), a model guide to title, escrow and other closing issues. Gadow's top-notch partner Web site EscrowHelp.com is also loaded with insight.

• Before hiring a title or escrow company or escrow attorney, obtain several referrals from those you trust, family, friends, co-workers, real estate agents and others who've recently closed a satisfactory escrow.

• Ask for a referral to the title or escrow officer, not the company. The officer should be familiar with the type of home you are selling, especially if it's a condo or other multiplex home, an older historic home or other special house.

• The escrow office should be conveniently located or able to tap branches near you. Saving time saves money.

• Consider a professional who is patient, exacting and willing to give you the time and information you need to understand escrow.

• Compare the costs of different escrow and title companies before agreeing to use one. Fees can and do vary widely. Ask for all escrow costs from title insurance and search and escrow service fees to all the little so-called "garbage fees" that crop up in escrow.

• Be aware of discounts. Refinance-related discounts may be available when the loan being refinanced is relatively new, or only a few years old.

• Be sure when you complete an application for a loan you get settlement costs and good faith estimate information. Federal law requires the lender or mortgage broker deliver these documents to you within three days of receiving the application. Costs on the good faith estimate and final settlement sheet are not only title insurance and escrow related fees, but a host of other costs for the mortgage, insurance and taxes among others.

• Remember, the good faith estimate is only an estimate. For example, the lender may not know the costs for a escrow agent or title company that you use, or the exact amount that will be collected for title insurance and other costs not levied by the lender.

• To avoid surprises, let the lender and settlement agent (escrow or title company) know that you will want to see the settlement statement one day in advance and that you won't be rushed on closing day.

• Compare the good faith estimate with the settlement statement and, if necessary, contact the lender as well as the title/escrow company, demand that they explain any differences. Ask the lender, title or escrow companies to waive any fees that were not listed in the good-faith estimate. Learn about in advance and watch out for something called a "yield spread premium" which is a broker's fee that doesn't have to show up until closing.

• On closing day, come prepared with plenty of time, pencil, paper, a calculator, and an inquisitive, demanding mind. You are allowed to have your representative -- a real estate agent, mortgage counselor or other professional -- attend closing with you. If a real estate agent is involved in the deal he or she should accompany you. It's one of the services their commission provides. It's also their job to see that the deal closes in a satisfactory manner.

• Do not hesitate to question any amount that you do not understand and sign nothing until you understand each charge.

• Hard nosed consumer advocates suggest demanding a receipt for each and every charge on the settlement statement, but be prepared for resistance (title companies argue the settlement sheet is the receipt) and be prepared to delay closing to get them. Ask for a waiver of any fee not accompanied by a receipt or which can't be explained to your satisfaction.

Title Insurance And Kickbacks

In Santa Clara County, title companies also act as escrow companies -- the neutral third party that handles the paperwork, money, transaction instructions and other details of a home purchase or mortgage refinance.

Title insurance policies, which protect homeowners and lenders from claims against the title, are issued after the title company has investigated a title to make sure it is clear of any encumbrances, such as liens or judgments, forgeries or fraud and any other title anomalies.

Lenders demand the coverage. Consumers foot the bill. In Santa Clara County, the buyer traditionally buys insurance for a new home, the seller buys it for resale homes. However, the cost, like virtually every real estate cost, is negotiable.

The total premium on a $500,000 home purchase in Silicon Valley ranged from $2,000 to more than $3,000, with most companies charging nearer $2,200, according to a California Department of Insurance (CDI) "2033 Title Insurance Survey".

The median price of a single family detached home in Silicon Valley was $733,000 in March, 2005 and the title insurance premium on a $735,000 home (nearest price the online survey allows) ranged from about $3,000 to $4,000 with most companies charging nearer $3,000.

When a home owner refinances and uses the same lender, the cost is about half the amounts above, because the home owners coverage remains in effect. The lender demands a new policy.

CDI's investigation says for years title insurance companies had been splitting a portion of the premiums with others and such activity amounts to a kickback to induce referrals. Title insurers said the splits went only to companies experiencing risk in the transaction.

California's Insurance Code Section 12404 specifically says, "It is unlawful for any title insurer, underwritten title company or controlled escrow company to pay, directly or indirectly, any commission, compensation, or other consideration to any person as an inducement for the placement or referral of title business" and goes on to extensively define kickbacks.

The federal Real Estate Settlement Procedures Act (RESPA) likewise says "No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person." RESPA also prohibits fee splitting and receiving unearned fees for services not actually performed. It also prohibits a seller or his agent from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. The full text of RESPA is available online at .