Steve Poizner, the insurance commissioner for the California Department of Insurance, recently stated that "the title industry is broken." I can't say that I disagree with that much of what he announced on June 1, 2007. It is broken.

(PHOTO: Steve Poizner, California Department of Insurance Commissioner)

He also said that he "intends to fix it." I also think that is a positive sign. Fixing the problems with the title insurance industry needs to happen on the state level. All of the talk about RESPA enforcement by the Department of Housing and Urban Development (HUD) is a farce. Expecting HUD to enforce RESPA is like expecting your local school crossing guard to raid crack houses: they are woefully ill-equipped to deal with the problem.

However, I respectfully disagree with the direction of Poizner's plan of attack. He stated that, "faced with pending regulations, I expect the industry to propose and implement a series of fundamental reforms including licensing of sales agents, rate reduction and simplification, and increased direct marketing to consumers to create more choice."

The licensing of sales agents is definitely a good idea. I'll give him that one. Sales representatives need to know what they can and can't do in the pursuit of business. Many RESPA violations likely occur when sales reps offer special deals or provide gifts to customers in return for repeat business. What a good salesman may just consider "schmoozing" Realtors and loan officers, may be a violation of Section 8 of RESPA.

Rate reduction and simplification is not such a simple issue, especially when you look at it in combination with his goal to increase direct marketing to consumers. Title insurance rates are very reasonable - they are far less than most lenders' loan origination fees and a mere drop in the bucket compared to the Realtors' six percent commission. If the goal is to get the title companies to market directly to consumers, that may increase operating costs. It may be difficult to get the title companies to spend more money on marketing in the face of rate caps. Fortunately, Poizner has delayed the implementation of the rate cap until 2011.

I think that instead of concentrating on the cost of title insurance, Poizner should be focused on the value of title insurance. I don't think the consumers are being over-charged, I just don't think they are getting what they are paying for anymore. The title industry has pretty much gone to short searches for most closings and they are paying less for them. However, the savings have not been passed along to the consumers. A thorough title search has been replaced with blanket exceptions on the title policy. Thus, the consumers are getting less coverage for the same money.

Worse yet, more and more of the current owner searches are not even completed by professional abstractors anymore. Many are completed by untrained abstractors, over-seas title plants, or instant title products compiled from incomplete databases.

Attacking title insurance rates is a sure way to gain public support. Everyone likes to hear that their government officials are going to save them money. The problem is that the public doesn't understand title insurance, nor the difference between a quality policy and one stitched together from unreliable sources with blanket exceptions. Fighting for lower prices is gimmick to gain political clout; it sure worked for John Garamendi who turned his battle with the title insurance industry into a position as Lieutenant Governor. However, it does not create any meaningful change that will improve the industry or protect the consumer.

Before we start to address the cost of the product we need higher standards for issuing title insurance that will protect the consumers and "really" provide them with the peace of mind that title insurance used to offer.

As I have stated many times in the past, meaningful change means regulating the title industry from the bottom up. Each title policy issued must be based on a thorough and accurate title search prepared by a knowledgeable title professional. With no regulation of the title abstractors, this cannot happen. Cheap title searches and alternative online products are shaking the foundation of our industry and it will eventually collapse no matter how heavily the top layer is regulated.

Robert A. Franco
SOURCE OF TITLE
rfranco@sourceoftitle.com