Theory, Conjecture, and Best Intentions

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Source of Title Blog

Theory, Conjecture, and Best Intentions
by Robert Franco | 2007/08/24 |

I watched a bit of the four and a half hour long hearings held by the Florida Department of Insurance Regulation (OIR). I would have liked to watch the whole thing, but I do have to work. And, at times it was painful to listen to the comments. I know a few of you e-mailed the OIR because I was copied (and, thank you for that). But, still the OIR seemed to be under the impression you could print a title search off from the Internet with a few simple key strokes.

They didn't focus as much on the abstracting issues as I would have liked, but the subject was interesting to watch when it came up. A couple of the underwriters on the panel seemed to have a bit of a problem answering questions about instant title searches. You could tell that it was difficult for them to explain that there is more to searching titles than printing a report online when they own subsidiaries that advertise instant title products.

One of the topics I found most interesting was the issue of the agents' split of the premiums. Steven Parton, General Counsel for the OIR, brought up an interesting concept of separating the services portion of the agents fees from the premium. He posed a hypothetical question - if two borrowers have homes valued at $250,000 and one has a clear title and the title search is very simple, and the other has title problems that takes a lot of time to search and clear, why are they paying the same price for title insurance? He asked if it would not make more sense for the agents to charge their actual cost for their services as a separate and distinct charge from the premium.

Source of Title Blog ::

There were a couple of good answers from the panel. First, it was contended that regulating the premiums in such a way was a public policy decision made by the state of Florida. After all, if there were title problems from previous owners, its really not fair to charge one borrower more than the other.

Second, the suggestion was made that if the agents weren't guaranteed their split of the premium, the market would dictate lower prices. Without a set minimum level of compensation for the agents, competition would force the prices to the point where some would have to cut corners to make a profit. It might get to the point where prices are so low that the agent isn't doing a proper title search or spending the time necessary to clear the title. Providing a guarantees amount of the set premium to the agents ensures that they are able to do the job right.

To me, the first argument has more merit than the second. I would also add that often times the borrower has little choice but to pay for those services and averaging the cost among the many makes that possible. If the agents charged actual cost for their services, while some would see significant savings, others would be forced to pay outrageous amounts. For example, if someone has a clouded title that is going to costs thousands of dollars to clear, they can't simple say "no, I don't want to have my title cleared." The lender is going to require the work be done anyway for their loan policy.

The second argument could be overcome by requiring more oversight by the underwriters and the OIR. If an agent is cutting corners and not doing the required leg-work to issue title insurance, they should be cancelled by their underwriter and the OIR should pull their license to prevent them from moving on to another underwriter who may be unaware of the previous problems. But, if the agent can do the work properly for less, why not allow the competition?

Another problem that exists, which was brought up by the panel, is that the agent doesn't always know how much work will be required until they do it. It would be nearly impossible to quote the fees accurately and many would be shocked when they got to the closing table. There is also a problem complying with the Good Faith Estimate (GFE) requirements of RESPA; an agent would not be able to provide a reliable estimate by the time the GFE is required to be provided.

For the sake of argument, if the agents were not compensated through a split of the premium and had to charge actual costs for their services, what would actually happen when the borrower with title problems found out what their fee was going to be? Suppose the agent gets the order, does a thorough title search, and through the examination process realizes that its going to cost a few thousand dollars. At this point, most of the work is done, but if the borrower thinks the fees are too high what can he do? If he decides to shop for a better price, he may run out of time with the lender and lose his rate lock. Meanwhile, the title agent has done the work, which is useless for any other purpose. Nobody wins in that situation. The agents would still be forced to charge everyone an average of the costs of producing the policy. Though, I would say that there is no reason that the charge for the services rendered must be based on the amount of the loan or value of the home.

Overall, the hearings were very good, and very interesting. It is nice to hear these kinds of things discussed but in the end it was a lot of theory, conjecture and best intentions that just don't relate well to real work practice.

The good news is that the OIR is planning on holding another hearing in the near future. I would like them to do a little homework on the title search process so they can see that a good old fashioned, thorough title search is still an integral part of the process. My biggest concern is that real title searches aren't getting done like they used to, but the consumers are still paying the same prices for them.

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

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Categories: Abstractors, Small Agents, Title Industry

1355 words | 2433 views | 2 comments | log in or register to post a comment

	This has "Doctrine of Unintended Co...
	This has "Doctrine of Unintended Consequences" written all over it. If anything comes out of this, I am glad it is another state that is letting itself be the guinea pig. My gut feeling is that since no one understands title insurance, no substantive changes will be made. Problem solved, declare a victory for consumers, turn off the cameras, and go home.
	by David Jenkins \| 2007/08/24 \| log in or register to post a reply

	I think that title insurance origin...
	I think that title insurance originally did separate the premium component from the service component. You, the insured, paid the individual conveyancer to do the search and draw up all of the paperwork for the transfer, and then you paid a premium on top of that to cover any defects in his or her work. Back then though, the search was the bulk of work and the actual closing was relatively simple if the search was correct. Since then, the title research has become easier and less prone to error, but the conveyancing and transactional end has become much more complicated, time consuming, and claim prone. I also think that loading everything into the premium was considered a consumer friendly measure on some level since it guaranteed a price up front that was regulated by the state to prevent price gouging and included all of the services in one flat fee. I think it is safe to say that the bulk of premium that the agent keeps now, though, is solely for the expense involved in running the agency and the time consuming tasks involved on the transactional end. Only about 20% goes to the underwriter to handle claims (at least in PA). I think it would be quite easy to split out the service end and keep underwriters solvent by adjusting the actual premiums down to whatever the agents take to actually pay for claims. The agents could then feel free to charge whatever they want on top of that to cover their expenses. The premium and the agent fee would each be a separate figure on the HUD. The agent could show either a service fee as one charge or an itemized list of services provided (search, conveyancing, doc prep, etc.). That would incorporate greater use of free market principles into the system, allow competition, increase transparency and negotiating power to consumers, and still keep underwriters solvent. It would also likely drastically reduce prices in the industry as a whole. I usually say that any changes intended to make the system more consumer friendly or competitive never work because (a) our business is too confusing to understand except by us and (b) most of our business comes to us from third parties and not the consumers directly. A revamping of the current pricing structure though might might change that dynamic. I would keep an open mind on the effects of a dramatic change in pricing since I think consumers will take the time to learn about title insurance as soon as word got out that they could save $500 or more on a transaction by investigating which title company they should use and bargaining a price for the service portion of their fees. I could also write another 10 pages on what the resulting chaos might look like after such a change.
	by David Jenkins \| 2007/08/24 \| log in or register to post a reply

Source of Title Blog

Robert A. Franco The focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco
SOURCE OF TITLE

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