|
The Fix Is In
by Robert Franco
 | 2008/02/14 |
The Wall Street Journal is reporting a lawsuit in New York that charges the four largest title insurers of illegally fixing prices. According to the article, Fidelity, First American, LandAmerica, and Stewart dominate over 90% of the market in New York. Though the rates are set by the industry, state regulators are supposed to make sure they are not excessive. But, is the oversight sufficient to warrant immunity from an antitrust suit?
Title-insurance rates in New York are set by an industry group, which submits them to state regulators for review. The suit alleges that these rates overcharge consumers because they conceal from regulators referrals and other payments that make up much of the cost of a title policy. A 1994 Supreme Court ruling protects title-insurance firms from antitrust suits only if they are actively supervised by state regulators.
"They're gaming the regulatory system," said Gordon Schnell, a lawyer representing the four named plaintiffs. "Especially in New York, where the firms set their rates collectively, that's a violation of the antitrust laws." The suit cites a 2006 state hearing in which regulators conceded they can't adequately review agents' commissions, which make up 85% of rates.
I am not familiar with the inner working of the title industry in New York, but there do seem to be some problems. In Ohio, I have never been asked to pay a kickback in return for work from a Realtor or mortgage broker. I remember being shocked by hearings in Florida when representatives from the title industry said they were aware that these kickbacks were being openly solicited. If I recall correctly, the going price was $300. In New York, testimony from the former president of the state's land title association demonstrate similar problems:
At the 2006 New York insurance-department hearing, witnesses said rebates and referrals were rife. In testimony from the hearing cited in the new suit, Larry Litwack, the former president of the New York Land Title Association, said, "Let's face it: There are no 'rules' governing title agencies in New York. Steering, kickbacks and referrals are open and notorious, often aided and abetted by the underwriters."
Even so, the proper way to address the issue is to more vigorously enforce the laws which make the kickbacks illegal. The fines just aren't working. The Government Accountability Office reported that title insurers have paid more than $100 million in fines, penalties and settlements since 2003. That is hardly a deterrent to an industry with revenue exceeding $16 billion in 2006. It makes for nice headlines, but it doesn't seem to have made much of an impact - clearly the fines are a small price to pay for what has become such a lucrative practice.
Source of Title Blog ::
On the issue of set, filed premiums, the MyClosingSpace Blog has an excellent post, See What Happens When You Charge Less... Although I have the opposite opinion as that expressed in the post, there are certainly some great comments that shows there are a couple of different views on the subject. Which is right or wrong probably depends on your perspective and experiences.
Here is a blurb... I encourage you to read the entire post:
By getting rid of these required rates you will introduce real competition. If a title company is able to find a way to offer lower rates while still running their business they should be allowed. And that is the crux of the issue. The reason state regulated rates were created was not to help consumers but to help the huge title insurance companies retain control of the market and continue to reap huge profits in the backs of consumers. The proof is in the pudding. These rates are not maximum charges but instead they are designed to keep any title company from charging less than the set rate. If you don't believe it start a title company and try to charge below the set rate. It won't be long before you have to fight the charges against you. Not because you are harming consumers but because YOU ARE NOT CHARGING ENOUGH. See, they don't really care if you charge more but if you charge less the big title companies will be all over you.
I quite agree that the filed rates represent the minimum you can charge, but, they are also the maximum. Thus, they serve two purposes in my mind. First, they do protect consumers from being charged more than the maximum rate. I have no doubt that if some agents could charge more, they would. This could certainly happen when the agent has captive business from an affiliated business arrangement or joint venture and there is little to fear from the competition who may charge less if the rates were not fixed. Second, they protect the many small, local, reputable agents who would suffer from large, regional or national companies that would severely undercut their fees if they could charge less. This was brought up as a concern in Florida when they held hearings on title insurance premiums. The theory presented was that if competition focused on the cost of title insurance premiums, prices would drop so much that it would cause more agents to cut corners to remain competitive. Thus, by ensuring that the premiums are kept high enough that the agents can afford to maintain reasonable standards the consumers benefit from the quality of work that is done in the process of issuing a policy.
I tend to agree that there must be a minimum premium that allows the process to work effectively. And, it must also function as a maximum to protect consumers from excessive premiums. When the same rate does both, it is properly set at the correct rate. If it does not accomplish both, the system has failed... and the regulators have failed. The ratings system and the regulators should be scrutinized to ensure that they are both fulfilling their purpose.
I think the rates in Ohio have been set at an appropriate level. I don't think they are excessive to the point where they allow consumers to be gouged. And, I don't think they are too low to the point where a reputable agent is unable to provide quality protection to the insured.
However, where I do feel the system has failed is in the minimum standards that must be followed to issue title insurance. The standards allow for short searches that are arguably "too short" to really be able to provide substantial value to the consumers. Some underwriters even promote the use of automated searches or those produced online from overseas companies. In these cases, the value of the policy is questionable and even the filed rates could effectively result in the consumer being overcharged.
What is needed isn't lower rates, or an elimination of the filed rates. What the regulators should be doing is insisting on higher standards that reflect the filed premiums. Ten years ago, there weren't so many accusations in the media about consumers being overcharged... but ten years ago, the industry wasn't allowing so many short cuts to be taken when issuing a policy. The problem isn't the rates, it's really the reduced value of the product.
Once we have reasonable standards enforced in the industry, then we can take a look at the premiums. I suspect that the rates in many states would hold up to scrutiny if the proper amount of work was actually going into producing the policies.
Robert A. Franco
SOURCE OF TITLE
rfranco@sourceoftitle.com
Categories: Title Industry, Title Standards
1703 words
|
2382 views
|
|
|