There is no doubt that the underwriters are in the driver's seat in most states. What have we seen from them in the past decade? Automation, Affiliated Business Arrangements (AfBA), and pressure for more premiums to be generated. Are any of these good for the small independent title agents?
Instant Title - just add water and stir.
The underwriters have made substantial investments in thin-title plants and overseas operations to be able to produce "instant" title searches and commitments. We all know that these sources are not "complete" but they are apparently sufficient to comply with the shoddy search standards promulgated by the underwriters these days.
Here are the claims of one such company, NextAce:
TitleEDGE utilizes technology to complete an automated search and preliminary examination for a wide variety of title and foreclosure products, allowing the title company to deliver completed title commitments to the lender and consumer in as little as one hour.
The consumer is still paying the same rates for title insurance and search fees, but the companies that utilize automated sources are no longer providing the same in-depth search of the public records. Small title agents that still send abstractors to the courthouse to develop their searches are at a substantial disadvantage. It takes longer to have a professional abstractor review the official public records and even more time to property examine the search and prepare a title commitment. How can they compete with one-hour automated services?
Affiliated Business Arrangements - closing out the competition.
I have been to several conferences and seminars over the past 5 years and inevitably the topic of AfBAs is brought up by a small agent. The consensus seems to be that small agents hate them... with passion. The underwriters and large agencies are setting up AfBAs and promising potential sources of referrals (lenders, builders, and Realtors) a piece of the title insurance action. This creates captive business and makes it nearly impossible for small agents to compete.
When a small agent brought up the topic at a First American event, Gary Kermott, currently the Vice Chairman of First American and President of ALTA, told the audience that he didn't like them either, but if you have set them up to be competitive, First American was there to help. My initial reaction was "Duh!" Underwriters don't care whether their premiums come from independent agents or AfBAs; their split of the premium remains the same. It is the agent that must share the profits of the venture - not the underwriter. If anything, the AfBA model benefits them. The more agents that set them up, and captivate a larger market share, the more premiums the company generates for their underwriter.
Sadly, I have spoken to several small agents that have been suffering because competition from large agents and underwriters has convinced some of their largest customers to set up AfBAs. That work is gone for good. Typically, those arrangements are made by the higher-ups at the affiliate. It no longer matters whether the individual Realtors or loan officers want to continue to use their small local agent, with whom they have a strong business relationship - they are told to direct the work to the AfBA. They get a piece of the action by directing all of their work in that direction. It's the equivalent of a credit card rewards program - you use the credit card that gives you the most frequent flyer miles. The beauty of the AfBA is that when the bill comes the affiliate doesn't have to pay it, their consumer pays for the perks! How does a small agent compete with that (without violating RESPA)?
Demand for Higher Premiums - the equivalent of "publish or perish"
First American, the underwriter with the highest loss ratio at 12.9%, recently announced that it will be cancelling agents. Approximately 60% of it's claims are coming from agents.
We [at First American] are currently performing a profitability analysis on all agents which will examine the agents split, claims experience, profitability, and other factors. If the agent does not meet our required thresholds, we will renegotiate the agency split, cancel the agreement or take other appropriate actions. Many agency relationships have already been terminated and we are specially focused on our agency business the western states which have a relatively unfavorable agency split.
A former agency representative with another big underwriter told me that she had picked up several small agents who were cancelled by First American because they did not generate enough premiums. Fortunately, not all underwriters have taken this approach, but it certainly marks a growing trend.
A recent Reader's Poll on The Title Report asked "has your underwriter asked your agency to remit a certain amount of premium this year?" The results showed:
17%: Yes, and I'm cooperating to meet my underwriter's needs
25%: Yes, but I didn't want to be bullied so now the underwriter has dumped me
58%: No, I haven't been approached by my underwriter
A recent article from The Title Report indicated that most of the major underwriters were scrutinizing their agency relationships and making changed based on claims experiences. However, remittances are also a factor.
LandAmerica’s chief financial officer, Bill Evans, said the company continues to examine low-remitting agents and those with poor claims experience.
“If there’s not a willingness to improve, then we will cancel agents such as those,” he said.
It is tough out there for small agents. Not only are they facing tougher competition from their underwriters, those who use "instant" title products, and AfBAs, but they also have to worry about getting cancelled if they cannot "meet required thresholds for profitability." This is the title industry's equivalent of "publish or perish."
Some markets are dominated by attorneys where strong "unauthorized practice of law" statutes prohibit non-attorneys from providing title opinions and conducting closings. Critics often claim that these statutes are unnecessary and only serve to protect attorneys and drive up the cost of real estate transactions. An anonymous blogger recently shared this opinion on Democrat and Chronicle.com, Unlawful Practice of Law: A smokescreen.
Many States do not require the use of attorneys to close real estate. The results? Faster closings, less costs, more choice. Sadly New York State is controlled by attorneys, or those who were formerly attorneys.
The idea that these attorneys are trying to protect the public is a flat out lie. Attorneys are not necessary in a real estate transaction, but we are forced to use them. Attorneys have also dug deep into other real estate related businesses. The title insurance business is literally being bullied by lawyers and millions of dollars annually are given as kick-backs to attorneys. When the Attorney General went after title insurers he ignored the biggest crooks of all - his peers.
But, there certainly is evidence to the contrary. I wrote a blog in January of 2007, A Simple Transaction, in which I shared a bit of my all-time favorite court opinion from a New York case, Bonior v. Citibank, N.A., 2006 N.Y. Slip Op 26525 (N.Y. Misc. 2006). The case was brought by a borrower over closing costs and pre-payment penalties, but the most important thing about this case is that the borrower was not represented by counsel and the comments the court made about that lack of representation.
The court's observation, in part:
Apparently someone has taken the advice of Dick the Butcher in Shakespeare's Henry VI, Part II and "kill(ed) all the lawyers." Nowhere in this transaction does there appear to be the participation of any lawyers... At one time a real estate transaction consisted of a deed, a note and a mortgage; took about fifteen minutes to complete; and had the participation of an attorney for all parties to the transaction. The last time the Court checked, we were still in the City of New York where people do not even verify the score of the Yankee game without consulting counsel, and yet, lawyers have effectively been eliminated from real estate closings involving the refinance of mortgages and secondary loans, including home equity lines of credit. One could conclude therefore that these transactions have no legal implications. That, however, would be far from the truth. The borrowing of money secured by a mortgage is often a complex transaction with serious legal implications for all of the parties involved, especially the borrowers who are pledging their home as security.
Other states have been very aggressive with their unauthorized practice of law statutes, such as South Carolina. South Carolina recently proposed rules that would define nearly every function of the closing and title insurance process as the practice of law (see Only An Attorney). The open comment period produced mixed feedback, mostly opposing such strong restrictions (see A Few Comments From South Carolina).
Though South Carolina may have taken the issue to an extreme, I generally support substantial attorney involvement in the real estate closing process. I tend to agree with the Bonior decision that there is no such thing as "a simple transaction." Every real estate transaction has complex legal consequences that most non-attorneys are ill prepared to spot. If that were not the case, we wouldn't have 50 pages of documents to sign in a closing. Consumers need representation that simple disclosures cannot provide.
Other states, such as Iowa and Oklahoma, take a different approach. They require a full abstract certified by a licensed abstractor to be reviewed by an attorney before a policy can be issued, or a title guarantee in the case of Iowa where title insurance has been banned (see Okay.... Oklahoma IS Different and Lessons From Iowa). Though these states may go too far, there is some merit to the process. It requires the best possible title evidence: a complete abstract of title, prepared by licensed professionals. It also requires a lawyer to examine the abstract and provide an opinion of title before a title policy, or title guarantee, can be issued.
I certainly am not saying that there are not any non-lawyer title agents who aren't well trained and skilled enough to examine a title search to determine insurability - after all, I am a non-attorney title agent (until I complete my last year of law school). However, the underwriters' high rate of claims from agency operations shows that there are many who are probably not qualified for the task.
Furthermore, the vast majority of states have no regulation of title abstractors (or title searchers) who provide title evidence to the agents. I believe that many non-attorney agents have very different priorities when it comes to making underwriting decisions and choosing their abstractors. Non-attorney title agents, with notable exceptions, seek out the abstractor who can provide the fastest and cheapest searches. My experience has been that, attorney-owned agencies generally have more strict searching requirements and they understand the importance of using professional, well-trained abstractors.
If you compare and contrast the extremes of the very different models, you have to ask two questions: 1) Which is best for the consumers? And, 2) Where is there a place for the many small agents and abstractors?
On "quality of title evidence," clearly the attorney model is head-and-shoulders above the underwriter's model. Attorneys clearly have a better understanding, probably from reading many court opinions, of the hazards that can result from relying on short searches or, worse yet, automated searches derived from thin-title plants assembled and indexes overseas by unskilled laborers who speak English as a second language. And, they also realize the potential liability they have for providing a title opinion based on anything less than a thorough search of the public records.
The consumer is clearly better protected by the attorney model requiring a thorough title search. In the end, both offer title insurance to protect the consumer. However, the attorney model is better suited to avoiding potential claims. After all, isn't that what the purpose of the process of issuing title really is?
On "open markets," the attorney model is better suited to providing a competitive market with more choices for consumers. The underwriter's model seems to be leading to growing the large operations at the expense of the small agents and abstractors. AfBAs have created captive markets in which small agents can no longer compete for business. Agents without sufficient remittances run the risk of being cancelled and put out of business by their underwriters. This will lead to fewer agencies for consumers to choose from for their title and closing needs. We all know that there isn't often much consumer choice involved, but there seems to be a small movement that is focusing on direct marketing to consumers. That will become moot if too many small agents close their doors because they have been effectively cut out of the market by AfBAs.
On "consumer representation at the closing," the attorney model again beats the underwriter model hands-down. The underwriter's model has created large vendor management companies that will hire a notary/signing agent to meet the borrower at their home to conduct the closing. Many of these signing agents will even tell you that they are not there to answer questions - they are there to make sure the documents are properly executed and notarized. If there are questions, they must stop the closing and direct them to call their lender or closing officer.
I often listen to podcasts on The Legal Talk Network and a recent discussion on mortgage fraud addressed the issue of witness-only closings. Attorney Melissa Huelsman, a lawyer from Seattle who specializes in predatory lending, mortgage fraud, and foreclosures, had this to say about loan closings in the context of predatory lending:
Host: Aren't the people that are borrowing the money to blame themselves for this? I mean, you know, you read the documents, understand what you are getting into, or don't read the documents and don't understand what you are getting into. I mean, what level of responsibility do the people who get these kinds of loans have to take?
Atty. Huelsman: I'm all for personal responsibility. I believe in that. But the fact of the matter is that when people are getting loans they're presented with 50 to 60 pages of documents and they are allocated about 20 minutes to have the signing done in an escrow agents office. And, that assumes they are even in an escrow agents office. Because most of the time what I see is that they just send a notary to the person's home. Of course, the notary's job is only there to witness signatures, they cannot answer any questions about the documents. So even if homeowners knew enough, or noticed something enough, to ask a question, there is nobody present there to answer the question.
I asked a group of lawyers and bankruptcy lawyers and judges a couple years ago when I was speaking to "just raise their hands if they had actually read their loan documents at signing." And only about 15% of those, which are bankruptcy lawyers and judges, admitted to reading their loan documents at signing. The fact of the matter is that it's an overwhelming of information and people trust the people that they're dealing with to do it honestly and truthfully. And, unfortunately they are not able to do so. So, do I say homeowners should read their documents? Yes. I read mine. But the fact of the matter is that most people don't and it doesn't make them crooks or irresponsible when the system has been set up to play upon that premise because the lenders and the servicers know full well that people don't read them and even if they did they wouldn't understand because their written by lawyers in legal jargon. And, they count on it and then they set up a system to mitigate their own responsibility and liability and then turn around and point the finger back at the borrower. And, I find that to be reprehensible.
Not to offend any notary/signing agents, but this is just madness. You can't fault the signing agents for doing what they were asked, but they cannot answer questions. If a borrower signs all of their closing docs and doesn't ask any questions, they are either not paying attention or they don't care. Even non-attorney closers are very limited in what they can do in a closing. The transactions are complicated and when the borrower asks questions, the closer has to walk a fine line between explaining the document and giving legal advice. Wouldn't it just better all around to have an attorney there to represent the borrower?
On "the future for small agents and abstractors," the attorney model seem to provide more opportunities. With the underwriter's model pushing automated searches and instant title commitments, they are claiming that traditional abstractors are no longer necessary.
GATORS® Unit of Fiserv Lending Solutions Introduces On-line Title Abstracting Tool:
"GatorSearch provides GATORS users the ability to execute self-service title searches, greatly reducing the turnaround times associated with traditional examiner/courthouse abstracting. Reports can be run from the office or home computer to provide searches that are fast, comprehensive, reliable and precise."
In fact, in a recent forum post, it was announced that one of the largest vendor management companies, Integrated Real Estate Processing, would no longer be using independent abstractors.
IREP will be doing their title work "in house" from now on and will not be needing independent abstractors... they "have their ways" to search title without going to the courthouse.
This affects small agents as well. Today, a search can be obtained on-line, instantly from anywhere, in some cases it can be had in commitment form. The closing can be overnighted to a notary/signing agent who will be more than willing to go to the borrowers home to conduct the closing. In fact, there are vendor management companies that will handle all that for a small fee. Large state-wide, regional, or even national operations can now service the local markets which were once dominated by small independent agents. The last thread of hope for the small agents was the personal relationships they have established over the years with other local business sources. Today, however, AfBAs can provide a strong incentive to reconsider even the strongest of those relationships.
The small independent agents and abstractors could still operate in the attorney model. Perhaps not in the same manner they have become accustomed to, but there is still a place for them. It may be necessary to hire a staff attorney, or at least work closely with outside counsel.
In my opinion, there needs to be some middle ground. The requirements of Oklahoma and Iowa are very cumbersome. I do not believe that it is necessary to do a full abstract of title every time a real estate transaction takes place. However, I don't think a current owner is ever sufficient. Like Oklahoma, Iowa, and a few other states, I do feel strongly that abstractors should be licensed professionals. They should be required to have some basic training and be competent enough to pass a difficult test. They should certify their search and be liable for errors.
When it comes to insuring titles, I think it may be wise to require an attorney examination of the search. When problems are objected to, they should be corrected - not merely insured over. However, that is not to say that the attorney should take exception to every minor defect that may be nearly impossible to cure without a quiet title action and present little risk of a claim. After all, that is what title insurance is for.
For the closing, I'd like to see an attorney at least available during the signing. I think non-attorneys are probably capable of explaining the documents and getting them properly executed. But, when the borrower asks questions, their should be someone there who is permitted to give them legal advice. After all, a real estate transaction is a legal arrangement between the parties.
The system is in dire need of change and we are going to get it. Unfortunately, I don't think the change we are likely to get will be positive. What we really need is a third option, but until someone steps forward to lead us down that path, we must choose from the options we have. Before you decide what side you are on, consider what it will mean for you and your business... then, choose your poison carefully.
Robert A. Franco
SOURCE OF TITLE