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Source of Title Blog

It's Time For Honest Competition
by Robert Franco | 2009/08/19 |

Hardly a week goes by without a news article on the evils of title insurance. They usually allude to the fact that title insurance is over-priced. Some call the fees "mysterious," others cite to the lack of "transparency," and Scott Woolley at Forbes calls title insurance premiums "dubious charges." Lately, they point out that title insurance is a $10 billion dollar industry.  Despite ALTA's CEO Kurt Pfotenhauer's statement that "nobody's getting rich" selling title insurance, the media, and the public, aren't buying it.

There is talk about federal regulation and many states have begun taking a hard look at addressing the issue before it comes to that. Maybe something does need to be done, but what is clear is that nobody seems to understand the nature of title insurance or the problems with the current regulations.

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The latest buzz word in political circles seems to be "transparency."  Translation: "I don't understand it." When dealing with issues that nobody understands, politicians love to point out the lack of transparency. I'm not really sure what that means and I'm not sure how it applies to the title insurance industry. In Ohio, and many other states, title insurance premiums are regulated by the states' departments of insurance. The filed rate schedule mandates that for a policy with a specific amount of coverage the premium is a set amount. What could be more transparent than that? No matter where you close in the state of Ohio, the premiums are the same.

Perhaps they are insinuating that there is a lack of transparency because nobody understands how the filed rates are determined.  If that is the case, maybe the department of insurance could hold public hearings when they approve new rates (who knows, maybe they already do). But, what good would it do? Do you think anyone would be interested in sitting in that room all day? Most people would be bored to tears and still leave without any clarification or deeper understanding at all. Besides that, does anyone really understand how any other rates are calculated where there is governmental regulation? Is there any better transparency in utility rates, taxes, surcharges, fees at the DMV, etc?  Of course not, but when people start to clamor about how much it is costing... it must be due to a lack of transparency.

And, what about the $10 billion dollar industry? While I don't quite agree with Pfotenhauer's statement that "nobody's getting rich" selling title insurance, certainly in this market some are going broke! Perhaps it would have been more accurate to say that "not everybody is getting rich selling title insurance."  I believe that there are some at the top of the food chain that are making a killing.

Forget about the premium for a moment.  Abstractors have been forced to lower fees year after year, with rates for some searches between $25 and $45. Searches conducted in India are selling for as little as $4.25! Have you ever heard of a consumer paying less than $125 for a title search? I have seen many settlement statements indicating a fee of between $250 and $350. Please... don't tell me that nobody's getting rich with that kind of markup. 

Another media favorite is comparing traditional title insurance rates with the Iowa Title Guarantee Program.  The Wall Street Journal pointed this out in Title-Insurer Fees Draw Scrutiny

Charges vary widely around the country. In Texas, for instance, the current cost of basic title coverage for a $250,000 home-purchase loan is $1,644. That is supposed to include the cost of searching for and examining title records and related tasks, Texas insurance regulators say, but they warn that title agents sometimes tack on unjustified fees. In Iowa, the costs of similar coverage—including fees for lawyers and title researchers—range from around $500 to $800. Unlike the rest of the nation, Iowa has a state agency that provides title insurance.

Critic's of the Iowa program claim that the complex process is time consuming and delays closings. Well, even if that is true, there is some merit to the system.

Title Guaranty issues coverage based on an abstract and attorney title opinion. Once a participating abstractor prepares an abstract, a participating attorney reviews and then issues a title opinion or Title Guaranty Commitment.

The abstract/attorney's opinion system mimics what the traditional title insurance industry used to offer.  I'm sure it results in fewer claims because of the thorough process of searching and clearing the title.  This is something the traditional title agency points to in justification of its premiums, but does it really exist anymore?

It baffles me that the traditional title insurance industry can still claim that its thorough process is what makes title insurance a value to the real estate transaction. So far, I have only read such claims, but I'd love to see someone actually say it out loud with a straight face. There are two main problems here: 1) there are practically no search standards that are actually adhered to anymore; and, 2) there are too many people in the title industry that don't have a clue about how to write title insurance.

For the first point, just consider that we used to do full searches anytime a policy was issued.  Something that they still seem to do in Iowa. Iowa requires their participating abstractors to maintain title plants in the counties they operate in.  Perhaps that is overkill, but I'm sure it produces reliable results. In contrast, the traditional title industry will allow a policy to be issued on a current owner prepared by anyone with a pen and fax machine.  Worse yet, they will accept title reports prepared in India by anyone with an Internet connection who can access our online records (as incomplete as some are).

For the second point, I have had dealings with title agents that have apparently had no training and know nothing about real estate titles. Here are two examples that I love to point out:

A national title agency owned by a national lender issues a loan policy insuring a mortgage. Title was vested in the husband and wife as tenants in common. The mortgage was signed by the wife and above the husband's signature line, they typed "deceased."  There was no probate and the lender didn't care because their title agency was willing to insure it.

Another national title agency called to tell me that my search was incomplete because I didn't indicate an amount on an easement we showed. When I explained that there is no amount on an easement, she asked me how she was supposed to get a payoff for it.  Utterly clueless! I took the time to explain what an easement was and suggested that she take exception to it on her policy... then she told me that I would have to revise my title search and remove the easement from my report. "We don't want easements," she insisted.  Really, who does? But, they are out there.

Now, let's consider the competition we have today, if you can even call it that.  In Ohio, and other states with filed rates, the premium is exactly the same no matter where you close and it is based on the coverage amount and type of policy issued.  Furthermore, the policies are all standard ALTA policies.  So, the product is the same everywhere. As far as the consumer is concerned... there is no competition.

But, within the industry, there is competition... it's just not fair competition and it doesn't involve the consumer. The problem is that title agents don't compete for consumers' business - how can they when the product and the price are predetermined?  Instead the competition is for the referrers (i.e. Realtors, lenders, builders, etc.).  RESPA generally prohibits this type of competition, but since there is very little enforcement... well, you know what happens.  Referrers are attracted with expensive gifts, dinners, special deals on rental space, etc.

The most obvious form of unfair competition, which is conveniently an exception to RESPA, is affiliated business arrangements.  Direct operations and large agencies are permitted to establish partnerships with referrers where, in return for referrals of business, the non-agent partner receives a share of the profits.

In another case, where the competition does seem to be aimed at consumers, Entitle Direct has filed premiums at rates 35% below all of the other underwriters.  They offer their services at lower rates marketed directly to consumers.

How can a truly independent title agent compete in this market?

In the vast majority of instances, the consumers don't get involved in choosing the title agency.  Even if they do, most lenders seem to have "approved lists" of providers they will work with.  Getting on that list can be tough.  It's nearly impossible if the lender has a financial interest in their preferred provider.

Some of the very large banks have their own title insurance agencies. Many of the smaller banks, realty companies, and builders have affiliated business arrangements with larger title agencies.  Because they share in the profits of their preferred title agency, they have a natural incentive to send as much work as they can to their partner.

In cases where the consumer does ask for an independent agent, the referrers aren't too shy about saying "we can't do that, we have our own title company."  RESPA violation?  Ahhh... who cares?  Certainly not the department of insurance or HUD.

If the consumer is going to shop around and insist on selecting their title agent, what are they going to find?  Most likely, that all of the local agents are the same price and provide the same coverage.   Or, they may find Entitle Direct, who can offer premiums 35% below everyone else.  The local independent agents are required to charge the rates filed by their underwriters.  They are legally prohibited from offering a competitive price.

So, what is the solution - how could the status quo be changed to provide honest competition for consumers? (I'm glad you asked).

Change the filed rates to include only the underwriters' portion of the premium that they need to collect for the risk they assume and do away with the agents' split.  Something that has been discussed in Florida. Typically, the agent gets 80% of the premium and in return, they are denied any means of competing in the marketplace.

In Ohio, the premium for a $200,000 owner's policy is $1,087.50.  The underwriter receives $217.50 and the agent retains $870.00.  With no room to negotiate a competitive fee, there is no incentive for a referrer to go outside of their preferred provider, who returns to them a share of the profits, and there is no way to compete with Entitle Direct at filed rates 35% less than the traditional underwriters.

Why not reduce the filed rates to the underwriters' share of the premiums and allow the agents to negotiate fair and competitive prices that more closely reflect the work involved and the risk of claims that the agent might be liable for?  If the deal is very straightforward with one payoff to a local bank and a simple lot in a subdivision to search, let the agent do it for less than the filed rate.  Allow him the option of charging a reasonable search and closing fee, the premium for the underwriter, and a small profit that better reflects the work he has to do than a one-size fits all premium based on nothing more than the coverage amount.

Why not? (Again, I'm glad you asked).  The underwriters set the rates and they have direct operations.  They are competing with their agents.  If the agents were permitted to charge less than the filed rates, the underwriters would have to charge less to compete.  That would cut into the underwriters' revenue.  Think about the power the underwriters have with the filed rate system... they get to set the rates of their competitors to essentially bar them competing in the marketplace.  I kinda think they like it that way.

Remember, the underwriters make the rules and they always work in their favor.  Affiliated business arrangements don't bother them - their split of the premium is the same whether if comes from an AfBA or an independent agent.  They actually benefit by having an agent who can lock up marketshare with an AfBA.  And, whether its an AfBA or an independent agent, the premiums are fixed so there isn't really much competition for the underwriters' direct operations.

Is it a perfect solution?  Not by a long shot.

The problem with doing away with the current filed rate system is that it would open the door to price-wars.  Nobody wins in price-wars.  The competition may be too fierce and prices would drop to levels that cannot sustain many title agencies.  Everyone would make less money and many would not be able to survive. 

Just look at the abstractors' market for a prime example.  There is no price regulation on title searches and abstractors are constantly being pressured to lower fees.  Clients demand it, competitors cut corners to undercut the guy next door, and there is apparently a market for $4.25 searches coming from India.  This is what happens when there is too much competition and no regulation.

If agents were to start cutting corners to reduce their costs and offer lower prices to consumers, many agents would close up shop leaving the underwriters on the hook for more claims - that would start driving premiums back up and reduce options for consumers.  This was the argument used at hearings in Florida regarding their filed rate system.  It was postulated that if there wasn't a floor on premiums that could sustain viable title agencies, agents would be forced to cut corners.

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.

Thus, we need more regulation of the procedures and standards for issuing title insurance, and less regulation of premiums.  First, we should start by eliminating conflicts of interest - flatly prohibit lenders, Realtors, builders and any other referrers from owning any part of a title insurance business.  Title agents should all be completely independent from their sources of business.

Second, abstractors should be licensed and search standards should be strictly enforced.  Every search used as the basis for a title insurance policy should be required to show marketable title, since that is what a title policy insures, and it should be certified by a licensed abstractor.  Arkansas has excellent search requirements:

The search shall include a review of all matters affecting the title to the property or interest to be insured for a continuous period of not less than the immediately preceding thirty (30) years.

Third, blanket exceptions on title policies should never be permitted on a title policy. A policy that takes exception to "all easements, restrictions, and conditions of record" is meaningless and really provides very little coverage at all. Texas rules prohibit blanket exceptions:

Special Exceptions---With the knowledge of the Insured, it shall be permissible for the Company to insert such special exception(s) as shall develop from the examination of the title under consideration. Such special exception(s) shall in all cases specifically describe the particular item(s) excepted to, and shall not be general in its terms.

Fourth, clearing the title should be mandatory.  There are too many agents that are willing to insure over defects rather than delay a closing long enough to fix the problems.  Consumers expect that the title company will ensure that they are getting clear title to their home, not merely a policy that they don't understand.  Agents and underwriters all too often just trade indemnification letters back and forth hoping that nobody will ever notice the defects.  This is clearly contrary to the purpose of title insurance.

Fifth, underwriters should be more diligent in auditing their agents and canceling those who present undue risk.  Because of the potential for agents to cut corners to lower their prices and be more competitive, underwriters will need to be more selective with their agents and cancel those who fail to do the necessary work on their closings.  Too often underwriters sign anyone who can generate premiums... and if the premiums are big enough, they apparently turn a blind eye to the manner in which they do it.  The main concern seems to be on the money; they want to make sure that the escrow accounts are being propertly maintained.  That is great... but the same care should be given to proper searching and closing procedures.

The theory is that if the title industry were forced to adhere to high standards that actually protect consumers from title defects, cutting corners would not be an option. Agents who attempt to cut corners would be canceled.  If everyone were required to do the thorough job that is expected of them, the same thorough process of searching and clearing title that the industry boasts about, prices would have to be set at a sustainable level.  Agents would have to charge enough to do the work properly, and they would still be afforded the ability to compete.  Those who can do the work for less by working more efficiently and reducing their exposure to claims, would benefit.  And, in the end, offer consumers a better product at a lower price.  Shouldn't that be our goal?

We can have honest competition. Unfortunately, it will require fundamental changes to the title industry.  There really can't be any competition if we continue to allow conflicts of interest to exist and deny independent agents any room to negotiate their fees.

Robert A. Franco



Categories: Competition, RESPA, Small Agents, Title Industry, Title Standards

4406 words | 5830 views | 3 comments | log in or register to post a comment


I agree with the bulk of your post.  I would love to see the underwriters take a more aggressive stance with rogue agents.  The problem will aways come down to cold, hard cash.  Does the agent cost them more in claims than they make in premiums?  The underwriters have no problem killing an unprofitable agency. 

I am also not a fan of Shotgun language on the final policy, but as a closing/sales side title person, its never offended me.  I am very much on board though with anything that makes our industry to further professionalize itself.  If that means no shotgun language then lets do it! 

But the point I love it the licensing.  I am in a state with no licensing requirements at all!  The title closer is the only person at the table other than the buyers and sellers who aren't licensed by the state in any way.  I am pushing for licensing within my state's LTA and I hope everyone is doing the same in their's!

Michael L. Rubin


by Michael Rubin | 2009/08/20 | log in or register to post a reply

Almost there, just a question or two


Speaking from a state where price competition is the reality, I am impressed with all of the angles you have thought of and addressed in your post.  Each time I said AHA! while reading, my gotcha was covered in the next paragraph.   Harumph.

One question remains, though.  While the premiums are set by the state, are there other fees, such as a closing fee or title search fee, even endorsement fees, that you could adjust to compete pricewise?

If you want to introduce price competition in your state, you at least have thought of ways to protect the product from losing its value and the agents from losing their agencies.  Without some of those mechanisms in place, you will only find free-falling prices initiated by desperados and well-capitalized would-be monopolizers who think they can wait out the inevitable exit of the competition.  Turns out, many agents are quite resilient.  So, they work harder for less.  Same game as the abstractors are playing, just different players.

by Patrick Scott | 2009/08/22 | log in or register to post a reply

Other fees...

Thank you, Pat.  There are some other fees that are charged in addition to the premium.  I wanted to explain that, also, but my post was already much longer than I usually like them to be.  In Ohio, the examination fee and closing fee are in addition to the premium.  Unfortunately, there isn't a lot of room to negotiate those either.  Ohio requires that we charge everyone the same fees.  So, most companies set their fees at the same price and they don't change. Around here, they are about $150 each. 

So, if we get a large policy with a good size premium, we can't waive the exam and closing fees, or else we would have to waive them for all of our customers, even the ones with minimum premiums.  It would be nice if we had the ability to negotiate fees on each order depending on the complexity of the work involved, but we can't.

Robert A. Franco

by Robert Franco | 2009/08/24 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe 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



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