| The current regulatory environment enveloping the | | | | concerned that the Department of Insurance's |
| title insurance industry is clouded by constrained | | | | proposed statistical reporting requirements will force |
| enforcement resources, minimal oversight of title | | | | them out of business, as they cannot now provide |
| agents and a lack of coordination among state and | | | | data from past years that was not required of them |
| federal regulators, according to the U.S. Government | | | | at the time. |
| Accountability Office's (GAO) long-awaited report on | | | | "Some of the information the GAO wants to collect |
| the title insurance industry. | | | | drills into personnel and hiring practices and |
| On April 17, the GAO, the investigative arm of | | | | micromanages the entire process," said Joe Petrelli, |
| Congress, released the results of its much ballyhooed | | | | founder of Demotech, a ratings firm based in |
| probe of the title industry, launched a year ago at | | | | Columbus, Ohio. "It's a level of detail I don't think |
| the request of then-House Financial Services | | | | people have. It's a tremendous layer of fixed |
| Committee Chairman Michael Oxley. | | | | overhead that no one anticipated, and it's not like |
| The report, titled "Title Insurance: Actions Needed to | | | | you can snap your fingers and get that type of |
| Improve Oversight of the Title Industry and Better | | | | detail." |
| Protect Consumers," identified significant barriers to | | | | Matters for Congressional consideration |
| the successful regulation of the title industry, but for | | | | As far as Congress' role in the melee, the GAO |
| every weak link in the regulatory chain, the GAO | | | | recommended that Congress reevaluate certain |
| offered a remedy, calling for the active participation | | | | aspects of RESPA. |
| of federal, state and local regulators. | | | | "Revisiting RESPA to ensure that consumers receive |
| "Given consumers' weak position in the title insurance | | | | this information as soon as possible when they are |
| market, regulatory efforts to ensure reasonable | | | | considering any type of mortgage transaction ... could |
| prices and deter illegal marketing activities are critical," | | | | be beneficial," the GAO said. |
| the report stated. "Given the variety of professionals | | | | The GAO's recommendations to Congress were |
| involved in a real estate transaction, a lack of | | | | twofold. Congress could provide HUD with increased |
| coordination among different regulators within states, | | | | enforcement authority for Section 8 violations, such |
| and between HUD and the states, could potentially | | | | as the ability to levy civil money penalties. Congress |
| hinder enforcement efforts against compensation for | | | | could also make a detailed homebuyer information |
| consumer referrals. Because of the involvement of | | | | booklet available to consumers. |
| both federal and state regulators, including multiple | | | | These recommendations are in line with what HUD's |
| regulators at the state level, effective regulatory | | | | RESPA office has likely been discussing since Fall |
| improvements will be a challenge and will require a | | | | 2005, when the department retreated into its |
| coordinated effort among all involved." | | | | chambers to mull over RESPA reform. Thus, by all |
| This effort is one strongly supported by all industry | | | | accounts, the GAO's Congressional recommendations |
| players, but exactly how and when the GAO's | | | | stand a fair chance of becoming reality. |
| recommendations will be implemented is a source of | | | | "HUD has long sought such authority, and the GAO |
| some debate. | | | | report may be HUD's best chance to get it," said Rich |
| Frustration exists at federal and state levels | | | | Andreano, partner with the Washington, D.C., law firm |
| Limited state and federal oversight of the title | | | | Weiner Brodsky Sidman Kider PC. |
| industry has resulted in proposals for change, the | | | | Doubting Thomases |
| GAO found, but those changes are focused on the | | | | But the apparent consensus between HUD and the |
| state level, mainly in the affiliated business arena. | | | | GAO does not mean these recommendations will see |
| "Some state regulators expressed frustration with | | | | the light of day, at least in the foreseeable future, |
| HUD's level of responsiveness to their requests for | | | | said some skeptical industry leaders. |
| help with enforcement, and some industry officials | | | | Some industry players are hedging their bets that the |
| said that RESPA rules regarding ABAs and referral | | | | recommendations will be swept under the carpet as |
| fees need to be clarified," the GAO said. | | | | Congress contemplates changes to predatory lending |
| However, the more limited regulation and oversight | | | | and FHA reform. |
| of title agents and AfBAs in less active states could | | | | Noted RESPA attorney Phil Schulman of Kirkpatrick & |
| provide greater opportunity for potentially illegal | | | | Lockhart Preston Gates Ellis said, "The timing of the |
| marketing and sales practices, the GAO said. While | | | | report works in the industry's favor, given that the |
| the GAO listed states such as Colorado, California and | | | | focus on Capital Hill and elsewhere is on subprime |
| Minnesota as leaders in enforcement and oversight, | | | | lending and the avalanche of foreclosures, not title |
| the report concluded that states' enforcement of | | | | insurance reform." |
| anti-kickback and referral fee provisions were uneven. | | | | National mortgage training expert Christopher Cruise |
| That would place the onus on HUD, but HUD officials | | | | observed that "the title insurance industry has |
| expressed concern over a lack of enforcement | | | | dodged a bullet here. Asking the states to step up |
| authority for RESPA Section 8 violations, the GAO | | | | their enforcement activities seems reasonable, but, |
| said. | | | | except in a few states with strong insurance |
| "According to HUD officials, it is difficult to deter | | | | commissioners, that simply won't happen. I believe, in |
| future violations without stronger enforcement | | | | the long run that this report will have minimal effect |
| authority, such as civil money penalties, because ... | | | | and that title insurance rates will change little, if at all." |
| companies view small settlements as simply a cost of | | | | Ken Trepeta, regulatory policy representative for the |
| doing business," the GAO said. | | | | National Association of Realtors (NAR), likewise said, |
| Viewing these concerns as critical to the health of | | | | "The RESPA civil penalties issue is intriguing, but I |
| the industry, the GAO made a number of | | | | wonder if anyone in Congress really has the stomach |
| recommendations to improve oversight at each | | | | to revisit RESPA. I know Sen. [Mel] Martinez is |
| government level as well as to better coordinate the | | | | interested in RESPA, but he has spoken more along |
| various efforts of those regulators. | | | | the lines of disclosure." |
| Agents: Where's the beef? | | | | The writing on the wall |
| State regulators could most benefit by examining title | | | | Although some are skeptical that the report will |
| agent costs, the GAO found. Officials in several state | | | | matter much in this era of increased scrutiny on |
| insurance departments last year questioned whether | | | | predatory lending and mortgage issues, others believe |
| agents are worth their premium splits, and the GAO | | | | it is a fallacy to say that the problems of the title |
| quickly picked up on this debate, finding that | | | | and settlement services industries are that far |
| regulators do not fully assess title agents' costs | | | | removed from the problems in the mortgage |
| during rate reviews. | | | | industry. |
| "Few regulators review the costs that title agents | | | | Indeed, Rep. Spencer Bachus, R-Ala., ranking member |
| incur to determine whether they are in line with the | | | | of the House Financial Services Committee, has |
| prices charged," the report stated. "In fact, in the | | | | commented, "The GAO's findings are significant, and I |
| majority of states, agents' costs for search and | | | | look forward to reviewing those findings thoroughly." |
| examination services are not considered part of the | | | | Some respected sources have indicated to The Legal |
| premium and thus, receive no review by regulators. | | | | Description that Congress has been waiting for the |
| Therefore, title agents charge separately for their | | | | results of the GAO report in order to determine if |
| search and examination services, yet they receive | | | | there were issues that needed to be addressed |
| about the same percentage of the premium as | | | | before putting RESPA and title industry reform on |
| agents in states where these costs are included in | | | | the front-burner. |
| the premium." | | | | Other industry leaders willing to speak on the record |
| Title insurers told the GAO that they generally share | | | | agreed that this scenario is not as farfetched as |
| the same percentage of the premium with their | | | | some skeptics believe. |
| agents, around 80 to 90 percent, regardless of | | | | "Congress obviously is still reviewing this and will be, I |
| whether those agents were in states where | | | | presume, taking that under consideration along with |
| consumers pay for agents' search and examination | | | | any other appropriate legislation," said Sue Johnson, |
| services within the premium rate - known as | | | | executive director of the Real Estate Services |
| all-inclusive states - or whether they were in states | | | | Providers Council Inc. (RESPRO). "I would be surprised |
| where agents can charge consumers separately for | | | | if Congress did not touch base with HUD to check on |
| those services - known as risk-rate states. | | | | the status of their RESPA rule and consult with them. |
| However, reliable data to determine whether | | | | A lot of this has to simply play out." |
| consumers in risk-rate states consistently paid more | | | | Andreano was perhaps most confident in the |
| than those in all-inclusive states does not exist, the | | | | prediction that Congress will put all of the pieces of |
| GAO said, and thus recommended a "multi-step | | | | the puzzle together to bolster its ongoing |
| process that could involve detailed analysis of some | | | | homeownership initiatives. |
| title agents." While the GAO placed the onus of this | | | | "I think it's safe to say that the GAO will not be on |
| auditing function on state insurance regulators, some | | | | the title industry's Christmas list this year," Andreano |
| industry experts pointed out that reporting | | | | said. "While the report focuses on, and is critical of, |
| requirements currently vary by state, making it | | | | the title industry, all settlement service providers |
| difficult for some companies to provide the type of | | | | need to focus on Congressional reaction. Clearly, title |
| uniform data needed to form constructive | | | | industry revenues are now under a microscope and |
| conclusions. | | | | the industry needs to be prepared to address |
| In California, for example, some companies are | | | | scrutiny from regulators and lawmakers. |