Regulators are dogging the title insurance industry again -- this time for over-priced services, anti-competitive pricing as well as kickbacks and collusion with the real estate industry.
After a scathing 112-page study of the title insurance industry, "An Analysis of Competition in the California Title Insurance and Escrow Industry" found excessively high title insurance prices in California, the state's Insurance Commissioner John Garamendi vowed to reduce title insurance costs.
Garamendi said the findings underscore ills found in the industry for the past 30 years, but that those ills would be cured.
"What's different this time, is that I'm going to do something about it," he promised.
Responding with just as scathing remarks, industry trade group California Land Title Association said the report is "bogus" and "not worth the paper it is written on."
The association refers to a recent Bankrate.com study, in which it "... indicates that California has highly competitive title insurance rates...below the national average and are significantly lower than comparable title insurance rates in other large states."
However the Bankrate.com study may not be a fair comparison. A study of most closing costs (mortgage, title and others), it does not include escrow costs. California's study does.
Also, the Bankrate.com study is based on a $180,000 mortgage transaction, a rare transaction in California where the median cost of homes is more than a half million dollars.
When all costs in the Bankrate.com study were considered, California was the 8th most expensive closing costs state and about $600 higher than the national average.
Garamendi commissioned the study by Birny Birnbaum, a consulting economist, title insurance expert and former Chief Economist of the Texas Department of Insurance.
The study was conducted to determine why the costs of title insurance have been skyrocketing in recent years.
The report's findings include:
- Three companies now control more than 75 percent of California's market, and in most counties, three or fewer companies control more than 90 percent of the market.
- Prices have skyrocketed while the cost of producing title insurance policies has fallen. The only base-rate changes title insurers have instituted in nearly a decade have been rate increases. In a competitive market, prices typically adjust for falling production costs and rising average transaction size (more expensive houses). That hasn't happened in the title insurance market.
- Escrow fees are not set in a competitive market. Fees in Southern California, where escrow is handled by independent escrow companies, are substantially higher than escrow fees in Northern California, where escrow is included in the services of the underwritten title company.
- Escrow on a $500,000 transaction in Los Angeles may cost twice as much as the same policy in San Francisco. It appears that the independent escrow company is just another middle-man driving up prices, not a source of competitive pressure on price.
- Consumers are steered to title companies by real estate agents and companies, lenders, and other settlement providers, who exert no pressure on title insurance prices. "Competition" in the title industry consists not of lowering prices to attract consumers, but of "reverse competition," in which gifts and illegal kickbacks are lavished on middle-men to refer business to the title company.
The report is the latest in a string of allegations, investigations and court suits against the title insurance industry that date back at least to 1970.
It comes on the heels of a nationwide crackdown on title industry kick backs -- illegal monetary inducements or payments for referrals.
Regulatory officials say it's as if the cost of doing business for the trade appears to be persistent punitive fines and the cost of waging war with regulators.
The industry typically denies wrongdoing, but is generally swift to pony up fines, rebate consumers and institute policy reversals in response to investigations about questionable practices.
After decades of investigative scrutiny, however, the industry's reputation is at stake.
- After a nationwide investigation spawned by Colorado investigators in early 2005, First American in February agreed to give back $24 million to consumers nationwide while denying any wrongdoing after it was charged with kickbacks to real estate agents, lenders and developers. Kickbacks are a violation of California and other state laws as well as federal law known as RESPA (Real Estate Settlement Procedures Act).
- A month later, Old Republic Title Company agreed to finish paying $50 million to the City and County of San Francisco -- including $14.8 million in restitutions and interest to consumers -- in a settlement agreement stemming from a 1998 civil suit charging the company with withholding escrow funds unclaimed by consumers and charging fees for services not performed.
- Two months later, after a 30-month investigation, Stewart Title of California, Inc. paid nearly $1 million in fines and related costs for kickbacks it denied.
- In 1999, in the nation's largest ever action against the title and escrow industry, a class-action suit by California's Controller at the time, Kathleen Connell, sought a half billion dollars in escrow funds which the suit said some 200 title and escrow companies had wrongfully withheld from the state's consumers since 1970. The state collected at least $20 million.
Regarding California's latest study, Garamendi said, "This report confirms that California homeowners and home-buyers are being systematically overcharged because title insurers refuse to compete with one another on the basis of low prices. These overcharges operate like a tax on home purchases and refinancing, pricing people out of the market and dragging down the economy."