A few weeks ago I wrote about efforts to undo a New Jersey state law which mandates price fixing for title insurance. Judging from some of the mail I received you would have thought I was against motherhood and not too bright, either.
Well, actually -- and I hate to bring this up -- several weeks after the column was published the General Accountability Office, the nonpartisan investigative arm of the federal government, just happened to issue a report regarding, oh dear, title insurance. It's interesting to see what the GAO had to say and to look at what I wrote in February.
I noted that a 1980 Maryland study found that 60 cents of every dollar paid for title insurance didn't go to pay claims, it went for commissions to those who sell title insurance. I also quoted J. Robert Hunter, Director of Insurance for the Consumer Federation of America, who said that "on a countrywide basis, the top four title insurers paid an average of about 80 percent of the title insurance premiums to their title agents in the form of commissions. An analysis of commission splits in California found that between 8 percent and 12 percent of the premium was paid to the title underwriter and between 88 percent and 92 percent of the premium was paid to the title agent."
Let's see, the midpoint between 60 percent and 80 percent is 70 percent. Here's what the GAO found:
"Title insurance differs from other types of insurance in key ways. First, in most property and casualty lines, losses incurred by the underwriter account for most of the premium. For example, property-casualty insurers' losses and loss adjustment expenses accounted for approximately 73 percent of written premiums in 2005. In contrast, losses and loss adjustment expenses incurred by title insurers as a whole were approximately 5 percent of the total premiums written, while the amount paid to or retained by agents (primarily for work related to title searches and examinations and for commissions) was approximately 70 percent."
Just 5 percent of your title insurance premium is used to pay claims, says the federal government, while 70 percent is paid out in the form of agent commissions. Shouldn't this be the other way around?
One correspondent helpfully wrote that such fees are justified because "we as independent agents do ALL the work. Unlike life insurance the underwriting involved in title insurance requires more than plugging an age and smoking preference into an actuarial table. As a real estate professional you should know that each and every title presents its own distinct problems and queries. The level of staff necessary to decide on bankruptcy and foreclosure issues alone is an expensive business cost."
But the GAO says "depending on the level of technology used, the accessibility of public documents, the relative efficiency of local government recorders' offices, and other factors, this process can take from a few minutes up to a few weeks or more."
So why should all title insurance agents charge the same fees -- and why should the state of New Jersey REQUIRE that all title insurance agents charge the same fees -- if the cost of business differs with each case? Do all title insurers have the same expenses for offices and staff? Why shouldn't title agents be allowed to discount their fees to consumers when the workload can be whittled down to just a few minutes on a computer?
Not required to cut fees by issuing rebates, but merely allowed to reduce closing costs. Wouldn't that make the sale of title insurance more competitive? Isn't competition a good thing with cars, life insurance and gasoline? Why not with title insurance? Why should there be a law which says you cannot pay less for title insurance, even if title agents are willing to cut their fees? Doesn't such legislation merely protect those who can't compete?
One correspondent, no doubt deeply and only concerned with protecting the public interest, complained that the real power behind the New Jersey proposal was, gasp, a home builder who offers title insurance services.
Oh my. Doesn't that say it all. Instead of looking at the merits of the issue or the lack thereof let's look at who is behind the evil notion of open competition.
"Imagine," wrote one defender of the status quo in New Jersey, "if this bill becomes law nationwide, as you have proposed, and other builders offer the same inducement, thereby eliminating their affiliated mortgage company's competition. By not being allowed to shop for the best mortgage rate, hundreds of thousands of buyers could be paying higher mortgage payments. Under the inducement, the buyers would also continue to pay the highest rate possible for title insurance because they would be forced to pay whatever the builder's title company charges."
But fixing prices, as is now the case in New Jersey, absolutely eliminates any competition of interest to consumers. Without price competition, consumers have no reason to prefer one price-fixed title agent over another price-fixed title agent.
One correspondent said those who wish to complete would be "violating the CURRENT title laws by offering discounts."
Who wrote the current title laws? Who wants to keep them the way they are? Who benefits? The fact that New Jersey does not allow title insurance competition merely means the system is in need of change.
There used to be rules which said that optometrists, lawyers, architects and other professionals could not advertise. The only purpose of such laws -- despite claims to the contrary -- was to limit competition.
Such laws and advice have been dead for 30 years, and despite claims that competition would destroy given professions we still have optometrists, lawyers, architects and other professionals who are still in business and still able to charge fairly for their services.
"Do agents selling any other line of insurance anywhere in the country give rebates on their insurance commissions?" asked one writer. "Do Realtors give rebates on their commissions? Do mortgage brokers give rebates on their commissions?"
This is cute. Rebates are unnecessary because insurance agents, real estate brokers and mortgage brokers are not compelled by state law to charge the same fee. People can shop around for the best rates and prices -- and they do.
Lastly, it was pointed out that if title agents are allowed to compete, then money under the table might go to real estate brokers and others. But today, right now, RESPA says real estate agents are not to receive kickbacks. No doubt it will say the same thing in the future.
Besides, who says there are no problems now? In Minnesota, as one example, the state's Department of Commerce recently announced "four separate enforcement actions that include over $1 million in civil penalties against title insurance companies and their referral partners.
"We are sending a clear message today that these sham business arrangements need to end immediately," said Glenn Wilson, Commissioner of the Minnesota Department of Commerce. He alleged that "Minnesota consumers are paying too much for title insurance in order to support these illegal kickbacks, and most of the time they don't even know it is happening."
Congress is now looking at ways to modify the lending process so we have fewer foreclosures. Why not, at the same time, assure that the closing process is open to competition? That would cut closing costs, which means more people would be able to buy a home. Sen. Mel Martinez (R-FL), the former Secretary of HUD and an expert in these matters, is someone who can surely offer some guidance.
New Jersey has a very fine woman's basketball team at Rutgers, a wonderful museum where Thomas Edison once worked, and a great battleship in Camden. There's no reason why the state can't also have a title insurance system which is open and competitive.
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