Concerned, repeated million dollar fines levied against the escrow and title insurance industry amount to little more than a slap on the wrist. The California Department of Insurance wants to slash escrow and title fees so much that a home buyer could save more than $2,300 on closing costs.
The consumer rate cuts would shave $1 billion a year off the title and escrow industry's $4.5 billion annual revenues in California.
The department says that's necessary because the title and escrow industry is a dysfunctional system of illegal kickbacks, gratuities and questionable partnerships where the lack of competition squeezes consumers.
Insurance Commissioner John Garamendi is seeking an average 23 percent roll back on the cost of title insurance alone -- a potential savings of up to $2,370 on a $600,000 home.
The median price of a home in California was $564,430 in May, according to the California Association of Realtors.
"I have repeatedly fined these companies $1 million and more to put a stop to their illegal schemes that have dashed the hopes of consumers looking to realize the American Dream," said Garamendi.
"But to these companies, given their excessive rates, a $1 million fine was merely a small cost of doing business," he added.
The commissioner also said without competition, skyrocketing housing prices take title and escrow fees along for the ride because insurers base their fees on a percentage of the home price.
The title insurance industry vehemently insists competition is alive and well in the Golden State, and suggested fines are the way to go to punish wayward companies.
It vowed to fight the proposed rate reductions at the policy level and in the courts.
"It's absolutely true over the decades there have been occasions where companies have engaged in rebates to try to get business and we have tried to work with what is legal vs. kickbacks, but now he (Garamendi) wants to take a sledge hammer and reduce everybody's rates. If there are companies doing bad things, he should go after them," said Mike Belote, spokesman and lobbyists for the California Escrow Association.
Calling plans to lower rates a "media-friendly regulatory stunt" the Escrow Institute of California (EIC) said in a prepared statement, because the state Department of Corporations, rather than the insurance department, regulates escrow companies, lowering rates would unfairly, perhaps illegally impact escrow companies. In southern California, escrow companies, typically smaller independently-owned companies, work in tandem with title companies. In northern California title companies offer both title and escrow services.
The industry argues because escrow companies order title insurance from title companies they would also be forced to lower their rates even though they are not regulated by the insurance department. Because they are smaller, independently owned companies, their bottom line could suffer.
"In his haste to make headlines, however, Commissioner Garamendi failed to consult with DOC or with EIC to gauge the impact his actions would have on small business owners. In fact, he refused repeated requests by EIC to discuss this draconian decision, which will adversely affect thousands of independent licensed escrow companies in California," the statement said.
The action is the latest in a series of punitive measures against the title and escrow industry dating back decades in California and elsewhere. The repeated battles put the industry's reputation at stake.
One of the most recent, spawned by Colorado investigators, became a nationwide investigation of several major title insurance companies. Among the settlements, First American 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 many state laws as well as federal law known as RESPA (Real Estate Settlement Procedures Act).
Because the title and escrow industry is quick to pony up fines and institute policy reversals in response to investigations about questionable practices, Garamendi decided lower rates would provide a better long term solution.
He also vowed "to do something about it" last year when a department-commissioned report, "An Analysis of Competition in the California Title Insurance and Escrow Industry," found alleged anti-competitive practices in the title and escrow industry, practices the industry denies.
What Garamendi wants to do includes:
- Set "interim maximum rates" based on each company's rates in 2000, before the sharp rise in home prices. The result will be an immediate 23 percent reduction in title insurance rates for a home purchase, a 16 percent reduction in the cost of title policies for refinancing, and a 27 percent decrease in the cost of escrow services provided through escrow companies controlled by title insurers.
- Beginning in 2008, mandate that companies report to the insurance department comprehensive data showing their costs and operations to help the commissioner better determine reasonable cost-based rates for title insurance.
The commissioner plans to use the data collected to determine a maximum amount that a company may charge for a title insurance policy and escrow fees. The maximum is expected to be well below current rates.
"This is real money that will help reinvigorate the housing market in California by enabling more of us to become homeowners," Garamendi said.