Buyer Beware: Illegal Kickbacks, Schemes Bump Up Title Insurance Premiums
Before you take the keys to your new home, agencies could be keying in on ways to make some decent money at your expense.
Anyone who has really looked over the fees associated with a home purchase has probably wondered why they are paying so much for title insurance. Why do you have to pay $1,000 or $2,000 for coverage — especially when payouts on actual title defect claims are minuscule?
This was the subject of a congressional subcommittee hearing hearing in late April, writes syndicated real estate columnist Kenneth Harney. One of the key matters of debate was the extent to which illegal tie-ins among agents, mortgage brokers, home builders and title agents inflate the premiums paid by consumers at closing.
For those of you who haven’t exactly followed the title business closely for the past year, the hearing produced some rather startling revelations:
In Colorado, according to Deputy Insurance Commissioner Erin Toll, the pervasiveness of kickback schemes in the residential real estate process has created a black market that makes it impossible for those who play by the rules to compete. The cost of kickbacks is, of course, passed on to consumers and “rolled into” the premiums they are charged.
Toll said the situation is similar in other states, based on observations as co-chairwoman of a National Association of Insurance Commissioners task force examining title insurance practices. An independent title insurance agent from Minneapolis, Douglas R. Miller, president and CEO of Title One Inc., testified to similar practices in Minnesota.
“The title insurance industry and the real estate industry have locked up almost the entire marketplace through controlled business schemes,” Miller said. “Steering real estate consumers into overpriced ancillary services for secret profits.”
Miller’s firm doesn’t take part in joint ventures with real estate brokers or mortgage providers and, despite the lowest premiums in the area, still struggles to attract business from home buyers. He doesn’t play the premium-sharing game, so real estate and mortgage companies don’t send customers his way.
State insurance commissioners across the U.S. recently levied close to $50 million in fines and penalties against title insurers and title agencies for illegal kickbacks. In Colorado alone, $25 million has been returned to consumers, while three large insurers paid $12.5 million to settle charges alleging illegal kickbacks and referral fees in California.
At the federal level, dozens of kickback and sham title agencies that exist solely to funnel referral payments back to realty brokers, loan officers and builders have been uncovered. Deputy Assistant Secretary for Housing Gary M. Cunningham told the hearing about a $675,000 settlement with an unnamed builder that used its own affiliated title company to illegally split consumers’ premiums with a major title insurance company.
For further evidence of title insurance scams, Cunningham also told the congressional panel about a scheme in Memphis, Tenn., that kicked back portions of premiums to the real estate agents, mortgage brokers and home builders who referred consumers’ settlement business to it. The agency paid $680,000 to settle the allegations, with the participating builders paying up another $226,000.
Representatives of the title insurance and real estate brokerage industries condemned the evidence of kickbacks and law-breaking at the hearing, while at the same time arguing that title insurance premiums are not excessive and that referral fee payments are not the norm.
Rande K. Yeager, president and CEO of Old Republic National Title Insurance Co., said that most title premiums go toward identifying and eliminating the bulk of the risks the insurance is intended to cover (the steps taken to ensure clear title), which is why the payouts for claims represent just 5 percent of premium dollars, versus 60 percent for auto insurance and 86 percent for HMO insurance.
The president of the National Association of Realtors, Thomas M. Stevens, said his industry is greatly concerned by allegations of illicit setups between title agents and real estate brokers. He said that joint ventures involving real estate firms and title agencies typically are bona fide, law-abiding business arrangements that benefit consumers.
As a consumer, what should you take away from the hearing testimony? You might start by considering what J. Robert Hunter, former Texas insurance commissioner and currently insurance director for the Consumer Federation of America, had to say. Hunter believes that title insurance is grossly overpriced in most parts of the country. Iowa is the only state to ban private title insurance and replace it with a state-administered fund.
As a result, title premiums there are less than half what they cost elsewhere. No kickbacks. No splits. Makes you think.
