New legislation returns title insurance kickbacks to front burner

The topic of title insurance kickbacks is back in the news, pushed along by the Consumer Federation of America’s (CFA) call to back new legislation to end incentives for referrals of business to title insurance companies.

According to the CFA, the Fair Prices in Title Insurance Act of 2015 would halt kickbacks and reduce the overall cost of title insurance, a key closing cost for consumers.

There are two types of title insurance policies. The lender’s policy – demanded by mortgage lenders – protects the lender for the loan amount. Although the lender requires the lender’s title insurance policy, the lender never pays for it. Rather, the buyer pays for the lender’s policy. An owner’s policy protects the buyer up to the purchase price of the property.

In addition to errors and omissions in the review of title records, title insurance also protects against unknown problems with the title. Title insurers guarantee that the title ownership is sound, defend the buyer against challenges to their title, and compensate the buyer and the lender if there is a problem with the clear ownership of the title.

According to CFA, the fundamental market problem with title insurance is “reverse competition.” Reverse competition refers to a structure in which the seller of a product markets the product to an intermediary instead of to the ultimate purchaser of the product. In the case of title insurance, title insurers market their products to real estate professionals – real estate agents, mortgage lenders, mortgage brokers, homebuilders, attorneys – who, because of their position in the real estate transaction, are able to steer the consumer who is actually paying for the product to a particular title agent or title insurer, causing insurance premiums to increase.

The problems are graver elsewhere. That’s because Mike Kreidler, a doctor of optometry now in his fourth term as Washington State Insurance Commissioner, has always focused a watchful eye on real estate salespersons and others in position to influence homebuyers.

Kreidler once fined Ticor Title Insurance Co. and First American Title a total of $35,000 for violating regulations that limit the use of incentives and inducements to obtain title insurance business.

Washington state law limits the use of incentives and inducements to $25 per person per year. The Real Estate Settlement and Procedures Act (RESPA) also limits the amount third-party providers can spend on individual agents to $25 a year. That doesn’t even cover the cost of a decent seat at a Mariner game, yet the amount was set to show only a token appreciation of thanks for business received. Needless to say, the figure is regularly disregarded even though some officials in the housing industry have sought clarity on the rule in an attempt to see if $25 really means $25 a year.

Kreidler’s investigators once found widespread and illegal spending among 10 Puget Sound title companies but no fines were levied at that time even though many of the companies exceeded the $25 limit by thousands of dollars on a regular basis. Instead, the commissioner’s office decided on a blanket warning – that apparently fell on deaf ears.

Kreidler’s office fined Ticor for the purchase of holiday gifts, dinners and floral arrangements for real estate agents and lenders in three instances, which exceeded $25 per person and constituted violations of regulations pertaining to rebates and illegal inducements. The agency fined the company $25,000 with $20,000 suspended on the condition of no further violations and the company’s adherence to a compliance plan.

The Washington state findings were small potatoes compared to some of the referral abuse announcements in other states. California-based Southland Title Corp. and its subsidiaries, Southland Title of Orange County and Southland Title of San Diego, were alleged to have spent at least $174,000 on food, beverages and entertainment plus $62,000 on gifts and gift certificates and $218,000 more on “business support services.”

The amazing discovery was that the same company had been fined $1.5 million two years earlier for similar practices. That’s a lot of free lunches – and it gives you an idea of what one company felt it had to do to stay in the client referral game.

Real estate is a tough, competitive and highly lucrative business. Brokers say third-party providers are constantly showering them with goodies while the providers contend that they will quickly be dropped if they don’t provide the gifts.

Great stories are common. A few years ago a title insurance company offered to furnish a real estate brokers’ office if all of the agents in that office wrote in the title insurance company’s name in the appropriate spot in the earnest-money agreement. Another company offered a broker the use of billboards in public places for carrying the company’s name atop preprinted earnest-money agreements. A third company offered all expenses-paid fishing trips.

All worth more than $25.

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