The current regulatory environment surrounding the title insurance industry is marred by limited enforcement resources, minimal oversight of title agents and a lack of coordination between state and federal regulators, according to the long-awaited report from the US Government Accountability Office (GAO) on title insurance. industries
On April 17, the GAO, the investigative arm of Congress, released the results of its highly publicized investigation into the securities industry, launched a year ago at the request of then-Chairman of the House Financial Services Committee, Michael Oxley.
The report, titled “Title Insurance: Actions Needed to Improve Title Industry Oversight and Better Protect Consumers,” identified significant barriers to successful regulation of the title industry, but for every weak link in the regulatory chain , the GAO offered a remedy. , calling for the active participation of federal, state and local regulators.
“Given the weak position of consumers in the title insurance market, regulatory efforts to ensure reasonable prices and deter illegal marketing activities are critical,” the report states. “Given the variety of professionals involved in a real estate transaction, the lack of coordination between different regulators within the states, and between HUD and the states, could potentially hamper enforcement efforts against consumer referral compensation. Due Due to the involvement of federal and state regulatory bodies, including multiple state-level regulators, effective regulatory improvements will be challenging and will require a coordinated effort among all involved.”
This effort is strongly supported by all industry players, but exactly how and when the GAO recommendations will be implemented is a source of debate.
Frustration exists at the federal and state level
Limited state and federal oversight of the title industry has led to proposals for change, the GAO found, but those changes are focused at the state level, primarily at the affiliated corporate level.
“Some state regulators have expressed frustration with HUD’s level of response to their requests for enforcement assistance, and some industry officials have said RESPA’s rules regarding ABAs and referral fees need to be clarified,” he said. the GAO.
However, more limited regulation and oversight of AfBA and title brokers in less active states could provide greater opportunity for potentially illegal sales and marketing practices, the GAO said. While the GAO listed states such as Colorado, California, and Minnesota as leaders in enforcement and oversight, the report found that states’ enforcement of the anti-bribery and reference fee provisions was uneven.
That would place the onus on HUD, but HUD officials raised concerns about the lack of authority to enforce violations of RESPA Section 8, the GAO said.
“According to HUD officials, it is difficult to deter future violations without stronger enforcement authority, such as civil money penalties, because…businesses view small settlements as simply a cost of doing business,” the GAO said.
Viewing these concerns as critical to the health of the industry, the GAO made a series of recommendations to improve oversight at each level of government, as well as to better coordinate the various efforts of those regulators.
Officers: Where’s the meat?
State regulators could benefit more from examining the costs of title agents, the GAO found. Officials from several state insurance departments last year questioned whether agents were worth splitting their premiums, and the GAO quickly picked up this debate, finding that regulators don’t fully assess title agent costs during fee reviews.
“Few regulators review the costs incurred by title agents to determine if they are in line with the prices charged,” the report said. “In fact, in most states, agent costs for search and examination services are not considered part of the premium and therefore do not receive review by regulators. Therefore, the Title agents charge separately for their search and examination services, but receive approximately the same percentage of the premium as agents in states where these costs are included in the premium.”
Title insurers told the GAO that they generally share the same percentage of the premium with their agents, about 80 to 90 percent, regardless of whether those agents are in states where consumers pay for title search and examination services. agents within the premium rate, known as all-in states, or if they were in states where agents can charge consumers separately for those services, known as hazard rate states.
However, there are no reliable data to determine whether consumers in hazard rate states paid more than those in all-inclusive states, the GAO said, and therefore recommended a “multi-step process that could involve an analysis details of some title agents”. “While the GAO has assigned responsibility for this audit function to state insurance regulators, some industry experts noted that reporting requirements currently vary by state, making it difficult for some companies to provide the kind of uniform data needed to form constructive conclusions.
In California, for example, some companies are concerned that the Department of Insurance’s proposed statistical reporting requirements will force them out of business, since they are now unable to provide data from prior years that were not required at the time.
“Some of the information that the GAO wants to collect simulates staffing and hiring practices and micromanages the whole process,” said Joe Petrelli, founder of Demotech, a ratings firm based in Columbus, Ohio. “It’s a level of detail that I don’t think people have. It’s a tremendous layer of fixed overhead that nobody anticipated, and it’s not like you can snap your fingers and get that kind of detail.”
Matters for Congressional Consideration
As for Congress’s role in the melee, the GAO recommended that Congress reevaluate certain aspects of RESPA.
“Revising RESPA to ensure that consumers receive this information as soon as possible when considering any type of mortgage transaction…could be beneficial,” the GAO said.
The GAO’s recommendations to Congress were twofold. Congress could give HUD greater enforcement authority for Section 8 violations, such as the ability to impose civil money penalties. Congress could also make a detailed homebuyer information brochure available to consumers.
These recommendations are in line with what HUD’s RESPA office has probably been discussing since the fall of 2005, when the department went back to its chambers to reflect on RESPA reform. So, by all accounts, the GAO’s congressional recommendations have a good chance of becoming a reality.
“HUD has long sought such authority, and the GAO report may be HUD’s best opportunity to obtain it,” said Rich Andreano, a partner at the Washington, DC law firm of Weiner Brodsky Sidman Kider PC.
doubtful Thomas
But the apparent consensus between HUD and GAO doesn’t mean these recommendations will see the light of day, at least not for the foreseeable future, some skeptical industry leaders said.
Some industry players are hedging their bets that the recommendations will be swept under the rug as Congress contemplates changes to predatory lending and FHA reform.
Lead RESPA attorney Phil Schulman of Kirkpatrick & Lockhart Preston Gates Ellis said: “The timing of the report works in the industry’s favor, as the focus in Capital Hill and elsewhere is on subprime lending and the onslaught of foreclosures, not on title insurance reform.”
National mortgage training expert Christopher Cruise observed that “the title insurance industry has dodged a bullet here. Asking states to step up their enforcement activities seems reasonable, but, except in a few states with strong insurance commissioners, that simply won’t happen. I think in the long run this report will have little or no effect and little or no change to title insurance rates.”
Ken Trepeta, regulatory policy representative for the National Association of Realtors (NAR), also said: “The issue of RESPA civil penalties is intriguing, but I wonder if anyone in Congress really has the stomach to revisit RESPA. I know the senator. [Mel] Martinez is interested in RESPA, but has spoken more along the lines of disclosure.”
The writing on the wall
While some are skeptical that the report matters much in this era of heightened scrutiny on predatory lending and mortgage issues, others believe it is a fallacy to say that the troubles in the title and settlement services industries are so far from trouble. in the mortgage industry.
Indeed, Rep. Spencer Bachus, R-Alabama, a ranking member of the House Financial Services Committee, has commented, “The GAO findings are significant and I look forward to reviewing them thoroughly.”
Some respected sources have told The Legal Description that Congress has been waiting for the results of the GAO report to determine if there were issues that needed to be addressed before bringing RESPA and title industry reform to the fore.
Other industry leaders willing to speak officially agreed that this scenario is not as far-fetched as some skeptics believe.
“Obviously, Congress is still reviewing this and, I assume, will take it into consideration along with any other appropriate legislation,” said Sue Johnson, executive director of the Real Estate Services Providers Council Inc. (RESPRO). “I’d be surprised if Congress didn’t contact HUD to check on the status of their RESPA rule and consult with them. A lot of this just has to be played out.”
Andreano was perhaps more confident in the prediction that Congress will put all the pieces of the puzzle together to bolster his ongoing homeownership initiatives.
“I think it’s safe to say that the GAO will not be on the title industry’s Christmas list this year,” Andreano said. “While the report focuses on and is critical of the title industry, all settlement service providers should focus on the reaction of Congress. Clearly, title industry revenues are now under scrutiny and the industry must be prepared to deal with scrutiny from regulators and legislators