AuthorSterk, Stewart E.


The real property recording system is designed to protect purchasers and mortgagees against defects in title. Navigating that system is beyond the capacity of most laymen; historically, purchasers hired lawyers and other professionals to identify and eliminate title risks. Institutional lenders, however, sought more protection than a lawyer's opinion could provide, leading to the development of title insurance.

Title insurance, unlike most other insurance, is focused not on risk spreading but on risk elimination. By examining title before issuing a policy, a title insurer minimizes the likelihood of a successful claim by an insured whose title turns out to be defective. Evidence establishes, however, that the price of title insurance exceeds the total cost of producing it, even accounting for the insurer's ex ante search costs. Concentration in the industry is a contributing factor, but the principal problem is that the industry's customers are largely insensitive to price. Lenders require home purchasers to buy title insurance, but those purchasers are one-shot customers who have little incentive to spend time and money comparison shopping.

Moreover, in many jurisdictions, purchasers who did engage in comparison shopping would soon learn that the prices charged by "competing" title insurers are nearly identical--due in part to well-meaning but ineffective state regulation of the industry. That regulation often erects barriers to entry that make it difficult for startups to introduce more cost-effective title insurance models based on modern technology. Federal regulation has been no more effective in protecting consumers against excessive title insurance cost.

Regulation would be more effective if it focused less on title insurers and instead required lenders to bear more of the cost of title insurance. As repeat players with significant resources, institutional lenders have leverage with title insurers that home purchasers do not and also have the capacity to influence legislators to remove barriers facing startups seeking to disrupt the industry.

TABLE OF CONTENTS INTRODUCTION I. DEVELOPMENT OF TITLE INSURANCE: A BRIEF HISTORY II. THE STRUCTURE OF THE INDUSTRY A. The Underwriters B. The Agents C. Title Plants D. Premiums and Premium Splits E. Price, Cost, and Value F. Kickbacks G. Startups III. STATE REGULATION OF THE TITLE INSURANCE INDUSTRY A. Minimizing Title Insurance Claims B. Ensuring Adequate Funding C. Controlling Title Insurance Costs 1. State Regulatory Approaches 2. Correlation Between Regulatory Approaches and Insurance Rates D. Restrictions on Kickbacks and Referral Fees IV. FEDERAL REGULATION A. Antitrust Law 1. The State Action Doctrine 2. The McCarran-Ferguson Act 3. The Filed-Rate Doctrine 4. Mergers and the Clayton Act B. RE SPA 1. Introduction 2. The Statutory Scheme 3. The Statute in Operation 4. RESPA's Limited Effectiveness C. RICO D. Summary V. POTENTIAL SOLUTIONS A. State Takeover: The Iowa Model B. A Better Way Forward: A Lender-Pays Model 1. Creating Incentives 2. Mechanics 3. Exclusions CONCLUSION INTRODUCTION

Title insurance has become ubiquitous in American real estate transactions. Because states and localities do not generally maintain offices with the capacity to certify title to particular parcels of land, lenders and purchasers face the risk that an unforeseen party will advance claims that jeopardize their interests. Title insurance reduces that risk. The insurer agrees to indemnify the lender or purchaser against losses attributable to adverse claims.

Reduction of title risk comes at a cost: the title insurance premium paid to the title insurer. In 2019, lenders and purchasers paid $15.81 billion in title insurance premiums. (1) By contrast, the industry paid out only $544 million in claims. (2)

The dramatic difference between premiums collected and claims paid is not all profit to the title insurer. Unlike most other forms of insurance, which focus on risks eventuating after issuance of the policy, title insurance protects purchasers against risks that are already in place on the date the insurer issues the policy. (3) As a result, much of the cost-and value--of title insurance is informational, reflecting the insurer's efforts to ferret out and resolve title risks before title closes and the policy becomes effective. (4)

The disparity between premiums and claims nevertheless raises a basic question: does title insurance add enough value to justify the premiums the title insurers collect? The market does not provide an answer to that question, because the consumers of title insurance are largely price insensitive. In the typical real estate transaction, the mortgage lender, most often a bank, acquires a policy insuring its loan against adverse claims, but passes the bill for that insurance to the purchaser as a "closing cost." (5) The lender has no incentive to shop for insurance, or even to decide whether insurance is worth the cost, because the lender does not pay for the insurance. And the purchaser has no meaningful choice, because the lender will not make the mortgage loan unless the purchaser pays for the insurance. Moreover, because the premium is a one-shot expense for the purchaser, and represents a modest percentage of the overall purchase price of the real property, the housing consumer is unlikely to engage in much comparison shopping.

If the housing consumer did try to comparison shop, the consumer would face a market with little price competition. Four major players in the title insurance industry have captured 85 percent of the title insurance market. (6) Congress has largely left regulation of insurance, including title insurance, to the states. Although states have taken different approaches to regulation, state regulation has not ameliorated, and in some circumstances has exacerbated, the absence of competition in the industry. As a result, within any state the rates charged by competing insurers are often close to identical.

A unique problem with regulation of title insurance rates is that the regulators have no reliable basis for assessing the value of the product title insurers sell. Because the principal value of the insurance is in claims avoided rather than claims paid, the ratio of claims to premiums is not nearly as relevant as it might be with other forms of insurance. And regulators have little insight into the claims avoided by the work that precedes issuance of the title policy and no financial incentive to investigate.

Although no entity has perfect information about the problems title insurers avoid, the entities in the best position to monitor title insurance costs and benefits are the primary consumers of title insurance: institutional lenders. These lenders are repeat players who, unlike regulators, have the opportunity to see and evaluate the title reports prepared by the insurers. The problem is that lenders derive the primary benefit of title insurance while they bear none of the costs, removing their financial incentive to police the industry.

The title insurance industry is poised for disruption. A number of startups are attempting to harness modern technology to offer title insurance more quickly and cheaply than the established companies. (7) So far, they have had limited success because their primary potential customers--institutional lenders--have insufficient incentive to patronize startups as long as consumers foot the bill. Moreover, existing regulations in many states complicate entry into the highly concentrated title insurance market.

A more productive regulatory structure would enlist lenders to monitor title insurance cost. Lenders would be much more likely to root out inefficiencies in the industry if they were required to bear more of the cost of title insurance. A simple fix would be to ban banks from billing purchasers separately for title insurance and to require banks instead to roll title insurance fees into the basic interest rate of mortgage loans.

Consumers shop for mortgage loans based on interest rates; although title insurance is a multi-billion-dollar industry, title insurance costs are an afterthought for an individual consumer choosing a lender. Federal statutes--the Truth in Lending Act (TILA) (8) and the Real Estate Settlement Procedures Act (RESPA) (9)--mandate that lenders disclose expected costs, including title insurance costs, within three days after receiving a loan application. (10) But only the most careful consumer is likely to focus on the fine print in federal disclosure statements, and even that careful consumer may not find it worth the time and effort to shop around for a one-time saving in premium cost.

Consumers do, however, compare interest rates, which they expect to pay for the life of their mortgage loans. If lenders were required to bundle title insurance with interest rates, they would have a financial incentive to control title insurance costs to gain, or maintain, a competitive advantage. If the goal is to control title insurance costs, then the optimal solution may not be more regulation of title insurers, but instead, more regulation of their principal customers: institutional lenders.

In developing this thesis, Part Two briefly explores the development of title insurance. Part Three describes the complex structure of the industry, setting the stage for the current regulatory landscape. Parts Four and Five explore state and federal regulation, respectively, and explain why neither has been effective in ensuring that the price of title insurance correlates effectively with the cost of providing it. Part Six outlines an alternative approach that homes in on lenders rather than insurers as the most promising targets for regulation.


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