State tries to reduce title fees

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Representatives of the title insurance and escrow industries turned out in force at a public hearing in San Francisco on Wednesday to protest California Insurance Commissioner John Garamendi‘s proposal to drastically roll back their rates and fees.

Garamendi says California consumers pay too much when they buy or refinance a house because there is insufficient competition in the title and escrow businesses.

Instead of marketing to consumers, he says these businesses market to real estate agents, lenders, mortgage brokers and home builders who steer clients their way. Because consumers buy or refinance homes infrequently, usually under a tight deadline, they usually go where they are led.

Garamendi claims the system is “rife with illegal kickbacks and gratuities,” which are passed along to homeowners in the form of higher prices.

Last year, Garamendi reached a settlement with nine title companies that agreed to pay $37.8 million in refunds and penalties for alleged illegal rebating.

Industry representatives admit they depend on referrals from third parties, but strongly deny that kickbacks are widespread.

At a rally before the public hearing, P.J. Garcia, chairman of the Escrow Institute of California and owner of an independent escrow company, said homeowners trust their agents for referrals “the same way I rely on a doctor to refer me to a heart surgeon.”

Industry leaders critical

Representatives of the industry say it is highly competitive and portray Garamendi’s proposal as election-year politics. “Garamendi’s running for lieutenant governor and wants the media attention by cutting title rates,” says Larry Green, executive vice president of the California Land Title Association.

Title insurance protects property owners and lenders against losses stemming from an ownership dispute caused by liens or other defects not uncovered during the initial title search.

An escrow agent handles the closing and makes sure all conditions of a real estate deal are met before funds are transferred or a deed is recorded.

Title and escrow fees are generally based on the price of a house or the amount of the loan.

Garamendi says title insurance and escrow companies can afford to pay referral fees because property values have been soaring.

His proposal would, on an interim basis, roll back title insurance and escrow prices essentially to where they were in 2000, before the run-up in home values began.

To accomplish this, he would force each company to reduce the rate it charged in 2000 by 23 percent for title insurance when a home is bought or sold, 16 percent when a house is refinanced and by 27 percent for escrow services.

Because this lower rate would be applied to a higher-priced home, the total price consumers would pay in 2006 would be roughly equal to what they would have paid for the same transaction in 2000, plus a small increase commensurate with the consumer price index. Companies would be free to charge less than these maximum rates.

Garamendi estimates this reduction would save homeowners about $1 billion per year and force companies to reduce or eliminate the referral fees they allegedly are paying.

The interim rate reduction could take effect as soon as March and would stay in effect until the Department of Insurance implements a far more complicated method of setting maximum rates. The long-term approach would require companies to submit reams of statistical expense data as described in a 232-page proposed regulation.

The department would use this data to come up with an industry-wide maximum rate for title insurance and escrow fees. To compensate for the industry’s cyclical nature, this rate could go up when home sales or loan volumes shrink and go down when business is booming.

The Department of Insurance regulates all title insurance companies and the escrow companies they own. In Northern California, most escrow companies are owned by title companies.

In Southern California, most escrow companies are independent and regulated by the Department of Corporations, not the insurance department. They would not be affected by Garamendi’s proposal directly, but could be affected indirectly.

“If you mandate a 27 percent rate reduction from one big player like the title industry, it’s going to force the independents to lower their rates. It will clearly affect them,” says Mike Belote, a lobbyist for the California Escrow Association.

This is the insurance department’s first attempt to regulate title insurance and escrow prices. Although it regulates rates for other types of insurance, to set title insurance and escrow fees it first had to establish that the market was uncompetitive, which it claims to have done with a number of studies.

Protest march

Before the public hearing, about 65 escrow agents wearing bright blue “Shame on You John Garamendi” T-shirts protested his proposals on the sidewalk outside the department’s offices on Fremont Street

The proposal “would not create competition, it would destroy competition,” said Fran Bulter, incoming president of the California Escrow Association.

Juliana Tu, director of the California Escrow Association, called Garamendi’s proposal “a slap in the face.”

The protesters, like escrow officers in general, were predominantly female. Asked why, Tu said, “Escrow officers need several things: patience and attention to detail. Need I say more?”

Inside the hearing, the department heard first from four experts representing Fidelity National Title Insurance.

Norris Clark, a former deputy commissioner for the department of insurance who now works as a consultant for a law firm, argued that the expense data his former employer is demanding from companies is “incomprehensible” and “unclear.”

Michael Miller, an actuary, objected to an industrywide maximum rate because it would penalize companies with higher-than-average costs and potentially force them out of business, leading to less competition.

He also pointed out that because of lag in data collection and analysis, rates could get “out of sync” with the market and go down when they should be going up or vice versa.

Greg Vistnes, a vice president with CRA International, challenged the department’s research showing the market was not competitive, calling it “fundamentally flawed.”

He said a survey by showed that title insurance in California is slightly cheaper than the national average.

A spokesman for several consumer groups that support Garamendi’s proposal was scheduled to testify in the afternoon.

“I think it’s going to save a lot of people a lot of money,” said Doug Heller of the Foundation for Taxpayer and Consumer Rights, who supports the proposal but was not at the meeting. “I think the insurers will fight. They’ll file a lawsuit I suspect. Garamendi has a pretty good track record in terms of beating the insurers when they try to avoid reforms.”

Consumer Watchdog
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