March 15, 2010
Richard L. Brodsky
Corporations, Authorities and Commissions
422 Legislative Office Building
Albany, NY 12248
RE: Proposed N.Y. Senate Bill S6290
Dear Assemblyman Brodsky:
On behalf of independent title insurance agents, independent title insurance underwriters and interested title insurance industry stakeholders who are dedicated members of our organization, please allow me to introduce you to the National Association of Independent Land Title Agents (NAILTA). NAILTA was formed in November, 2008 by concerned independent title insurance agents from across the country who are determined to foster transparency, promote education and understanding and preserve the value of the land title process, all of which ultimately benefit the consumer.
I have reviewed New York Senate Bill S6290 which proposes to create a state-run title insurance guaranty fund similar to the system currently operating in Iowa. We are concerned about this type of title insurance product for numerous reasons and are opposed to such a system anywhere in the United States. Despite our opposition, I remain hopeful that NAILTA and your office can arrive at common ground in order to effectuate the necessary changes to the business of title insurance that will be beneficial for the consumers who rely upon our products and services and our independently-owned and operated members.
We recognize and appreciate your efforts to improve consumer choice and reduce anti-competitive behavior in the title insurance industry. We share that common goal with you. However, the means by which we attempt to reach that goal appear to be different. Allow me to explain why.
Title insurance may be one of the least understood and most unjustly maligned forms of insurance available to the American consumer. Since its inception in 1876, title insurance has suffered from the same problem — the inability of the producer to effectively communicate its value to the consumer. The reasons for the breakdown in communication are plentiful. First, title insurance process from public records through the settlement process and issuance of a policy is not easy to understand. In additional and most importantly is the fact that title insurance is not marketed to the ultimate consumer of the product. Instead, it is marketed to the referral source (i.e. the real estate firm, mortgage company, homebuilder, lender, developer, etc.) who, in exchange for the referral, often times receives incentives or other kickbacks to encourage the affiliation. Consumers rarely participate in the process of selecting their title insurance provider and more often than not, whether voluntarily or involuntarily, defer the selection of title insurance provider to the referral source. As a result, title insurance is, more or less, a closed system of competition from the very start of the process.
Independent land title agencies provide important safeguards against the eroding nature of title examination and underwriting standards and help to keep title insurance claims in check. Independent land title agencies suffer none of the direct conflicts of interest found in the performance of similar title duties by affiliated business arrangements. Independent land title agencies promote fair competition and help maintain the overall solvency of the industry. With a healthy title insurance industry, there will be fewer competition conflicts. When there is more competition and more business for all, the consumer, as well as the independent agent benefits.
Based upon the last thirty years, the practice of illegal kickbacks and incentivized referral systems has gained tacit acceptance in the title insurance industry even though many states have statutes prohibiting the practice. Weak enforcement from state departments of insurance and HUD have only exacerbated this problem. Because title insurance is a relatively small percentage of all insurance products, including both dollar amount and number of people affected, very few resources are committed to review and/or enforce industry standards let alone state and federal statutes. These anti-competitive business practices have reduced transparency in the process, created conflict of interest, and resulted in decreased quality in the ultimate product which creates more claims in turn. By proposing to create a state-run system for title insurance, the root causes of these problems will not be addressed and the cost of insurance is therefore not likely to decrease or benefit the consumer.
The process of creating these referral systems is alarmingly simple. In order to lock in referral partners, push out competition and reduce consumer choice, title insurance agencies, with the tacit approval of the underwriter, permit their referral sources to own up to fifty percent of the capital stock or ownership units of the controlled title insurance agency. This allows referral partners to have unregulated access to the business of title insurance without requiring those partners to be licensed title insurance agents or perform any of the core title services related to the title service provided. These controlled business arrangements also lock out competition and create a “race-to-the-bottom” business model because the controlled title insurance agency has no incentive to compete on price. Further, the title insurance premium is only the icing on the case as the other commissions and fees charged by realtors and mortgage lenders are always far greater than a title insurance premium. The result is many independent agents are locked out of many real estate, mortgage and banking offices reducing competition and quality. In the end, consumers and the title insurance industry lose.
Unfortunately, these types of referral systems will continue unabated regardless of whether it is the state or the private industry that controls the business of title insurance in New York. In order to reduce title insurance costs for real estate consumers and eliminate anti-competitive behavior in the title insurance industry, the New York Department of Insurance needs to enforce anti-kickback rules designed to prohibit this conduct. Stricter enforcement measures can do more to reduce settlement costs and improve price competition than any change at the insurer level.
Moreover, it appears there has been an alarming lack of data supporting whether the New York title guaranty fund — which is modeled off of the Iowa Title Guaranty Division — will actually provide a cheaper alternative to the product provided by private industry. After all, in Iowa, the guaranty fund was created in the absence of a private market whereas, in New York, the guaranty fund would be joining the process well into one of the highest claims periods on record. Last year alone, New York saw claims ratios rise from 4% in 2007 to nearly 7% in 2008 while at the same time direct premiums fell from over $1.1 billion dollars in 2007 to $756 million dollars in 2008. The cost and expense of title insurance operations is historically 98% of revenue, leaving small profit margins of 2% or less. In periods of high claims, there is greater stress on the decreased revenue stream to pay claims. It appears that the New York model does not account for these fluctuations nor does it account for the operational issues associated with the business of title insurance. Meanwhile, anti-competitive practices will continue regardless of whether the state or the private industry is the one in charge. Instead of reactively responding to the rate and claims loss swings, it is important to discover the root cause of these phenomenons so as to proactively reduce their impacts.
It is expected that a slow economic recovery will exacerbate the demands on small businesses in the title insurance industry. Thus, it is imperative that the legislature investigate ways to improve oversight and enforcement of statutes and rules designed to insulate the title insurance industry from its anti-competitive market forces. If this is done, longer term pressures on the title insurance industry caused by its historic inability to communicate with consumers might be addressed and alleviated now — before these important independent agents are squeezed out of the market by risky and anti-competitive market behavior. For example, giving consumers or independently-owned and operated title agencies a private right of action to pursue alleged anti-competitive market behavior might take some of the enforcement pressure off of currently taxed insurance regulator resources. If alleged violators can be brought into court by their true victims, this might be the best “built-in” disincentive to the conduct we both agree is at the center of this debate.
Your support and dialogue are critical to NAILTA’s efforts. Our members are title insurance agents, title searchers, title examiners, underwriters, and real estate attorneys from across the United States, including many from within your state. We represent hundreds of years of combined experience from all corners of the title insurance industry. I invite you to contact me so we can schedule a time to discuss the state of the title insurance industry and our efforts to help improve the business of title insurance in greater detail.
Please include NAILTA in your department mailing and distribution list for any and all correspondence regarding issues affecting the title insurance industry. Please make sure to forward any proposed rulemaking or bills relevant to the title insurance industry directly to my attention.
I can be reached via our website at www.nailta.org or via telephone at (610) 361-2655. Our email address is firstname.lastname@example.org. I look forward to hearing from you and the opportunity to personally meeting to review what can be done to benefit consumers and the title insurance industry.
Charles W. Proctor, III, Esquire, C.L.T.P.
cc: New York State Land Title Association, Inc.