The District of Columbia recently adopted a new law that prevents consumers from receiving any rebates, discounts or other inducements in connection with title insurance.
Title insurance protects real estate purchasers from liens, land survey discrepancies or other title problems. It’s required by virtually all lenders in a purchase or refinance transaction. Owner’s coverage is optional.
Title premiums are priced based on the home’s purchase price and loan amount. For example, for a $500,000 home with a $400,000 mortgage, title insurance will cost the homeowner approximately $3,390.
Until recently, in the District, title insurance premiums and all other settlement fees and charges were wholly negotiable. That meant that although the various title underwriting companies published title insurance rates, title agents were free to negotiate those rates competitively. All other settlement costs, such as settlement fees, document preparation fees, title examination fees and the like, were also negotiable. Price-conscious consumers could comparison shop online or by phone to obtain the lowest possible prices.
The law became effective Jan. 1, 2011, as part of a comprehensive new regulatory scheme to license and regulate title insurance underwriters, agents, rates and continuing education requirements in the District. While there did not appear to be any emergency market groundswell driving this legislation, it did bring title insurance regulation into conformity with the surrounding jurisdictions in some ways.
However, because of these new regulations, D.C. consumers will be paying more for their title insurance and overall settlement fees in the future.
The new law appears to solely benefit large real estate brokerage firms that have entered into affiliated business arrangements with title companies. These arrangements are typically between real estate brokers, mortgage lenders and/or title insurance companies.
In practice, the real estate brokers “steer” their clients to their affiliated lenders for a mortgage loan and to their affiliated title companies for settlement and purchase of title insurance. In return for these referrals, the revenue from those affiliated entities are legally “kicked back” to the real estate broker through a revenue-sharing arrangement based on equity ownership of the captive title company.
In the past, the most common way non-affiliated title agents competed with this “closed loop” was to offer economic incentives to match or beat the affiliated companies’ rates. Those practices are now expressly illegal.
“If you were really seriously interested in increasing competition, you would require the real estate brokerages to divest themselves of their title insurance affiliates,” said Peter Antonoplos, partner in the JDKatz Law Firm with offices in the District and Maryland.
According to District of Columbia Associate Commissioner for Insurance Philip Barlow, the rationale for the regulation was to ensure that similarly situated homebuyers received identical pricing from the settlement agent. Barlow explained that it was perceived to be unfair to only offer discounts to those savvy consumers who asked for them at the expense of those borrowers who didn’t.
Barlow pointed out that the District is not setting title insurance rates or settlement fees. Rather, the regulation simply makes illegal the prior, common practices of offering negotiated discounts at the settlement table. Not all discounts are illegal. For example, the regulations permit discounts for employees of the settlement company; to repeat customers, or for actions that improve the efficiency of the settlement transaction, he said.
Both Maryland and Virginia have regulated title insurance rates but not settlement fees. Maryland and Virginia have also limited the scope of their regulation to the title insurance premium. Whereas, the District now seeks to regulate not only the title insurance premium but also all settlement fees, including, potentially attorney’s fees incurred in connection with the sale of title insurance.
The new regulations are “absolutely not pro-consumer, just the opposite,” according to Todd Ewing, president of Federal Title and Escrow in the District. Ewing echoed the sentiment that these regulations “entrench the affiliated business arrangements to the detriment of the consumer.”
Shopping for title services could save D.C. homeowners up to $1,180 per closing, according to an independent study commissioned by Federal Title. That same study concluded that Maryland and Virginia consumers could save up to $900 per transaction when permitted to comparison shop for title services. That study, conducted in early 2011, compared Washington area-based title companies that published their settlement fees on their Web sites.
Yet the new law does not require settlement services providers to disclose their fees in writing or publish them on their Web site. The new law creates a huge disincentive to continue to publish settlement fees and costs since those disclosures could later be used by the District as evidence that those fees were not applied in all similarly situated settlements.
Violations of the new regulations carry stiff penalties of up to $2,500 for a first violation, $5,000 for each successive violation and revocation or suspension of the title insurance license. No doubt title agents will be erring on the side of strict adherence to their published fees, if any, or documenting every file to make sure to justify any variance from fixed fees for all similarly situated consumers.
Time will tell how many independent title agents will be around next year to “compete” with the affiliated title companies who now no longer need to worry about price competition.
Harvey S. Jacobs, Esq., is a partner in the Rockville law firm of Joseph, Greenwald & Laake, P.A. He is an active real estate investor, developer, landlord, settlement attorney and lender. This column is not legal advice and should not be acted upon until legal counsel has been consulted. He can be reached at firstname.lastname@example.org.