A recent legal settlement between the federal government and a title insurance agency is drawing fresh attention to one of the murkiest, least understood and costly items you get charged for in a real estate closing: title insurance.
You are hardly alone if, like many buyers and mortgage borrowers, you didn't shop for the lowest cost and best title insurance coverage and settlement services the last time you closed on a home loan. Instead, you probably went along with the recommendation made by your realty agent or lender. Although the title insurance charge came to $1,500 or more, you may not have been exactly sure what your money paid for and who got most of it.
For example, you might not have understood that the insurance underwriter — the company that actually insures against title problems affecting your new home — didn't end up with the majority of the premium charges you paid. In fact, it may have received just 10 to 20 percent of your total fees; the title agent or settlement attorney pocketed the other 80 to 90 percent. You could also have missed the monetary side deals that may exist between the realty brokerage firm and the title agency or settlement attorney.
It can all get rather incestuous and laden with conflicts of interest, which is why federal law requires real estate settlement service providers to disclose whether there are any financial arrangements among the parties involved in your transaction. The disclosure itself often comes across as part of a paper blitz that may not get the attention it deserves from consumers whose eyes are glazed by the overwhelming details and emotions inherent in many home purchase transactions.
Mandatory though they may be, not all relevant financial arrangements and conflicts of interest are always disclosed, as the latest legal settlement from the federal Consumer Financial Protection Bureau illustrates. The bureau charged that Meridian Title, a title and settlement agency headquartered in South Bend, Ind., failed to disclose its overlapping ownership interests in the title underwriter, Arsenal Insurance, to which it routinely sent its title insurance business.
The CFPB found that three of Meridian's executives were part-owners in Arsenal, but that fact was never disclosed to consumers, as the Real Estate Settlement Procedures Act requires. By choosing Arsenal instead of competing underwriters, Meridian "was able to keep extra money beyond the commission it would normally have been entitled to collect," the bureau said.
During a three-year period, according to the CFPB, more than 7,000 consumers who should have received a disclosure about the arrangement between Meridian and Arsenal were left in the dark. The CFPB ordered the company to pay up to $1.25 million in redress to customers who were harmed by the failure to disclose the ownership conflicts and to "properly disclose" them in future referrals of business.
In a statement for this column, Meridian denied that "any consumers were negatively affected by its actions" and denied any wrongdoing. CFPB Director Richard Cordray had a starkly different take: "Meridian Title illegally steered consumers into purchasing a product from an affiliated company to add to its bottom line," he said.
Marx Sterbcow, a lawyer based in New Orleans who represented Meridian in the case, said in an interview that the failure to disclose the overlapping ownerships was a "technical" issue and that Meridian had been advised by state regulators that providing consumer disclosures about the overlapping ownership in Arsenal was not required. The CFPB, the federal regulator with oversight and legal authority in the matter, strongly disagreed.
So what should you make of all this? Most important, be aware that federal law guarantees you the right to shop around for title insurance and settlement services, and you should make the most of it. Even in states where regulators set premium rates, there can be significant differences in the total closing fees for which you get charged.
Be aware also that many realty brokerages — and some individual agents — have lucrative sideline affiliate deals with title agencies, including what are called marketing services agreements. Your agent's or broker's affiliate may not necessarily provide you the lowest costs and best total services available in the market, which is why comparison shopping — including checking with independent title agencies that refuse to participate in such arrangements — can save you real money.
Ken Harney's email address is firstname.lastname@example.org.