The title insurance scam that over the past three years has rocked the industry in California, Colorado, Tennessee, and Washington, D.C., has touched New York as well.
The Wall Street Journal in early March reported that Attorney General Eliot Spitzer was investigating national title insurance companies including First American Title Insurance Co., Fidelity National Title Group Inc., LandAmerica Financial Group Inc., and Stewart Title Guaranty Co. The attorney general’s office said it had been looking into potential corruption and price-fixing in the title insurance business for more than a year.
U.S. title insurers reported robust income for the ninth year in a row in 2004, as reported by the American Land Title Association and A.M. Best Co. From 2004 to 2005, New York State’s share of title insurance premiums went up by 6.4 percent, and in 2005, New York companies made $1.3 billion.
In resolving lawsuits in Tennessee, Colorado, California, and Washington, D.C., the top title insurers have paid millions of dollars in restitution to customers and in penalties to their state insurance departments (see sidebar below).
On the tail of huge settlements in other states, mostly by national companies who have national practices and procedures that together account for the bulk of market share in New York, it’s no surprise Spitzer is investigating whether the companies paid millions of dollars in insurance-premium rebates to some large favored customers, such as real estate developers. His office also is looking at whether the title companies paid referral fees to their agents, mortgage brokers, and attorneys who delivered clients.
Some industry observers who prefer anonymity have chalked up the efforts in other states to cynical political motives. Said one of California’s Insurance Commissioner John Garamendi, “He was running for office, what do you expect?”
Not business as usual
Possible political motives aside, the New York investigation could have far-reaching implications. The companies being investigated by Spitzer are responsible for the lion’s share of title insurance business in the state.
Around 92 percent of the title insurance business in New York State goes to the top four companies named in the attorney general’s investigation, according to Jonathan Richards, president of the New York State Land Title Trust Association and numbers published by ALTA. Fidelity owns 33 percent of market share, with First American at 25 percent, LandAmerica at 20 percent, and Stewart with the smallest share in New York at 13.8 percent. The four companies work primarily through subsidiaries that they acquired and who were operating originally as independents, a pattern that is repeated in other states.
The purpose of title insurance in every state is to guarantee that a property being sold does not have any hidden owners, liens, or other encumbrances, and the search and warranty of this information is required by banks before they will issue a first mortgage.
But that is essentially where the similarities among states end.
In most states, title insurance can cost anywhere from a few hundred dollars to hundreds of thousands for searches of title records, and in New York, as in some other states, title insurance rates are set by the state based on input from the title insurance companies. The Journal reported that investigators in New York believe some title insurers misled the state into setting rates too high in order to provide rebates or kickbacks for a few large customers.
Another essential difference about New York is that here lawyers handle the closing, whereas in some states, often the title insurer not only conducts the title search, they also conduct much of the house-closing function, including depositing funds, transmitting documents, and closing the transaction, according to Richards.
Another intricacy that complicates New York rates is a rate structure based on geography. South from Albany and just above Albany, for example, rates include search and exam costs. But further north and west of Albany, exam costs are not included. One of the reasons is that exams can be much more complicated where the houses have been traditionally less expensive and have had less turnover, usually where tracts of land have long histories and a complexity of titles. “That makes the process a whole lot more complicated,” said Richards.
Old ways supply new hassles
Another aspect of New York that bears consideration when it comes to rates is that 99 percent of the search function is manual. “In New York ‘search and exam’ really means pulling out the old dusty books,” said Richards, whereas in California the exam portion means looking at an abstract and producing the title.
Even in New York City, which has automated much of its property information since 1962 on the city’s ACRIS system, which is accessible through the Internet, title insurers still have to go to the county clerk and a surrogate court to double check that previous restrictions and covenants predating 1962 don’t exist.
“Even when there’s a search that tells you that there are easements dating back to the turn of the century,” you still have to take those extra steps in New York, Richards said. Good examples are the thousands of driveway easements that are very common through parts of Brooklyn and Queens.
Other examples are the Revolutionary War and pre-Revolutionary properties, some of which line the Hudson River in Westchester, Rockland, and Orange counties.
Thus, title insurance providers are permitted to charge more for complex searches, and for a standard $500,000 house, fees normally run from $2,000 to $3,000, said Richards.
Len Cornell, who has owned for 23 years Advance Abstract, a small private title insurance company on Long Island, said small companies are less likely to be involved in kickback schemes. “We’re very sensitive as far as consumers are concerned, and we feel they should be treated fairly,” he said. Logically, margins for small companies that aren’t automated wouldn’t be large enough to afford referral fees.
A technology gap
But it is also true that the industry has seen a huge degree of technological innovation in the past few years, a feat not possible for smaller companies, which also allows bigger companies an easier way to pass along fees to referring companies.
Although he said that most companies are honest, “A lot of people came in to make a fast buck,” when the housing boom came along, said Cornell. “But if they can’t do the business on their own [without referral fees] they shouldn’t be in the business,” he added.
Lorri Ragan, a spokeswoman for American Land Title Association, could not comment on the New York investigations but agreed that many states do not use attorneys in the closing, and that in some states, title insurers handle everything. The different ways that records are kept across states accounts for some of the difference, she said.
The New York attorney general’s office would not comment on the status of the investigations while they are ongoing. Lloyd Osgood, a spokeswoman for LandAmerica, said of the Spitzer investigation, “We have received subpoenas and supplemental requests from the New York attorney general seeking information and documents related to its investigation of certain industry business practices, including, among other things, competitive market practices, the compensation of title insurance agents and producers by underwriters, the payment of potentially illegal rebates, and captive reinsurance arrangements.”
She indicated that the New York State Department of Insurance is also examining the company’s reinsurance arrangements. “We have indicated in our public documents other state investigations and inquiries, and it is not possible to predict the outcome of any of those matters,” she added.
Stewart’s general counsel, John Killey, said that the company “is cooperating with the attorney general’s office and has no further comment at this time as the investigation is ongoing.”
Previously, David Schulz, a spokesman for First American, said his company had cooperated with Spitzer’s office for nearly two years and with the state Department of Insurance for a year.
Who has paid how much so far
As part of Colorado’s probe, First American Title Insurance Co. last year agreed to refund $24 million to consumers in and outside of the state.
First American and LandAmerica Financial Group Inc. agreed to a combined $25.3 million in consumer reimbursements, which works out to an average refund of about $300 per household. It reflects the amount in each transaction that the title company allegedly paid to a bank, builder, or real estate firm in exchange for business, insurance officials said.
Separately, First American agreed to pay $15 million in reimbursements in California, and sent checks to about 95 percent of its affected customers, the Department of Insurance said. The insurer will pay the state penalties of more than $4.8 million and the Department of Insurance another $175,000 to cover investigation costs.
LandAmerica agreed last year in principle to pay $2.6 million in consumer refunds and $1.9 million in state penalties and reimbursements.
Fidelity National Financial agreed last year to reimburse consumers $7.7 million within four months as part of a settlement with California. Fidelity has also agreed to pay a $5.4 million penalty, which will be deposited in the state general fund, and to pay $175,000 to reimburse the California Department of Insurance for its investigation.
First American agreed to pay $680,000 to settle allegations that it set up sham companies in Tennessee to pay illegal referral fees to homebuilders and real estate brokers from 2002 to 2004.