The title insurance titans

Editor’s note: This story was published shortly before a judge annulled the Department of Financial Service’s new regulations on title companies’ marketing practices. The DFS has said it plans to appeal the decision.

Let me turn now to insurance law 6409(d),” uttered Andrew Amer, special litigation counsel at the New York state attorney general’s office.

This sublimely mundane sentence was a part of his testimony before New York State Supreme Court Judge Eileen Rakower in a cramped, windowless courtroom at 71 Thomas Street in Lower Manhattan. The hearing dragged on for roughly two hours on June 14 and featured much other dry legalese and the recital of state laws.

But for those in the room, the stakes could not have been higher.

At issue was the legitimacy of new restrictions that New York’s Department of Financial Services placed on the multibillion-dollar title insurance industry, which has earned a reputation for exorbitant spending on entertaining clients. The rules, implemented in February, come on the heels of a departmental investigation, which found that agents and companies spent millions on inducements and charged the prices back to consumers as “marketing costs.” For their part, title insurers raked in $1.09 billion in premiums in New York state last year, according to data from the American Land Title Association.

“Taking the real estate professional to a gentlemen’s club or otherwise wining and dining him is not the type of practice that the department has determined is appropriate,” Amer said during his testimony. “And it’s unlawful, frankly.”

This type of attention is new for the title world, according to Daniel Price, founder and CEO of Manhattan-based OneTitle National Guaranty Company.

“In many ways, the industry has sought to fly below the radar,” Price said. “I think there is a level of intentionality to that and not calling attention and seeking to do anything that could rock the boat in any way.”

But that obscurity may not last much longer. Firms are pushing back against the regulations hard — most notably with the New York State Land Title Association’s suit against the state, which argues that not only are the rules devastating, but that DFS did not have the authority to enact them. During the mid-June hearing, the trade association requested that Rakower throw the regulations out entirely. (The judge is expected to deliver a ruling sometime in July.)

“DFS is usurping the role of the legislature,” NYSLTA’s attorney Mylan Denerstein argued during her testimony. “They are picking winners and losers.”

In the wake of so much industry upheaval, The Real Deal decided to determine the most active title companies in New York City. All in all, the top 20 firms worked on $36.75 billion in sales transactions across the five boroughs during the 12-month period ending March 31, 2018. Of that total, $25.85 billion was on commercial properties and $10.9 billion was on residential.

“I think title insurance right now is at a major inflection point,” Price said. “This is an industry that has seen perilously little innovation for more than a century.”

By the numbers

First American Title Insurance clocked in as No. 1 on TRD’s ranking, writing policies on about $7.49 billion worth of sales across 376 deals. It was followed by Fidelity National Title Insurance at about $4.83 billion across 203 transactions and Chicago Title Insurance at about $2.7 billion across 172 transactions. Royal Abstract of New York came in fourth at about $2.55 billion across 208 deals, and Madison Title Agency rounded out the top five with about $2.36 billion across 347 deals.

Madison declined to comment for this story, while representatives for First American, Fidelity, Chicago and Royal Abstract did not respond to multiple requests for comment.

TRD’s analysis accounted only for lead firms — those identified on deeds filed with the New York City Department of Finance — on transactions worth $1 million or more. There wasn’t enough publicly available information to determine split deals (when two insurers work on a sale together). That’s largely because most firms did not respond to multiple requests for comment or declined to participate, citing the ongoing DFS lawsuit.

In the case of Kensington Vanguard National Land Services, No. 6 on the ranking, the company provided supplemental information on the sales it insured between April 1, 2017, and March 31, 2018. As the lead insurer, it had $2.09 billion in deals — $1.4 billion in commercial and $686.5 million in residential. But when including shared deals, Kensington’s numbers totaled $2.9 billion, $2.2 billion in commercial and $701.5 million in residential. All of its split deals, with the exception of one, were commercial.

Meanwhile, a mega-merger is set to rock the industry.

The title universe has long been dominated by the “Big Four”: Fidelity, First American, Old Republic and Stewart Information Services Corporation. But in March, Fidelity signed an agreement to buy Stewart for $1.2 billion. The deal, which is set to close sometime next year, would make Fidelity the largest title insurance company in the country by a wide margin. Prior to the merger, it controlled 33 percent of the national market and had $7.2 billion in reported revenue.

Price said consolidation has long been part and parcel of the title industry — although the deals are rarely as large as the one between Stewart and Fidelity.

As it stands, three of the top 20 insurers on the ranking are already owned by Fidelity: Fidelity National Title Insurance and Chicago Title Insurance as well as Commonwealth Land Title Insurance Company, which clocked in at No. 7 with $1.78 billion in deals. Together, the companies worked on a combined $9.31 billion in sales. Stewart, which may fall under the Fidelity umbrella next year, ranked 12th, writing policies on about $1.21 billion worth of transactions across 180 properties. None of the firms responded to requests for comment.

The consolidation of some of the industry’s largest companies can make it difficult for smaller firms to compete, according to sources. Aaron Krantz, vice president of business development at Omni Title Agency, said the company generally tries to stand out by emphasizing factors like customer service.

“We tell our clients you can get our lawyer on the phone at 7 p.m. if you need to,” he said, “whereas the big guys, you call the office after 5, and you’re lucky if someone answers the extension.”

A regulatory state

The state’s ban on offering clients entertainment — whether outings, vacations, parties, meals or beverages — has clearly drawn the title industry’s ire.

Offering such perks has always been a key way for title companies to distinguish themselves from one another, since they can’t do so with pricing. Rates in New York state are set by the Title Insurance Rate Service Association, and the largest players in the industry are members, including First American, Fidelity and Chicago — the top three on TRD’s ranking. Currently, the title insurance rate for the buyer of a $1 million property in Manhattan would be $4,508, according to multiple rate calculators. (That can vary somewhat depending on the firm.)

This isn’t the state’s first attempt to crack down on what the industry calls “inducements.” There just hasn’t been much in the way of enforcement in the past. But this latest effort is being taken much more seriously.

DFS is in the midst of collecting data to ensure that insurers are following the new regulations, and penalties for violations will likely consist of fines or revoking licenses, according to the agency’s superintendent, Maria Vullo.

NEW YORK’S TOP 20 MOST ACTIVE TITLE INSURERS

Krantz was critical of the new regulations, saying he did not view that type of entertainment as a big problem. “It’s difficult to draw the line, where like if we give a client tickets to a Knicks game, is that OK?” he said. “I’d say that’s fine, but if we give them season tickets, maybe that’s something else.”

Others say the DFS’ rules are well intentioned but ultimately go too far.

“If I have a client for 20 years, and I want to take them to lunch — not even that, I want to buy him a $3 cup of Dunkin’ Donuts coffee — that’s not allowed,” said Stephen Spedaliere, counsel for Statewide Abstract Corporation. “I don’t think somebody is giving me title because I bought them a cup of coffee.”

Instead, Krantz said, DFS should be focusing its energies on other issues.

“The entertainment is sometimes over the top, other times not, but that’s not the real problem,” Krantz said. “The real problem would be when people are getting kickbacks from deals — getting cash back or money back, because that’s what’s actually illegal.”

Alan Bell, the CEO of affordable residential development firm B&B Urban, said the new regulations were not having a huge impact on real estate investors themselves but were making their relationships with the title insurance industry much more confusing.

 “They’re all paranoid, scared that they’re going to get their hand slapped if they go beyond some line,” he said. “And it’s not clear what the line is.”

Bell argued that the real issue with title insurance was that pricing was not competitive, which is why the industry has come to rely so much on entertaining  clients in the first place.

“Don’t get me wrong: There’s no tragedy, but it’s awkward,” he said of the current situation between developers and title companies. “To me, the answer is just rates shouldn’t be set.”

Krantz also criticized the new rules as vague, saying his company is trying to make sure it complies with them but occasionally is unsure of what they actually mean.

“We ask our underwriters before we do anything that has to do with the regulations to make sure we are doing things right,” Krantz said. “Trouble is, they aren’t really sure how to interpret the regulations either.”

Vullo took particular issue with that claim. But changes to the rules may arrive eventually, and they could come from the Legislature rather than the courts. The state Senate has passed multiple bills to ease up on some of the new regulations, allowing title insurance companies to continue buying their clients coffee or lunch and take them golfing.

Additionally, Assembly member Kevin Cahill, who chairs the Committee on Insurance, said in a statement that the Senate is considering legislation to clarify the regulatory authority that Vullo and DFS have over the title insurance industry. However, the committee does not plan to produce any bills until the next legislative session.

Closing time

Some say the real victims of DFS’ new regulations aren’t title companies themselves.

Instead, closers — who ensure all documents are in order before deals are done — are getting the brunt of it. The independent contractors have typically relied on tips for most of their income, a practice the state has banned. Spedaliere said he already knows some closers who have left the industry because of it.

This year, a group of closers formed a trade organization called the New York State Closer Association to advocate for their interests in the wake of the new regulations. The impetus was the lawsuit that NYSLTA had filed, as closers did not feel it adequately addressed the ban on gratuities. (Denerstein did bring this issue up during her testimony, warning that regulations prohibiting fees for closers would have “extremely severe consequences.”)

Jim Hunter, president of NYSCA, said he is trying to be optimistic about the future of the industry, but this is proving to be a difficult task.

“We have gone through a very severe financial period of stress from January through the beginning of May,” he said. “So it’s hard for me to say that I can find a silver lining in all of this at this point.”

Vullo vigorously defended the new regulations, describing them as a way to reduce closing costs and rein in unethical practices in the industry. She said they have mandated that closers get paid for their services by the company that hires them, which should make up for their loss of tip revenue, and they should come to her if this system is not working for them.

“If they’re not being paid — and they have to be paid an appropriate sum — I will go after the people that are not paying them,” she said. “We’re here to protect them.”

Bob Grogan, a board member on NYSCA and the owner of MetroClosers, said the concerns closers had about the new regulations were much more significant than the concerns held by title insurance companies themselves.

“They’re going to worry about their parties, and they’re going to worry about taking their clients out,” he said. “In terms of the economic impact of the new regulations, closers are down 30, 40 percent in income. There isn’t a title company out there that’s down 30 or 40 percent because of these new regulations.”

Not so bad

Not every title insurance company is up in arms over the new regulations, as some do not view them as worth fighting.

“They’re not a horrible thing,” said Cynthia Bal, office manager at the title insurance company Atlantis National Services. “And it really does protect the people who are borrowing, buying, refinancing — whatever the case may be.”

She described the state’s rules as fairly harmless changes that are not dramatically impacting the way Atlantis does business. The company never made wining and dining clients a big part of its strategy and has not lost business over the regulations, she said.

“We have great client retention,” Bal said. “I think that’s our saving grace.”

The new regulations are not changing much for OneTitle either, according to Price. He said they were actually working out well for the company so far because OneTitle never focused on taking out clients the way other firms did.

“Others, I’m sure, are finding these regulations more challenging to their core business model,” he said.

Price described the title insurance industry as “very cozy,” adding that there is “no competition in terms of the normal ways companies compete.” However, he thinks this may change thanks to the new regulations driving greater transparency and openness. New players may also enter the market and look to change the way business is done.

He said this will benefit the consumer in the long run, as the lack of competition and new thinking have previously prevented the industry from serving its clients as well as it could.

“Competition drives improvement,” Price said. “Improvements on price, improvements on efficiency, improvements on service. The lack of competition has allowed high prices for both commercial and residential transactions and mediocre service to perpetuate and to remain unchallenged.”

Krantz noted that the industry is ripe for technological change as well. He said he went to a mortgage closing in June where about 1,000 pages of documents were printed out — an average number — and would like to see the industry be less dependent on physical sheets of paper.

Some companies are already working on applying blockchain technology to the industry, which Krantz said was an exciting prospect. California-based startup Velox.RE and law firm Hogan Lovells have teamed up to transfer property title via blockchain and document it in public records in Cook County, Illinois. The Republic of Georgia and the Swedish Land Registry have also been working on similar processes to transfer deeds.

However, Krantz noted that getting approval for these types of changes could be difficult.

“The challenge is that the county clerks who will be giving up their jobs for it have to be the ones approving it,” he said. “So that could take a while.”

—Additional research by Yoryi De La Rosa.