The title insurance industry is a small segment in the real estate realm that is accused of spending excessively to obtain referral business. The NY Times explained how clients are routinely taken to sporting events, country clubs, lavish steakhouses and even clubs offering adult entertainment. What does all this spending mean to consumers?
Many of these expenses drive up the costs of title insurance, a requirement for closing real estate transactions. The costs of title insurance in New York are notably higher than in bordering states, including New Jersey, Connecticut, and Massachusetts. This year there have been significant calls for change, which appear to be supported by Governor Cuomo. Legislative measures have apparently been met with resistance in Albany from a strong lobby.
What is Title Insurance?
The purpose of title insurance is to protect the buyer of the property and mortgage lender (if applicable) from any defects to the property's title. Some other entity could potentially surface claiming a lien against the property from fraudulent activity, taxes, civil judgments, etc. The home buyer typically pays for the policy that protects his or her interests as well as that which protects the mortgage lender.
How the NY Market Differs
As already mentioned, the difference between the New York market and other states is the difference in costs. To compare, look at the example of New York's rate against Iowa's rate, where the state government assumed responsibility for the title insurance business years ago. The cost in Iowa for a residential property purchase of under $500,000 amounts to an average of $110. In New York, the cost for a $500,000 home, with a 20% down payment, is approximately $2,700.
How Insurers Compete
Title insurance is needed to secure a property's ownership. In most transactions, this product is considered to be somewhat of an “afterthought” in the overall closing process. In most cases, an attorney or real estate agent who is facilitating the transaction will suggest the title insurer. Primary title companies all offer the same regulated price, which is part of the problem because consumers do not feel the need to evaluate or compare the different title companies since they are viewed largely as offering the same for the same price. In order to generate business, title insurers target referral sources directly--bearing gifts as a means to distinguish themselves from competing title insurers.
According to the New York Department of Financial Services, there are two primary goals in title insurance reform. The agency's Superintendent, Maria Vullo, wishes to end the practices of essentially using meals and entertainment to generate business for title insurers. The first regulation provides some transparency about these “marketing expenses” as well as clarity regarding the fees associated with closings. The other strives to confirm that title insurers are acting independently from any sources of potential business.
The finalized regulations should provide detailed listings of both prohibited and permitted business expenses. In the future, title companies will be required to provide rates reflective of the excluded expenses. In addition, consumers should realize more favorable rates with reduced ancillary fees. Proponents hope to increase active competition in the market. Stay tuned; I'll keep you updated on the latest developments with these new regulations.