Consumer Financial Protection Bureau Seeks Title Insurance Fix

After decades of inertia, reform of home-sale commissions is happening, thanks to a landmark lawsuit. Could title insurance be next?

Quite possibly: The Consumer Financial Protection Bureau this month proposed making lenders pay for title insurance that protects them. The standard practice is to make homebuyers pay.

In home sales, title insurance is nearly universal, yet usually an afterthought. Buyers focus on the price of the property and the interest rate on the mortgage, while title insurance is begrudgingly accepted as a routine part of the transaction.

But it represents about 0.5 percent of the cost, which is significant — $2,000 on a median U.S. home sale, or $6,000 in New York. (Co-op buyers purchase shares, not real property, so title insurance does not apply.)

With home affordability at an all-time low and the ownership rate down to 65.7 percent from a peak of 69.2 percent, regulators are looking for ways to bring down costs. Title insurance has emerged as a target because it is disproportionately expensive on lower-priced sales and buyers generally do not shop around for it, instead accepting whatever company is recommended by their lender or agent.

Title insurers perform an essential role in home sales. They check that the seller actually owns the property and that any liens are brought to light before closing.

But title companies don’t market their services to homebuyers. Instead, they wine and dine — sometimes literally — the real estate professionals who recommend them to buyers.

New York regulators in the mid 2010s found title insurance companies and agents had spent millions of dollars on inducements, which it charged back to consumers as “marketing costs.” In 2017, the Cuomo administration passed regulations to end that practice. Two years later, the industry got New York’s sweeping overhaul thrown out in court.

Now, the federal consumer bureau is taking an even bigger swing at reform. It believes that because consumers don’t comparison-shop for title insurance, and because the industry is dominated by a handful of companies, Americans are overpaying.

“Lender’s title insurance is one example of a fee borrowers face at closing where the borrower has no control over cost,” the consumer agency wrote in a March blog post. “The amount that borrowers pay for lender’s title insurance is often much greater than the risk.”

Indeed, claims are extremely rare; the industry only pays out 5 percent of the premiums it collects, compared with 70 percent in other kinds of insurance.

However, that does not mean that insurers are keeping 95 percent of premiums as profit. Most of that money is being spent on administrative costs and fees, and policies are sold through brokers who receive commissions.

The Consumer Finance Protection Bureau’s new proposal is focused on something few homebuyers realize: They are paying for title insurance that only protects the lender. (Buyers can also buy policies to protect themselves, but are not required to.)

Lenders need a title policy to avoid providing a mortgage on a home that turns out to have liens against it — or, worse, was sold fraudulently and is actually owned by someone else. Also, lenders typically sell mortgages to government-sponsored entities or investors, who won’t buy them if no title insurance was obtained.

That’s why lenders insist on title insurance. But should they pay for it? The consumer bureau says yes, but that won’t necessarily save homebuyers money, because lenders would simply bake the cost into the monthly mortgage payment. However, the change could motivate lenders to negotiate for lower premiums, to make their mortgage offerings more attractive.

In any event, the bureau lacks the power to unilaterally change the rules, and the title insurance industry has defeated previous attempts at reform, as New York officials can attest. At the moment, the American Land Title Association is also fighting a Biden administration pilot program to do away with title insurance on refinancings.

Diane Tomb, CEO of the industry group, called it “a hollow attempt by the White House to placate Americans’ current economic frustrations.”

Various other solutions have been floated — for example, having lenders and loan-buying entities such as Fannie Mae self-insure against title defects. Alternatively, these big players could also use their leverage to negotiate for much lower title insurance premiums, rather than leave the industry and its brokers to their own devices.

One approach has been proven to reduce costs: Iowa banned commercial title insurance in the state entirely and set up its own program. Iowa Title Guaranty charges only $175 for title insurance on home sales up to $750,000. In the rest of the country, the rate is 10 times higher.

In New York, where title insurance premiums in 2022 totaled $1.36 billion, state Sen. Jessica Ramos of Queens and Assembly member Harvey Epstein of Manhattan introduced a bill to set up a system like Iowa’s. Their legislation has been stuck in committee for five years.

If history is any indication, the latest reform effort will meet a similar fate.

As Yvette Chen of the nonprofit Center for NYC Neighborhoods put it in an op-ed, “For too long, the title insurance process has been shrouded in added fees and a lack of transparency at the expense of homeowners.”