Title insurance protects borrowers from financial loss if the lender discovers a defect in the title to the property (for example, a previous mortgage) and demands a borrower to pay back the loan. Title insurance also guards against loss in the event that someone makes a valid claim to take possession of a borrower’s home; not because they don’t own it, but because they have an earlier legal right to do so.
Additionally, title companies are not allowed to accept any commissions or referral fees from lenders when issuing title policy coverage. Rather, the cost of these policies is regulated at the state level, which means rates can vary greatly between states.
However, most title policies offer 100% coverage of all costs associated without any title defects discovered during their review, but because any extra fees for services offered by title insurance companies in this process are not regulated, these “services” and additional fees are where borrowers are typically taken advantage of. Furthermore, because there is no unified platform for shoppers to compare title insurance costs for lenders, this can result in predatory lending practices on behalf of borrowers.
Regulations are only able to cover so much
Perhaps the interesting part regarding conformity in title insurance fees is found in Section 8 of RESPA (12 U.S.C. 2607), § 1024.14, regarding the prohibition against kickbacks and unearned fees. This section states that, “Title companies are not allowed to accept any commissions or referral fees from lenders when issuing title policy coverage.”
So, how do larger lenders/banks end up selecting the title company to use on all of their mortgage transactions, where possible? Moreover, do these lenders allow borrowers to select any other title company they prefer? If they do, many borrowers might not know where to find other competing offers for title insurance, as there is no “marketplace” or “exchange” to shop for title insurance. These issues highlight a necessity to implement conformity in the fees and services for title insurance on behalf of borrowers.
Because title insurance protects the title of a property from defects and title claims, it is typically purchased by lenders to protect their investment in a particular property, but can also be purchased and used by homeowners to protect themselves. As such, there are two different types of title insurance; lender’s title insurance and owner’s title insurance. The former (lender’s title insurance) is mandatory for most mortgages, while the category of owner’s title insurance is not.
The problem with add-on services and fees
Now, let’s focus on lenders’ title insurance premiums. We’ve already mentioned how these premiums — including all associated fees and service costs — are not standard across the board, as they can vary from state to state. In states where insurance is highly regulated, title insurers do not have much wiggle room on their rates, meaning that homebuyers seeking title insurance in these states will not find much difference in premiums from one company to another.
However, in nearly all cases, extra fees are part of the transaction when a borrower purchases a title insurance policy. These add-ons can include expenses such as mail and courier charges, copy fees, and costs for searches and certificates — all of which are charges that can be negotiable, even when the insurance premiums are not. Other extra fees can be included from services provided by title insurance companies when issuing a title, including:
- Conducting a search of public records related to the property’s title (this search looks for additional liens or encumbrances on the property),
- Issuing a title insurance policy,
- Handling all settlement/closing costs for a borrower’s loan,
- Conducting a review of the property’s survey (if applicable), and;
- Facilitating the signing of closing documents (optional)
A lack of conformity in title insurance creates predatory lending
Unfortunately for borrowers, even in those states where insurance is highly regulated, there is no control over the services involved in providing them with a title insurance policy. Borrowers are charged exorbitant fees for items that are extremely questionable, to put it lightly.
For instance, some title insurance companies and providers may include a service charge upwards of $250 for courier fees just to get the documents to a borrower within three business days. They may also charge roughly $150 as a copier fee to make additional copies of any necessary documents, even in today’s hyper-digital world. Some may even be so bold as to include a service charge for borrowers around $125 as a coffee fee.
The name of the fee and the reason to charge it is so loosely regulated that, essentially, there is absolutely no monitoring or reprimanding of bad behavior within the title insurance industry, making it one of the most profitable business sectors in the broader insurance industry.
What we need is a marketplace where borrowers can fairly compare different mortgage service providers like title insurance providers. By providing an open platform for borrowers to compare against not only prices, but the level of service, and the services that are mandatory versus optional, lenders are borrowers alike will be far better positioned to work in a collaborative manner in order to achieve the best mutually agreeable outcome possible.
Yatin Karnik is founder and CEO of Confer, Inc.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Yatin Karnik at yatin@confer.today
To contact the editor responsible for this story:
Sarah Wheeler at swheeler@housingwire.com
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