B. Problems Related to Bank Sale of Title Insurance The sale of title insurance by banks also threatens bank solvency and at the same time is inherently unfair both to consumers and to title insurance agents not affiliated with banking institutions. i. Competitive Problems: Title insurance is sold for a onetime premium paid at the time of closing and coverage lasts for as long as the insured has an interest in the property. There is no renewal market. Thus, unlike agents for some other types of insurance who can still compete for renewal business on policies issued by bank-affiliated agencies, such competitive opportunities are not available to independent title insurance agents. Accordingly, the business poses the potential for completely eliminating independent agencies from the market. This is precisely what happened when banks were permitted to enter the credit insurance business. Since most banks are interested in establishing title insurance agencies to capture the title insurance business generated by their own mortgage loans, the proliferation of bank-owned title companies would not increase competition since these agencies would not be competing for non-captive business. ii. Potential Conflicts of Interest: As noted above, home buyers and other real estate purchasers buy title insurance for financial protection against unknown liens and claims against their ownership interest. Mortgage lenders, such as national banks, require title insurance to protect the validity, priority, and enforceability of their mortgage liens. A bank, as prospective insured, has an interest in obtaining the broadest possible policy coverage, while in its function as title insurance agent has fiduciary responsibilities to the title insurer to minimize exposure to undue risks. This conflict of interest is particularly evident when a bank acts as agent for the issuance of title insurance on its own mortgage loans, which it usually expects to sell in the secondary mortgage market. The bank's interest in maximizing the marketability of those loans could easily cause it to ignore or insure over title-related problems that it discovers could affect the marketability of those loans. The independence of the agent's judgment is inherently compromised when the lender has control over the policy-issuing functions on policies it will be issuing to itself.3 iii. Potential Safety and Soundness Concems: Unlike agents in other lines of insurance, title insurance agents make substantive determinations in connection with the issuance of the policy - the search and examination of title, and the determination of what existing liens or claims must be excepted from the policy's coverage -- and are liable to the insurer for negligent performance of substantive policy-issuing functions. Thus, a bank acting as a title insurance agent has a far greater financial exposure than would be the case when a bank acts as an agent in other lines of insurance. In addition, the bank loses the safety and protection afforded by an independent judgment on the validity, priority, and enforceability of its mortgage liens, which minimizes the likelihood that an adverse title claim will arise. In view of the bank's financial interest in closing the loan, particularly when the compensation earned on almost any title policy is less than 3% of what the lender earns on a loan transaction, a bank-controlled title agent is far more likely to ignore or insure over a title problem that could jeopardize or delay the closing than would an agent exercising prudent and independent judgment. iv. Problems for Consumers: Since consumers purchase real estate and hence insurance so infrequently, they tend to rely on the recommendation of a real estate professional in the transaction, frequently the mortgage lender, in selecting a title company. If a bank owns or is affiliated with a title company, it has an obvious financial interest in recommending that company, 3For an excellent discussion of the problems posed in this regard, see Prof. Joyce Palmer's article "Bank Control of Title Insurance Companies: Perils to the Public that Bank Regulators Have Ignored," 44 Southwestern Law Journal 905 (Fall 1990). even if other independent companies can provide better service or rates for the consumer. The bank does not have to condition the loan on the consumer's selection of its affiliated title company. Where state-chartered banks have been permitted to sell title insurance, they frequently capture over 90% of the business of the bank's borrowers; there is no competition. Figures from a 1987 report to the Wisconsin Commissioner of Insurance, for example, showed that, in Montana, one title insurance company's market share increased from 11% to 52% in the first four years after it was acquired by a lender. In Minnesota, the state's largest savings and loan acquired a major interest in a title insurance company in 1979; from April 1979 to August 1980, the amount of business referred to the company from the S&L increased from 12% to 83%. Also in Minnesota, in the first five months of 1988, two savings banks had 94% and 96% of all their respective recorded mortgage transactions insured by captive title insurance agencies. This demonstrates that the consumer will accept the bank's recommendation in order to please the lender or because his lack of time or knowledge to select a title company on his or her own. In 1977, the Justice Department concluded that if professionals in real estate transactions, such as mortgage lenders, can refer title insurance business to captive agencies, "the purchaser is likely to end up (1) paying unreasonably high premiums, (2) accepting unusually poor service, or (3) accepting faulty title examinations and policies from the controlled title company." 114 In sum, ALTA's traditional support of the continued separation of the banking and title insurance businesses has been grounded on the threats that are posed to bank solvency and to title insurance consumers and agents when banks are permitted to engage in either title insurance underwriting or title insurance agency activities. Part II Permit Banks to Engage in Title Insurance Activities through Affiliates whose As noted at the outset, ALTA and its members are prepared to reverse their traditional opposition to bank participation in the title insurance industry but, for the reasons delineated below, this support is conditioned on clear statements that any title insurance underwriting and sales activities must be conducted through an affiliate under a bank holding company structure and that any title insurance activities in which a bank engages through an affiliate -- must be subject to functional regulations that address many of the unique problems that will be raised by bank participation in the title insurance industry. ALTA appreciates the philosophical approach expressed in H.R. 268 in the provision prohibiting a Financial Service Holding Company from entering the insurance agency business (other than that currently permissible under the Bank Holding Company Act) through a new affiliate unless it acquires an insurance agency that has been in business for at least two years (Section 132). This is exactly the type of concern for business transitions affecting both title insurance underwriters and agents that is of importance to the industry. This type of approach has several advantages. It encourages financial services institutions to take advantage of the expertise within the title industry. It also is likely to limit the problems which occur when a service provider enters a completely new area and undertakes functions it does not understand. Further, it would prevent an institutionaffiliated insurer or agency from "cherry picking" the easily underwritten loans. 4"The Pricing and Marketing of Insurance," A Report of the U.S. Department of Justice to the Task Group on Antitrust Immunities, January 1977, at 273. A. Limit Title Insurance Sales and Underwriting Activities to Affiliates ALTA and its members can support the extension of title insurance underwriting and sales authority to banks only if banks are required to conduct any title insurance underwriting and sale business in which they choose to engage through an affiliated entity within a bank holding company structure, and with a clear statement that state regulation of these activities is essential. We believe this is necessary for several reasons. First and foremost, requiring such an affiliation arrangement minimizes the potential threat to the solvency of a bank's deposit funds posed by the bank's title insurance underwriting and sales activities and the concomitant threat posed to the solvency of the bank's title insurance funds by the bank's other lending activities. Second, such a separation will facilitate the imposition of the functional regulation that ALTA and all of the other traditional participants in the insurance industry heavily advocate. Without such a separation, functional regulation becomes much more difficult to conduct because both insurance and banking regulators would be attempting to regulate the solvency and compliance of a single entity. Representatives of the OCC have clearly stated that they intend to preempt state laws which are important to the title insurance industry, namely controlled business statutes. Third, this separation will help ensure that a competitive equality between bank-affiliated title insurers and non-affiliated title insurers is maintained. If, in contrast, banks were permitted to underwrite or sell title insurance products directly, then, as noted above, different reserve and capital requirements might apply to the title insurance underwriting activities of banks and non-banks which might result in competitive inequalities. In addition to merely requiring banks to establish affiliates to engage in title insurance underwriting, it also is essential that appropriate "firewalls" be put into place to protect the institutional solvency that is the goal of the separation and to prevent less than arms-length dealing between a financial firm and its affiliates. These protections should protect the integrity of both the federal deposit insurance funds and state insurance guaranty mechanisms; enable all regulators to assure the financial integrity of the institutions for which they are responsible; and ensure that as banks are given freedom to affiliate with other financial services providers that they do not enjoy unfair advantages in capitalizing their move into these other arenas based on their deposit insurance or other elements of the federal safety net. An overriding element of this strategy is to eliminate the potential for dual regulation of title insurance that exists if the Comptroller of the Currency is able to establish separate rules and regulations for national banks, while independent title insurance agents and underwriters are under separate, and more onerous, state law and regulations. B. Subject All Title Insurance Activities to Functional Regulation As reviewed on February 11, ALTA believes that this Committee should reiterate that every entity that engages in the underwriting or sale of title insurance is bound by the provisions of the Real Estate Settlement Procedures Act (12 U.S.C. Sec. 2601 et seq.) This consumer protection statute was enacted in 1974 specifically to deal with the potential for abuse inherent in real estate settlements because the consumer is likely to be referred to other service providers by the Realtor or lender. ALTA hopes that the Committee also recognizes state law regulating title insurance activities and such state laws may be preempted only if they actually or constructively prohibit national banks or bank-affiliated entities from exercising their federally authorized insurance powers. The need for such functional regulation is especially evident in the title insurance context. As discussed at length above, the sale of title insurance by banks involves an inherent conflict of interest. The pressures on bank loan officers to consummate such sales and the implicit pressure from the bank's credit leverage that consumers will inevitably feel all virtually ensure that, in the absence of effective regulation, bank-affiliated title insurance providers will ultimately control the marketplace. State regulators, with their wealth of experience in this area, are in the best position to implement effective safeguards -- such as the physical segregation of a bank's lending and title insurance activities, the separation of loan and title insurance agent personnel, and the required disclosure of the consumer's prerogative to purchase the requisite title insurance elsewhere -- to protect title insurance purchasers from tying. In addition, such state statutes as solvency requirements, licensing laws, antikickback laws, controlled business statutes, and product regulation, are key to the survival of a functioning industry. Specific state protections -- and their added importance in the context of bank sales of insurance – are discussed at length in the February 11 Klagholz testimony and will not be repeated here except to note that the concerns related to bank sales of general lines of insurance are greatly magnified when banks engage in title insurance agency activities. CONCLUSION The financial services mechanism H.R. 268 seeks to establish must function in the real world. From a title insurance perspective that can only be accomplished if banks may engage in title insurance underwriting only through separate affiliates and if there is true functional regulation of all title insurance underwriting and sales activities. The affiliations prospects contemplated by H.R. 268 are exciting. But the solvency concerns that arise when the banking and title insurance businesses are combined must be addressed. There must be a level playing field for everyone in the industries involved. Small business concerns cannot be swept away by the resulting mergers of the bigger players. It is clear that the absence of sufficient regulatory authority over national banks -- or any other entity- that are active in the insurance arena is unacceptable. Neither the Comptroller nor any other federal regulator possesses the necessary expertise to regulate the vast intricacies of the insurance business. For this reason, and for the reasons delineated at length above, ALTA urges this Subcommittee to recommend enactment of legislation that clarifies that all entities that engage in the business of title insurance -- including national banks and any other entity in a new financial services holding company -- are bound by the applicable provisions of the Real Estate Settlement Procedures Act, by state law regulating those activities, and specifying that such state laws are preempted only if they actually or constructively prohibit the exercise of federally authorized insurance powers. This would maintain the status quo by ensuring that the states remain the paramount regulatory authority for the title insurance industry. Without enactment of such legislation, the emerging regulatory void in portions of this industry will continue to grow. The primary victims if such a bill is not enacted will inevitably be the consumers who are confronted by the unregulated participants in the essential but highly complicated business of title insurance. President: Mark J. Griffin (Utah) • President-elect: Denise Voigt Crawford (Texas) • Secretary: Adrienne R. Wanstall (British Columbia) • Treasurer: Deborah R. Bortner (Washington) Ombudsman: Robert M. Lam (Pennsylvania) |