Large multiple industry interests are watering down the Consumer Financial Protection Agency (CFPA) bill through intense lobbying. One of the most recent amendments to the bill excludes the title insurance industry because it was argued that they are already well regulated at the state level. Keep in mind that it is not just the American Land Title Association that wanted this exception. This amendment also benefits the mortgage, builder and Realtor lobby whose members all own substantial interests in title insurance companies. They might as well own the appraisal firm too…
At the very least, the reasoning for excluding title insurance products is in error. Title insurance is not well regulated at the state level – anywhere. In addition, if one carefully examines the role of the title insurance company they will find that title companies also provide closing services to the lenders in addition to insuring the title. A bad title company is in a unique position to facilitate the closing of a bad loan by insuring over title defects and mis-disbursing lender funds.
Although little attention has yet to be drawn to the significance of the title insurance industry, perhaps that should change.
First, it is not true that title insurance is well regulated at the state level. Although we have seen some enforcement actions at the state level in recent years, there is very little being done at the state level in regards to auditing escrow accounts, setting reasonable educational or experience standards for title insurance licensees, or scrutinizing unhealthy relationships between commission based service providers and safeguard service providers like title.
As an example of the poor regulatory position of states, we recently attempted to perform a Data Practices Request (same as a Freedom of Information Request but at the state level) with the Minnesota Department of Commerce to identify the licensed title agencies in Minnesota. Commerce was unable to fulfill this request because they didn’t even know who the title agencies were. Keep in mind that it is the title agency that often receives the lender funds, disburses them and is also responsible for stopping bad transactions if the title is bad or the lender instructions are not met. There could not be a better opportunity for financial fraud. These title agencies handle hundreds of BILLIONS of dollars of consumers’ funds in Minnesota alone and the Commerce Department doesn’t even know who they are.
Aside from being subjected to little regulatory or legislative restrictions, there are other reasons that the title insurance industry should come under the umbrella of the CFPA. Title agencies are often owned by, affiliated with, or selected by mortgage companies, builders and real estate brokerage firms. Since title agencies hold the purse strings to the transaction funding, being able to exert undue influence over the title agency has become an important asset.
Imagine a cash poor builder who owns a property with mechanics liens and that property is subject to an underlying blanket mortgage that should be paid off at closing. Imagine a property with a thirty thousand dollar real estate brokerage commission riding on the deal. Or how about a mortgage lender that is short on transactions. Imagine each of these firms owning a title company. Each of those firms (representing three different industries) is in a position to influence whether or not the title company raises objections and closes the transaction. If the last chance to stop a bad transaction rests with a title company, shouldn’t they be subject to the CFPA? And what about the fact that the decision to fund the lenders’ money on a bad loan is influenced and possibly controlled by a builder, mortgage firm or real estate brokerage firm? Shouldn’t they also be subject to the CFPA?
This exception was carved out by a Minnesota Congressman named Paul Erickson, a Minnesota Republican. Minnesota may actually be the starting place where controlled business got its foothold and where it possibly has the most widespread effects. It is typical for builders, brokerages and mortgage lenders to own title companies in Minnesota. It should come as no surprise that Minnesota authored this atrocity they call an “amendment.”