Title Insurance Shortcuts Increase Risks....What a Surprise

So as I was perusing Google News for the latest title insurance stories I came across an article in National Mortgage News about First American Equity Loan Service stepping up their fight against fraud. Now I am all for cleaning up fraud in the title and mortgage industry. When fraudulent schemes are allowed to proliferate everyone in the industry (as well as consumers) pays the price. It does not matter if the fraud is committed by mortgage lenders, title agents, real estate agents, or consumers we all end up paying for it.

So First American is Cleaning up Fraud they helped create

I am not putting all of the blame on First American. After all, the actual perpetrators of the crime deserve the blame. BUT First American made it way too easy for them to run this scam. Basically, First American Equity Loan Services developed an alternative title insurance product called FACT. This was done so they could turn the loans around in a much quicker time frame to keep up with the proliferation of home equity loans. This was not real title insurance and while it sped up the loan process it left First American wide open for scammers. And the scammers caught on quickly. People began getting multiple home equity loans in the same day. Since the initial title search was expedited and incomplete this scam was not noticed until was too late. Now First American is trying to clean up this mess but they appear to be heading into another mess. This one will hurt consumers directly.

Automated and Overseas Title Searches

If you follow Radical Title Talk or Source of Title Blog you have probably heard a lot about automated title searches and using overseas "title searchers". I am not going to get too deep into the issues as both of those places have done a great job exposing and discussing the potential problems. What I am more interested in is the fact that First American is trying to clean up problems they helped create on one hand and on the other they are pushing products that will create more problems. It makes no sense to me. Maybe in 3 years we will read another story about First American cleaning up all the problems they helped create with their "Automated Title Searches"....

Even the Big Dogs are Getting Whacked on the Head

Far too many small title companies are struggling or even going out of business with the downturn in the housing market. Obviously as the housing market goes so goes the title insurance market but until recently those who were struggling were the smaller title agencies. Part of the reason was because they are getting by on the smallest margins and their entire revenue stream was tied to the housing market. On top of that many were competing with the large underwriters and they relied on referrals from real estate and mortgage professionals. All of these issues came to a head and those small companies who did not diversify their revenue stream and potential customer base (by marketing directly to consumers) are either just getting by or closing their doors.

Now even some of the large underwriters are feeling the pinch. Recent news shows that Fitch Ratings has placed all First American Corp. ratings on Rating Watch Negative with the expectation of lowering the ratings by one notch following the company's fourth-quarter financial report. Fitch is expecting First American to see a fourth quarter loss of $50 million. While First American is fully diversified and currently operates in five segments: title insurance and services; specialty insurance; mortgage information; property information; and a risk-assessment division, the title insurance division is hurting their bottom line. This is probably the reason they decided to spin off the title and specialty insurance business into its own entity.

The real estate slowdown is hitting everyone hard and even the big dogs are not immune. Maybe they will wake up and realize that they need to put consumers first instead of playing the back room games that made them so much money before. When the market was booming the consumer was looked at like an ATM machine. As long as everyone got paid and they could hide the kickbacks and charges everyone was happy. Consumers are getting smarter and the with the market continuing to slide everyone needs to change the way they do business. The consumer is the ultimate client in any financial transaction and if they stop buying nobody gets paid. I hope the industry can change and get this mess straightened out before too many more small (and maybe even large) title insurance companies go out of business.

Another Round of Title Insurance Company Violations

First American has reached a $5 million settlement in Florida for paying kickbacks for business referrals. The U.S. Department of Housing and Urban Development and Florida insurance and banking regulators alleged that First American created title companies and set up sham affiliated business arrangements with real estate professionals to secure more business for First American. You can read more about this settlement here.

I would say it is amazing that this type of thing is still happening but sadly it does not surprise me. It seems like we read about sham ABA's and kickbacks every couple of weeks. This is bad for everyone in the title industry and all real estate professionals. From the consumers' point of view it reinforces the belief that everyone in the real estate industry is shady. That is not really true but until the upstanding title and real estate professionals take a stand the reputation will stand.

It seems obvious that the fines that the offending companies are being forced to pay do not impact their business. If that were the case they would cease using these methods. It would appear that the fines are considered another cost of doing business and that the additional revenue that comes from these arrangements more than makes up for the fines levied against the offenders.

Short of federal and state governments making the fines more punitive it is up to us in the industry to stand up and make changes from within. If we actually take away the ability of these companies to pay for referrals (with costs passed on to the consumer) they would stop. After all, if there nobody was willing to enter these illegal partnerships the perpetrators would be forced to change their methods.

By all means fight for change in the way RESPA violations are treated. Work to make the fines punitive enough that they can no longer be ignored. In the mean time make sure you only do business with companies that offer better service to your clients instead of the one that is paying you the most. The consumer is the most important person in a real estate transaction and we should all work together to provide them with the best service at the lowest price possible.