Tuesday, November 11, 2014

The Truth…About Title Insurance

      I am admittedly a big fan of the AMC television series, Mad Men. In one episode, advertising executive Don Draper, frustrated about losing a large tobacco client, pens an open letter and has it published in The New York Times entitled “Why I Am Quitting Tobacco.” The point of Don’s article was an attempt to attract business in a different way by pointing out the very real, but largely unpublicized at the time, dangers of cigarette smoking. I am undertaking this column after a similar experience with one of my own long time clients, which illustrates what the business of title insurance is really about.

     Imagine yourself at a car dealership, preparing to sign on the dotted line to purchase a vehicle costing anywhere from $30,000 to $80,000 when the salesman turns to you and states: “Hey, you know you need insurance on this beauty. Harrisburg says you gotta. How about I just place that for you? Our dealership has a financial interest in the insurance company.” Of course this doesn’t ever happen, mostly because people know that they have a choice as to where they get insurance. They know they can go with the reptile, Flo or maybe the guy with the deep voice to get their auto insurance, because auto insurance has been defined as a product by mass marketing, or advertising by a company such as the fictional Sterling Cooper Draper Pryce. But that is how title insurance is ordered every day, by allowing your realtor to order your title insurance, most likely from a company in which the real estate company or realtor has a financial interest. If your realtor was from one of the “big boys” in the real estate industry, that is almost definitely the case.

     Tell me the last title insurance commercial you saw watching any sporting event on television. I’ll wait. Never seen one? How about during your favorite news program? Nope. I would venture to say, with reasonable certainty, that you have never seen a title insurance commercial. Can someone explain how a product that protects your home ownership – which is worth probably ten times the value of your automobile – is given absolutely no respect and is utilized as an additional profit center by the real estate company?
      In 1974, Congress passed the Real Estate Settlement Procedures Act (“RESPA”) to regulate the costs consumers pay to settle their real estate transactions. The statute states: The Congress finds that significant reforms in the real estate settlement process are needed to insure that consumers throughout the Nation are provided with greater and more timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges caused by certain abusive practices that have developed in some areas of the country. 12 U.S.C § 2601(a). Further, ownership of a title insurance agency became, for the first time, available to realtors under the theory that the “bundling” of services would affect certain economies of scale that would result in lower prices to the consumer. 

      Let’s see how home buyers and sellers have fared in Pennsylvania since HUD gave the realtors the ability to own title companies.

      Since the title insurance premium is regulated by the Commonwealth of Pennsylvania Insurance Department, your title insurance premium, which is based on the purchase price of your house, is the same whether you purchase it from the realtor’s company or an independent title agency whose focus is on protecting your interests alone. So the consumer saves nothing by using the realtor’s company. 

      Have costs to the consumer increased since the title agency ownership changed from 100% independents to a mix of realtor owned and independent agencies? Sadly, yes. In addition to the real estate commission (somewhere between 3% to 6% of the sale price of the house), some real estate agencies collect “conveyancing fees.. These fees, ranging from $100 to $250 or more, and typically charged to the seller, are for the exact same services that the independent title agency performs as part of the title insurance underwriting (ordering tax certifications, obtaining mortgage payoffs, etc.), at no extra charge. So, instead of reducing costs, actually the opposite has occurred, as consumers are paying more for services that they used to get for free. 

      Another “charge” a real estate agency imposes on a buyer is something that used to be called a “broker service fee”; this fee, ranging from $200 to $550, is now called an “additional commission.” Some consumers initiated litigation in several states claiming that the fee being charged was unearned and therefore in violation of RESPA when:  (1) a fee is charged but “no, nominal, or duplicative work is done” in exchange for the fee;  or (2) a fee is charged that is unreasonably excessive in light of the services actually performed in exchange for the fee. One of the results of the litigation was not that the fee was relegated to the ashcan of history where it belonged, but that its name was changed.

      All of the above only drives home the need on the part of the Buyer or Seller of real estate to consult with an experienced real estate attorney before contacting a realtor for the sale or purchase of your home. You need to know what charges should be negotiated out of any buyer agency contract or listing agreement into which you enter, and you especially need to know the advantages of hiring a truly independent title agency to represent your interests in the most important purchase most of you will ever undertake. Your federally mandated right to choose an independent title agency should not be usurped by your realtor to allow the realtor, or their agency, additional profit.

      Andrew J. Monastra, Esquire recently joined the law firm of Wolf, Baldwin and Associates, P.C., which has offices in Pottstown, West Chester, and Reading. He has represented consumers and businesses in real estate transactions for over 23 years, and he is the owner of Heartland Abstract, Inc., an independent title agency located in Pottstown. He may be reached by calling 610-323-7436, or by e-mail at amonastra@wolfbaldwin.com.

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