MEDIA STATEMENT
INSURANCE COMMISSIONER JOHN GARAMENDI’S OPENING STATEMENT DURING HIS INVESTIGATORY HEARING INTO ILLEGAL KICKBACKS IN THE TITLE INSURANCE INDUSTRY
LOS ANGELES – “I have called this hearing today to investigate serious charges of illegal practices in the title-insurance industry, practices that many believe are driving up the costs of purchasing and financing a home.
“In the past few months, we have unearthed much detail on this widespread and growing practice among some of the largest home-builders, mortgage lenders, and real-estate brokers. These firms form “captive reinsurance companies” that appear to draw rebates from title-insurance companies. In exchange, the builders, lenders, and brokers allegedly channel business to the title insurer.
“Title insurance rebating is absolutely illegal under California and federal law. It is a form of commercial bribery and a breach of trust by agents, lenders, and builders, skewing the title-insurance market and inflating transaction costs. If my investigation determines that these captive reinsurance companies do indeed constitute an illegal rebating scheme, I will not tolerate them.
“Nothing less than the American Dream is at stake here. For most of us, home-ownership is the key to our financial security. Increasing the middle-man costs of home acquisition exacts a toll on home ownership.
“Last year 781,000 homes were bought and sold in California. About as many more were refinanced. In each of these transactions, the consumer was required to obtain — and pay for — title insurance. That insurance did not come cheap.
“The average premium on a title policy is over $1,400. It is an expense you cannot avoid. No lender will give you a mortgage without title insurance, and no buyer can safely purchase a home without assurance of the seller’s title. So every dollar of title premium is like a dollar of tax on the real estate transaction.
“And like any tax, the burden has the potential to stifle the market and drive out consumers. Studies show that for every additional $1,000 in the cost of a home, another 21,000 Californians are priced out of the housing market.
“Consequently California law prohibits rebating practices that drive up housing costs — either directly or indirectly. And I have vigorously enforced the law, taking significant enforcement actions to stop illegal rebating schemes:
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In 2001 and again in 2002, I prosecuted Old Republic Title Company to stop illegal rebating.
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I fined Southland Title in 2002 and again in 2004 for illegal rebating.
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In 2003, I restricted South Coast Title Corporation's license and fined it to stop illegal rebating in the form of direct cash payments to realtors, and in the form of bribes camouflaged as payments for office supplies, gifts, parties, and vacation trips.
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I prosecuted Commonwealth Land Title Company in 2004 to stop similar illegal rebating.
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I have an enforcement action pending against Stewart Title Company to end illegal rebating.
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I also have a pending action against Investors Title Company for illegal rebating that will go to trial in July.
“The allegation we are investigating today is that these captive-reinsurance arrangements are just such practices. They represent payments to lenders, builders, and realtors as inducements to funnel consumers to the title insurer. Sources have told us that the latest scheme to evade the anti-rebating laws is for the lender, builder or realtor to form a “captive reinsurer,” a subsidiary that takes a big chunk of the title-insurance premium, supposedly in exchange for sharing in the losses.
“This is suspicious at the least. These are unquestionably payments to the lender, builder or realtor, and they are explicitly linked to the firm referring business to the title company. While the companies call the payments “reinsurance premium,” the fact is that title insurance only rarely involves any reinsurance. And the so-called reinsurer is raking in nearly half of the premium in this line of insurance, an amount scarcely justified when assuming liability that typically is well below 10% of the premium.
“Consequently, my Department requested information from the title companies and opened an investigation. Because this appeared to be a multi-state practice, I brought the issue to the attention of the National Association of Insurance Commissioners, where we formed a task force to investigate the nationwide scope of the practice.
“As troubling as this information is, the insurers and producers are entitled to an opportunity to demonstrate to me that these arrangements are not what they appear to be:
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that this really is reinsurance,
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that they are receiving a real benefit from these arrangements,
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that the amount they are paying is reasonable for the benefit received, and that this is not an inducement for channeling business — not an illegal rebate.
“If the witnesses we hear today, and if the written testimony submitted and the data we have subpoenaed, do not satisfactorily answer these questions, I will commence whatever enforcement actions are warranted. And I am investigating others in the industry and will take action against any and every company within my jurisdiction that is engaging in illegal rebating.
“We will begin today by hearing from my staff, who will outline the evidence they have gathered so far. We will then hear from two of the largest insurance groups in the title industry, LandAmerica and Fidelity. These two groups write nearly 60% of all the title insurance in California.
“A panel of witnesses from LandAmerica and several producers with captive-reinsurance arrangements with LandAmerica companies will speak first. Following that panel, we will take testimony from a panel of witnesses from Fidelity and several producers having captive arrangements with Fidelity. And then the staff and I will address where we go from here.
“So I will first call as witnesses my Deputy Commissioner, Ramon Calderon, and Senior Staff Counsel Jill Jacobi.”
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