SB 231 TITLE INSURANCE Number 275 CHAIRMAN SHARP brought up SB 231 as the next order of business before the Senate State Affairs Committee and called Senator Rieger to testify. Number 280 SENATOR RIEGER, prime sponsor of SB 231, began by directing committee members' attention to a letter (from Jan Nauman) in their bill packets from an individual who had a narrow brush with having to pay for three title insurance policies within the space of a few weeks for some residential property. That letter is just the most recent in a string of correspondence his office has received over the years questioning the requirement for and the pricing of title insurance. In the past, one could get a discount on rates paid for title insurance policies when a piece of property was refinanced or when two title policies were issued upon the same piece of property. This changed several years ago, when the Division of Insurance handed down a directive denying any ability to discount, with the exception of a less than 20% discount. Senator Rieger noted that the actual title insurance is just a small fraction of the amount which the consumer pays in premium to the agent. Claims paid are around 4-5% of the amount paid in premiums. However, the Division of Insurance has been approving rates which cover a large amount of additional work, such as title searches, which are activities that the Federal Trade Commission (FTC) has found do not involve insurance. SENATOR RIEGER stated that SB 231 would address the issue in two ways: first, to attempt to prescribe a lower fee for a refinance. The second would be to repeal the Division of Insurance's rate- fixing policy, so that relief to the customer could come through market competition. Senator Rieger believes the latter approach would be preferable. So he would not object if Section 1 was removed, but thinks that approach should be out there for discussion. Number 365 ROGER FLOERCHINGER, President, Yukon Title Company, Inc., stated that if SB 231 is adopted, it will have negative consequences for anyone who owns, wants to purchase, or seeks to refinance a home. SB 231 will prohibit title insurance companies from charging more than $75 to issue a title insurance policy to the same person or the person's lender within 15 years and removes existing prohibition on title insurance companies discounting their published rates. But title insurance companies cannot issue a title policy for $75; that amount will not cover the title companies' cost. If those kinds of policies cannot be sold, except at a loss, title insurance agencies will be unwilling to issue them. Mr. Floerchinger contends that refinancing of existing homes will be the most affected, and refinancing may become unavailable. Number 395 MR. FLOERCHINGER stated that the second portion of SB 231, which modifies the rules regarding the rates title insurers are allowed to charge, would simply make tariff rates the highest allowable rate. Mr. Floerchinger thinks that in certain types of markets, competition is not an effective market regulator. He stated that, since there are a limited number of underwriters, it is important that those underwriters retain adequate reserves to cover potential losses. Over the last decade, the number of title insurance companies issuing title insurance policies has dropped from seven to two in Alaska. While there are several title insurance agencies, the policies they offer are issued by just two insurance underwriters. Mr. Floerchinger foresees the loss of independent agencies from the market in Alaska, with all the consequences one would expect from a monopoly. Because of this scenario, every state strictly regulates the title insurance industry. He stated that SB 231 would impose an arbitrary fixed limit on the price of one product, while removing existing regulatory constraints in other areas. Mr. Floerchinger asserted that the status quo works, and stated that SB 231 is a bad idea and will have precisely the opposite effect of that intended. Number 408 SENATOR LEMAN stated he understands the concern about competition. But he noted that in 1989 representatives of Alascom explained to him why intrastate competition would be bad for Alaskans. He didn't believe them at the time, and is glad there is competition. He finds it hard to understand why we can't translate that same thought into all businesses. Senator Leman asked Mr. Foerchinger why, since such a small fraction of the business is for insurance purposes, the service portion of the business shouldn't be competitive. Number 427 MR. FOERCHINGER responded that the margins of profit are already marginal. The way the bill is written, it will not allow the industry to increase those rates in instances where it's justified. SB 231 only allows for decreases in the rates. Something like this would put the small guys out of business. He doesn't think that title insurance will become unavailable in Alaska, but he does think that one will find an environment where insurance is only provided by national companies, probably examined and underwritten outside the state of Alaska. He does not think there will be independent companies offering the services currently offered. Number 450 SENATOR LEMAN asked if it would be possible to free up part of the industry, allowing the market to establish its' own rate, with perhaps the exception of the actual title insurance portion. Number 456 SENATOR RIEGER thinks that would be a reasonable approach to the issue: that there is an insurance component and a service component. The reason for the filing of a rate and then having the ability to go lower was that sometimes the closing process can be a highly charged, emotional situation and he wanted to prevent excessive rates. But he is open to discussion on that point. Number 470 JOE KAULHABER, Principal Real Estate Broker, Realty, Inc., stated though he is representing himself before the committee, he has a resolution from the Greater Fairbanks Board of Realtors opposing SB 231. SENATOR RANDY PHILLIPS noted that committee members have a copy of that resolution in their bill packets. MR. FAULHABER stated that he doesn't have any answers; the problem is a complex one. But he is concerned that the bill as presented would be very disruptive to the real estate industry. Formerly, he had his own escrow division within his company. It was very expensive and it didn't work very well, because it was mixing a marketing function with an accounting function. When the title companies in Fairbanks became sophisticated enough to take that function over, that was actually the first year Mr. Faulhaber experienced profitability in his own business. If this bill is passed, he believes the title insurance companies would be hampered to the point where services delivered to the unsophisticated residential customer would diminish significantly. MR. FAULHABER informed the committee that the first thing a real estate company does when marketing a property is to ask a title company for an abstracted title. Prior to the current good service, it used to take 90-120 days to get a preliminary commitment for title insurance. It was not uncommon to have five and six-month closings. This causes a lot of suffering. As Senator Rieger noted, selling or buying a personal residence is a very emotional experience. The biggest suffering is often unnecessary because it's something that could have been handled, but it comes in the form of a surprise. MR. FAULHABER thinks that if rates are deregulated to allow negotiation, commercial clients, who are more sophisticated, would negotiate their rates down, while consumer rates for houses would go up. Those rates probably wouldn't be negotiated. Once again, the people who could least afford to pay the most would be paying a larger pro rata share. Number 505 BRYAN MERRELL, Vice President and Chief Title Officer, First American Title Company of Alaska, Underwriter for First American Title Insurance Company, stated that if SB 231 passes, it will radically change the way the business of title insurance is conducted in the state by deregulating rates. To his knowledge, not a single state has enacted a similar statute. Currently, title insurance agencies are required to treat all customers equally, which puts all title insurance agents and underwriters on a level playing field. Mr. Merrell thinks that the only customers who would be able to negotiate rates under SB 231 would be the larger- volume customers. He does not think it will be the average homeowner who will benefit. MR. MERRELL noted that other rates in real estate transactions are negotiable, including the survey, the appraisal, the engineer's report, well and septic inspections, lender's origination fees, and the interest rate on the mortgage. While the costs of these components are almost never successfully negotiated for the typical homeowner's real estate transaction, they are always negotiated in a large commercial transaction involving a real estate developer. Mr. Merrell thinks the effect of SB 231 would be to allow significant reductions in rates charged to large commercial customers and real estate developers, while the rates charged to the homeowner would likely increase to offset the loss of revenue resulting from negotiating commercial rates. The maximum rate created by SB 231 will not prevent this inevitable outcome. If this bill is passed, the title insurance industry will remain a regulated industry. The Division of Insurance will continue to have the obligation to prevent the lack of regulation from creating failure in the industry. MR. MERRELL stated that the $75 fee to add an additional insured to a policy would not give the type of insurance that lenders are seeking when they come to the title companies for a refinance policy. Adding the insured will not protect a party who is either buying a new property or lending against the property after the date of the policy. The current charge to add an insured to a policy under the current rate schedule is $50, so SB 231 would actually increase that cost. MR. MERRELL stated that currently, competition among title insurance companies is based upon services rendered. We would like competition to continue upon those lines, and not on rates. We would like to keep the playing field level with the current rate schedule. Number 555 CLIFF GROH, Alaska Land Title Association, stated he has been associated with the title insurance industry for 30 years as an attorney. Mr. Groh said that SB 231 will not solve the problems of the title insurance industry. To solve Senator Rieger's problem of refinancing houses, you should confer with the industry and the Division of Insurance. There is a model Title Insurance Act. The legislature should consider that possibility. SB 231 is approaching the problem backwards. The reason the industry is regulated is to ensure that there will be enough money to pay the companies that are taking the risks, and enough money to pay the underwriters. Mr. Groh suggested just dealing with the question of refinancing. He does not believe that SB 231 is workable, because the underwriters will not let the agents set the rates. TAPE 96-7, SIDE B Number 585 JAN NAUMAN stated she is present to inform the committee of the consumer's side of the title insurance issue. She noted that the letter to which Senator Rieger referred was from her. She stated that her experience with the title insurance company was very different from that portrayed by the previous testifiers. Ms. Nauman repeated to the committee her experience, as outlined in her letter. All three transactions on the same piece of property required three different title insurance policies. She was told that, not only was she purchasing three consecutive title insurance policies, but that each policy voided the prior policy. MS. NAUMAN stated that the title insurance company wanted $970 for what they freely admitted was two-minutes worth of work, at which point she got rather excited. As a consumer, the most frightening part to her is that the existing tariffs do not cause title insurance to be administrated equitably. Her second problem is with the fact that the reissuing of title insurance causes the consumer to be damaged: if one purchases a house for a higher price, then one has title insurance for the whole transaction; the subsequent purchase of a loan or a rollover of a loan causes the purchaser to be insured for a lesser amount. The third thing she has a problem with is that the existing statutes allow collusion to exist between title insurance companies and banks. When she was asked for her third title insurance payment, the title insurance company claimed to be an agent of the bank. Since both she and the bank already had insurance, what was that third policy for? Ms. Nauman stated that her experience was disappointing, and whatever the changes made in statute, hopefully consumers won't be left hanging out to dry like she was. Number 508 MICHAEL PRICE, Attorney, Alaska Land Title Association, testifying from Anchorage, stated he speaks in opposition to SB 231. He informed the committee that there are only two national underwriters in Alaska. There are approximately 20 Alaskan companies, that he thinks will be impacted negatively by SB 231. He related settlement costs of a recent refinancing in which he was involved, in which title insurance composed only 10% of the refinancing costs. Mr. Price stated that the base title insurance rates have not changed since 1968. Number 463 SENATOR RIEGER asked Mr. Price if the base rate to which he is referring is a percentage of the mortgage. MR. PRICE responded that it is a dollar-per-thousand figure. SENATOR RIEGER thinks that the thousands of dollars of a typical mortgage must have changed since 1968. MR. PRICE responded that the value of property has changed, but not the rate charged by the title insurance industry. Number 455 STEVE JEWETT, First American Title Insurance Company of Alaska, testifying from Anchorage, stated that every commitment his company offers has a liability factor also. Sometimes lenders will actually use offers for a report or a policy of some sort. Number 445 TIM HURLEY, Western Alaska Land Title Company, testifying from Kodiak, stated opposition for SB 231. He doesn't think the bill's consequences have been researched, nor does he think it will effectively address the needs of the industry users. Number 430 MARY ANN ROWE, President, Kachemak Bay Title, testifying from Homer, does not think SB 231 has been thoroughly analyzed. She thinks the bill will have severe negative effects on the real estate and mortgage industry. She thinks the current regulations do work. Ms. Rowe stated that if the industry is deregulated, underwriters will no longer be able to afford underwriting in Alaska. She does not think the cost for title insurance is out of line with the product the consumer receives, and that SB 231 would be a lose-lose situation in all cases. Number 395 JEFF BLAKE, Pacific Rim Title Insurance, President of Alaska Land Title Association, testifying from Anchorage, repeated comments made in a letter written to Cliff Groh, which he believes was forwarded to the committee. Mr. Blake informed the committee that New Mexico has enacted a law similar to what SB 231 intends, but the rates do go up and down to try to keep agents in the state. Mr. Blake also commented that two of his jobs disappeared when underwriters left the state. He stated that on a refinancing, the insurance that's issued at that point insures the lien of a specific security instrument. If that instrument is reconveyed and satisfied, it doesn't transfer over. Number 363 DON KOCH, Chief of Market Surveillance, Division of Insurance, Department of Commerce & Economic Development, stated they have some concerns with the legislation. The first concern is with the repealer section, which would repeal the rate standards for title insurance. Those standards basically say that the rates shall not be excessive, shall not be inadequate, and shall not be unfairly discriminatory. It then provides for establishing a title rate as a maximum. The trouble the division would have with that is that there would be no way to tell what that maximum should be. There would be no standard with which to establish a rate. If the public was to see a rate there as a maximum, the natural assumption would be that since the Division of Insurance has approved it, that is the approved rate. But that rate may not meet any of the standards we're talking about. MR. KOCH stated that the second concern with the repealer is the unfair discrimination. There is also an unfair discrimination section in our Unfair Trade Practices Act, which does not go away. So that creates a dilemma, because the title rate would have those standards removed, but they would still exist in the Unfair Trade Practices Act, which would arguably still apply. Mr. Koch thinks this issue needs to be addressed. Number 337 MR. KOCH stated that the division's paramount concern as regulators is the solvency of the insurers. There are currently only two title insurers writing title insurance policies in the state. There are ten title insurers admitted to do business in the state. There have been a progression of companies "hopping out of here". An additional concern of deregulation of rates is the potential for the creation of a monopoly, or a monopoly in certain areas. The division would have trouble dealing with that. Number 315 MR. KOCH stated that there is a provision in the FTC Act that basically says the search and examination portion of the title insurance operation is not the business of insurance. What some states have done is to deregulate the search and examination portion of the rate. Currently in Alaska, the way the law is structured, the entire rate is subject to filing. This has created a dilemma for some time. The division has been trying to develop a methodology with which to test existing standards. The division has held numerous meetings with the industry, and we have had hearings. The hearings resulted in the order in 1992 where we said all the discounts are disapproved because the division had no way to support anything we were being told. There is no support. As long as those two rates come together in the way they currently do under our statute, it will probably remain almost an impossibility to develop a reasonable standard. Number 304 MR. KOCH stated it is currently the belief of the division that the title insurer portion of the rate, about 10-12%, is inadequate for their needs. The 88-90% of the rate that goes to the title insurance agent for title insurance pieces of the operation is probably excessive. The reason for this belief is that the examinations we've done to test the rebate statutes found that there is a very heavy subsidy for non-title services, such as escrow settlement and closing operations. The subsidies found in the Anchorage bowl area ranged from 29-64%. That meant that the escrow charges were not meeting the cost of delivering that service. They are integrated services, you can't have one without the other. He is merely pointing out that if you push down one button, another one will pop up someplace, and he's not sure what the ultimate cost will be. He doesn't raise issue with the statement that the overall cost of operating a title agency is marginal, but the allocations within the structure of those agencies are probably priced in such a way that there is probably too much coming in from the title side, and too little coming in from the escrow side. Mr. Koch stated he is providing the committee with an article he wrote a few years ago that was published in the journal of insurance regulation. It is a primer on title insurance for the regulator. It addresses some regulatory concerns. Number 270 CHAIRMAN SHARP stated that the committee would be gathering all the information available. Number 260 MR. KOCH stated that two possible options would be to preserve the rate structure for the title insurance portion. The other would be to develop a rate structure for the title insurer that considers everything they need to remain in business, and apply a similar methodology to the title insurance agent. The division will flesh out those alternatives and give the committee more concrete information. Number 245 CHAIRMAN SHARP stated he would look forward to that information. He noted that testimony has indicated that the market availability for title insurance services has dwindled considerably in the past ten years. He would not want to see a monopoly develop. Number 238 SENATOR LEMAN asked Mr. Koch if the challenge is more with the insurers, about there being a danger of a monopoly developing. Is the division not able to disaggregate the costs sufficiently. Are the services so intertwined with the insurance that they can't be separated? Number 226 MR. KOCH responded that there are some states that do not regulate what the title agencies do. However, the one thing that must be realized is that there is a greater diversity in how states deal with title insurance than any other kind of insurance. The monopoly that we are initially concerned with is the monopoly that could occur in the title agent market. Another concern is that the search and examination portion is considered by the FTC to be their turf. Because of that, the title industry gets downright paranoid when they hear "FTC". If the last two insurers in the state feel like we're under the looking glass from the FTC, they might start to think a little differently about whether they want to stay in a state the size of Alaska. It is also significant to note that 88- 90% of title insurance premiums stay in Alaska. The division did find that for the most part, none of the title insurance agencies believed in the discounts. They were simply used to gain a temporary niche in the market place. Number 156 SENATOR RIEGER asked Mr. Koch if the division has a position or inclination that the amount of discount currently allowed for refinancing is excessively low. MR. KOCH stated the division believes that the refinancing rate should be subject to some kind of discount, but we haven't allowed any, except for short-term discounts. We don't know where the number should be. We have told title insurers and people who call us that it is the division's intent that short-term discounts, which are 20%, should also apply to refinancing. Some agencies have not interpreted it that way, but we have tried to correct that interpretation. So that 20% discount is available, though he is not sure that is enough of a discount for a refinancing. CHAIRMAN SHARP thanks Mr. Koch for his testimony and stated that SB 231 will be set aside for at least two to three weeks. The committee will try to give ten days to two weeks notice on rescheduling of the bill.