Tuesday, September 09, 2008

What happens if a title company fails?

That's a really big question and it has two completely different sets of answers. Why? Well, the words title company are used interchangeably to describe two very different kinds of title companies. So, for you to fully understand the answers, you first need to understand the difference between a title agency and a title underwriter [the real title company].

Title insurance is written through AGENCY or DIRECT operations. When you focus on those two words, I think you can start to see the difference. DIRECT means you are dealing with an EMPLOYEE of the title underwriter/company. AGENCY means you are dealing with a person or entity who is an independent company - meaning NOT the real title company - who has been authorized to write title insurance on behalf of the title underwriter/company. Get it?

If you are in the mortgage business, this may seem like a model that matches the mortgage broker/mortgage lender model. If you look at it in that light, it's similar but you'd have to add delegated underwriting and then it's more in the ballpark.

The failure of the Mercury Companies "empire" - their nationwide structure of multiple and huge title agencies - which most people thought of as title companies - has people scratching their heads and thinking through the ramifications of failure. I'll talk about some of the issues. It's a much bigger subject than a single post could cover and frankly, I'm not an expert in failure - LOL - but I've witnessed it from afar and with interest.

The failure of a TITLE AGENT is almost always due to mismanagement of the books - either by theft or absolute negligence. In most states, the only one really watching the operations of a title agent is the title underwriter. This is one area that I think could be improved. I would prefer that states set an audit requirement as part of licensing so that we have a more secure and regular method of checking the operations of a title agent but that's a different topic. In the meantime, if the title underwriter hasn't noticed bad management by an agent, a failure can happen without any notice. A consumer or mortgage lender caught up in this kind of failure is apt to suffer inconvenience in most cases and in some, real financial loss. When a title agency fails, the real title company - the title underwriter - comes in and takes over. Their employees will sort things out - often with the state regulators keeping an eye on things.

All title insurance policies that have been written by the failed agent are honored because the agent had the authority to bind the title underwriter/company. Where it gets sticky is that agents who are doing a bad job with the money are usually doing a bad job with the policies, too. That means that they might have closed your transaction and failed to create a policy or pay the real title company. How do you protect yourself as a consumer? ALWAYS get a copy of the title insurance commitment PRIOR to closing and ALWAYS get and retain a fully signed copy of the HUD-1 Settlement Statement. The commitment is binding and identifies the real title company. That's important if the title agent wrote for more than one company. The HUD-1 is your evidence that you paid for the insurance. Even if the title agent failed to remit that premium to the title underwriter/company, your payment will be honored. Remember that you should receive your actual title insurance policy - reasonably - within 90 days after your closing. Keep track and if you don't get it - follow up. If the title agent is not cooperating, contact the real title company directly.

While I believe every consumer should shop for a title agent and make the selection based upon strength and expertise - it's sometimes hard to figure out which company is run by a negligent or crooked manager. I've posted tips for shopping but you should also rely on your guts and then take heart that there is a different, much stronger and more heavily regulated title underwriter/company sitting behind every title agent and that is the strength of the system.

The big question I have been asked is what happens if a title underwriter - the real title company fails. First, you need to know that underwriters as insurance companies, are strictly regulated and monitored. They must maintain reserves and those reserve requirements adjust as the risk of claims adjust. All of this activity is monitored by states and private rating companies. Fitch is a good source if you are interested. Finally, most states have some sort of arrangement for overseeing the dissolution of failed insurers. So, I'm not worried about the failure of the real title companies. There are lots of eyes watching their every move and authorities will step in to protect the system and the consumer if a company goes out of control but the likelihood is pretty slim.

Hope that helps and if there is anyone out there who would like to add to the discussion, please do.


John Bethell said...

Good post and good advice to retain your commitment and evidence of payment. Under the commitment terms, that usually initiates coverage. Be sure that the commitment names the Buyer as proposed insured and that the proposed policy amount equals the purchase price. Without those two things, the underwriter has a window to deny coverage.

Unfortunately, the commitment provides no coverage to the seller in the unlikely event that the title agency suddenly goes belly up. While not fool proof by any means, if the title agent appears unorganized, stacks files all over the office and conducts business in a casual, unprofessional manner, there is a higher likelihood that the books are not being kept to the standards required when dealing with other people’s money. Does that make the agent a crook? No, but it does increase the chances that the agent doesn’t know how much money they have in their accounts and who it belongs to. And that’s a recipe for problems, for sure.

Most agents that go out of business do so quietly and only stiff the underwriter for some back due premiums. A few exit in more spectacular fashion, usually due to gambling, drugs or excessive lifestyles. Occasionally, an employee will be the culprit, but almost always when that’s the case lack of internal controls is the enabling root cause.

Underwriters left to pick up the pieces have no one to blame but themselves. They’ve spent most of the last ten years signing up anyone with a pulse and a brother-in-law who could refer business. They’ve failed to make running the agency in a professional manner important to the ultimate consumers of their insurance and then validated that failure by providing Closing Protections Letters to facilitate the “brother-in-law business plan.”

I could go on but I’m at my self-imposed word limit.

John Bethell

Diane Cipa said...

Excellent comment, John. I'm going to add it to the conversation on Lenderama, if you don't mind. ;)