Tag Archives: closing

Shaking up the Title Industry

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Deeds

The United States Court of Appeals for the 9th Circuit issued an opinion in Edwards v. The First American Corporation et al., No. 13-555542 (Aug. 24, 2015) that may shake up how the title insurance industry works. As the court notes,

The national title insurance industry is highly concentrated, with most states dominated by two or three large title insurance companies. See U.S. Gov’t Accountability Office, Title Insurance: Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers 3 (Apr. 2007). A “factor that raises questions about the existence of price competition is that title agents market to those from whom they get consumer referrals, and not to consumers themselves, creating potential conflicts of interest where the referrals could be made in the best interest of the referrer and not the consumer.” Id. Kickbacks paid by the title insurance companies to those making referrals lead to higher costs of real estate settlement services, which are passed on to consumers without any corresponding benefits. (9)

The Real Estate Settlement Procedures Act (RESPA) is intended to eliminate illegal kickbacks in the real estate industry. In this case, the 9th Circuit has reversed the District Court’s denial of class certification in a case in which home buyers alleged that First American engaged in a scheme of paying title agencies for referring title insurance business to First American in violation of RESPA. The reversal does not get to the merits of the underlying claims, but it does open up a can of worms for title companies.

The title industry is not only highly concentrated but it is also highly profitable. In some jurisdictions like NY its prices are set by regulation at rates that greatly exceed the actuarial risks they face. Regulators like the NYS Department of Financial Services have begun to pay more attention to the title insurance industry. This is a welcome development, given that title insurance is one of the most expensive closing costs a homeowner faces when buying a home or refinancing a mortgage.

Home Loan Toolkit

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The Consumer Financial Protection Bureau has issued Your Home Loan Toolkit: A Step-by-Step Guide. The toolkit is designed to help potential homeowners navigate the process of buying a home. As the press release notes,

The toolkit provides a step-by-step guide to help consumers understand the nature and costs of real estate settlement services, define what affordable means to them, and find their best mortgage. The toolkit features interactive worksheets and checklists, conversation starters for discussions between consumers and lenders, and research tips to help consumers seek out and find important information.

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Creditors must provide the toolkit to mortgage applicants as a part of the application process, and other industry participants, including real estate professionals, are encouraged to provide it to potential homebuyers.

The toolkit asks many of the important questions that homebuyers have:

  • What does affordability mean for you?
  • What kind of credit profile do you have?
  • What kind of mortgage is right for you?
  • How do points work?
  • How do you comparison shop with lenders?
  • How does a closing work?
  • How do you read your Closing Disclosure?
  • How do keep your mortgage in good standing?

That being said, it remains to be seen whether this toolkit will actually help potential homeowners. It is important for the CFPB to design an effectiveness study to see how the toolkit performs in practice.

Reiss on New Mortgage Tool

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Tech News World quoted me in CFPB Shifts Some Power to Mortgage Shoppers. The story reads in part,

The Consumer Financial Protection Bureau on Tuesday introduced Owning a Home, a set of online tools designed to make it easier for consumers to comparison shop for the best deal in mortgage financing.

With one tool, users can plug in a credit score and ZIP code to get a sense of the current interest rates being offered within a particular area.

There is also a guide that walks consumers through the various loan options on the market, complete with basic definitions of “loan term,” “interest rate type” and “loan type.”

Another guide describes the closing documents in a typical home purchase.

There is also a checklist that offers suggestions for a smooth closing, including advice on mistakes to avoid.

Other tools will be added to facilitate shopping for a mortgage and improving consumer understanding of the mortgage process.

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This offering is not going to automatically assist all potential homebuyers as they approach the mortgage process, though, said Brooklyn Law School professor David Reiss.

“Shopping for a mortgage is one of the most complex financial transactions that people engage in,” he told CRM Buyer. “Providing additional information should help at least some people, but others are overwhelmed by this type of transaction and will continue to rely on word of mouth, advertising and preexisting relationships to find a lender.”

Shady Lenders
Some lenders benefit from dealing with uneducated consumers and are able to charge higher fees and interest rates as a result, Reiss pointed out.

The informed consumer is in a much better position to select products and services that provide the greatest value, Cadden observed.

“Informed consumers are, to put it simply, much better shoppers,” he said. “The challenge has always been how to easily acquire information.”

CFPB’s Mandate
The mortgage shopping assistance is a natural extension of the CFPB’s broader mandate to act as an advocate for consumers in financial matters, Reiss noted.

“It clearly complements the other components of that mission,” he said.