US weighs ban on charging homebuyers for lender title insurance: sources

A TOP US consumer watchdog is considering whether to bar mortgage bankers from charging homebuyers for title insurance that protects the lenders, ending a long-standing industry practice.

The Consumer Financial Protection Bureau’s (CFPB) plan is still in the early stages, according to people familiar with the matter. The agency will begin to lay the groundwork for the measure in a broad request for information on closing costs, including title insurance and other fees, that will be released as soon as this month, they added. Any final proposal on closing costs, including title insurance, would not come until 2025, one of the people said.

If approved, it may offer at least some relief to Americans struggling to purchase affordable homes due to limited inventory, elevated prices and closing costs, and 11 interest-rate hikes since March 2022. But it would also draw strong opposition from mortgage lenders and title insurers grappling with a housing market slump that has squeezed profits.

“Reducing the homeowner’s closing costs is excellent policy, provided the lender cannot recover that cost in another way from the homebuyer through some other fee or a higher rate,” Maria Vullo, who was superintendent of New York’s Department of Financial Services from 2016 to 2019, said in an interview. “A title insurance policy for the lender protects the lender’s interest. I think it is a positive, pro-consumer, pro-homeowner policy to say that the lender has to pay for it themselves.”

The draft measure would apply to both home purchases and refinancings, according to the people, who cautioned that it could be scaled back to cover only refinancings – or ditched altogether. Only the lenders’ insurance would be affected. Title insurance for buyers is optional and covers an owner’s equity in a property.

President Joe Biden has zeroed in on title insurance as one way to lower closing costs. Last month, the White House announced a pilot programme to waive the requirement for title insurance altogether for a small amount of refinances at the mortgage giant Fannie Mae, a government-sponsored enterprise.

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The CFPB declined to comment on the draft measure but said in a statement that it was “working with agencies across the government to foster greater competition in the mortgage market and help Americans save money when purchasing or refinancing a home”. 

The agency is already scrutinising closing costs, which it says are “too often full of junk fees”. Median home-purchase loan costs, including title insurance, surged 22 per cent to almost US$6,000 in 2022, according to a CFPB report.

The agency’s early plans have alarmed both industries.

“Title insurance is one of the most essential, but least expensive, parts of the home-buying process,” Diane Tomb, chief executive officer of the American Land Title Association, said. “We have real concerns about how this proposed framework would undermine the critical protections provided by title insurance.”

Bob Broeksmit, CEO of the Mortgage Bankers Association, said that the CFPB’s plan “reveals a fundamental misunderstanding of how the mortgage market works and a disturbing lack of awareness of existing regulations”.

Homebuyers seldom shop around for different rates on lenders’ title insurance, Freddie Mac said in a 2022 report. If mortgage lenders are forced to pay for it, they may negotiate lower title insurance premiums. That way, even if the lenders pass the cost on to homebuyers, there could be savings. Just how much buyers will benefit is unclear.

“There’s always a race to close, right?” Benjamin Keys, a professor at the University of Pennsylvania who has studied the title-insurance industry, said. “Homebuyers are trying to get the deal done. And so, I think just shifting it over to the lender isn’t going to solve the problem, because I think the lender is still going to have other ways to pass that cost on to consumers.”

Government-sponsored mortgage companies have required lenders’ title insurance or other title protections since at least the 1930s, and title insurance became widespread after World War II. 

Lenders are currently required to obtain title insurance for almost all home loans they make. It typically costs around 0.5 per cent of their loan amount, and is paid for by the homebuyer. Americans paid US$21 billion in title insurance premiums in 2022, according to the American Land Title Association.

Title insurance premium volume dropped in 2022 as the Federal Reserve raised interest rates. The average 30-year fixed-rate mortgage is now about 7 per cent.

The parent of First American Title Insurance, the largest player in a highly concentrated industry, saw its adjusted net income plunge to US$369 million last year, down from US$671 million in 2022, according to data compiled by Bloomberg. The title insurer is First American Financial’s biggest subsidiary. BLOOMBERG