For those who wish to be politically correct, these evolving adaptations in our industry are now euphemistically referred to as "affiliated business arrangements." We believe that the practice of soliciting captive title business during the loan application process is inherently adverse to the interests and welfare of the consumer in several aspects.
Statewide Title, Inc. has been unequivocal in its position of supporting the role of the attorney in the closing process, as typified in North Carolina. The statistics consistently demonstrate that our form of practice produces a lower closing cost to the consumer for title assurance. We believe that this is the result of the greater accountability and professionalism of the attorney-client relationship. This relationship results in fewer errors, resulting in fewer claims and lower losses. Controlled business arrangements erode this relationship by dictating the selection of the title insurer- without providing the consumer with an informed choice. The attorney has traditionally been the source of information for a consumers choice of insurer. Because of our laws in North Carolina, an attorney will not have a financial interest in the choice. The choice of insurer will typically be the result of a companys financial strength, performance, service and claims philosophy. Title companies are not all alike. There are very real differences in these aspects, and these differences will have an impact on the clients welfare in the event of a claim. The lenders have a very clear interest in the consumers policy being written by a captive company. We have heard apocryphal stories of attorneys complying with lender directives to use a captive company solely for fear of the lender steering business to more compliant firms, even when the attorney does not believe the captive company will serve the client well. We doubt that this situation occurs very often. Most attorneys take their professional responsibility too seriously for this and comply, because they have made an independent judgment that the clients interest is well served. Still, the concern for lost business is a very real one among real property practitioners. While this concern may not, and should not, be a deciding factor in insurer choice, its influence, nonetheless, casts doubt on attorneys independence of advice.
Clients, when questioned, sometimes report that they would rather leave the choice in place rather than risk incurring a lenders dissatisfaction and, thereby, unfavorably influencing lending decisions. This is, in all probability, the situation in most minds even if it is not articulated as such. We have heard such reported in the context of sophisticated commercial clients. Where does that leave the typical consumer who is relying on the bank for financial advice? Soliciting a self-serving business relationship during the loan application process has the appearance of economic coercion of the worst sort. If an attorney were soliciting investment by a client in some personal enterprise with no more disclosure than these lenders provide, it would be grounds for disciplinary action. Lenders with self-interested solicitations should make their pitch after the loan has been formally approved. Thus, they would avoid the appearance of improper influence.
These arrangements also provide an excellent opportunity for conflict of interest litigation to result. A title insurers risk on a lenders policy of insurance is lower than the risk on an owners policy. The risk is lower because there is rarely any liability to a lender, unless there is a default in the loan and foreclosure of the security instrument. Liability for covered losses exists on the effective date of an owners policy. This risk differential often results in lenders being afforded coverage over certain title matters that will not be made available in an owners policy. Suppose that an underwriting decision is made by a captive company to afford a lender, and not an owner, coverage over a title matter not normally insured against in a purchase context. If a successful claim arises, the lender will be paid in full by the title insurer under the policy, or by the borrower under the note. The owner has to absorb the loss, and is still obligated to pay the lender. The argument for liability goes as follows: if the lender had been unable to secure coverage, the loan would not have gone through, and the owner would not have purchased. The owner will claim that the assumption is reasonable- that if the lender was protected, so was the owner. Because of our societys deep-pocket syndrome, this will be a compelling argument. When one considers modern trends, it will not be surprising if the closing attorney is dragged into the litigation under some theory that there is a responsibility for the attorney to advise the client of the potential conflict that was created before the attorney was involved. Considering the propensity for consumer activism, based upon deep-pocket liability, it may not be prudent to wager on the outcome.
Insurers often feel compelled to participate in these arrangements in order to remain competitive and insure economic survival in a rapidly changing environment. This belief can result in negotiating leverage that results in contracts providing minimal profitability for the insurer. When this occurs, tighter claims management and more aggressive loss recovery policies will result. This creates further dissatisfaction among owners already struggling with the inconvenience, worry and stress of a title claim. We all know that it is the closing attorney that typically endures this dissatisfaction. Aggressive loss recovery activities by an insurer often result in economic losses for attorneys also.
While there are numerous concerns engendered by controlled business arrangements, we will limit our discussion to this last one. Lenders are increasingly making demands upon title insurers to provide affirmative coverage over title defects, regardless of whether providing such coverage might be prudent risk underwriting. As lenders become more closely involved in the underwriting process, as in the case of controlled business arrangements, these demands will further escalate and tend to be met. At some point, one can envision that the argument may be successfully postulated that attorneys opinions on title are unnecessary, that title insurance should be underwritten, and premiums accordingly based, simply on an actuarial loss basis. States that have excluded attorneys from the process dominate the top half of the cost statistics for title assurance. It is extremely reasonable to conclude that if such becomes the practice, that consumers will have to bear the cost of the increased losses that will of necessity result from attorneys being excluded from the title assurance process.
Attorneys who have clients that would like to change their selection of title insurer after being provided with the information necessary to make an informed choice, may use the Borrowers Title Insurer Selection form included with this newsletter, or download the form from our www.statewidetitle.com web site.