FEATURE ARTICLE, OCTOBER 2005

TEXAS TITLE INSURANCE
Local experts discuss Rule P-53 and Texas' seemingly high costs for title insurance.
Interviews by Chris Thorn

Title insurance is tricky business — governed by rules and regulations that differ from state to state. To find out more about Texas title insurance, Texas Real Estate Business spoke with Bruce Liesman, president of the Texas Land Title Association, and Bob Massad, division president in the Dallas office of North American Title Company.

TREB: What is the most important thing that businesses seeking title insurance in Texas should know?

Liesman: Texas has the most highly regulated title insurance industry of all the states in the United States. In Texas, by law, to become a licensed title insurance agent, you must have a title plant, consisting of all the public records affecting real estate for a minimum of 25 years for each county of operation. So, a title company cannot write title insurance on a statewide basis.

[It is also important that businesses know] the promulgated title premium is an all-inclusive premium, meaning that it includes the charges for title search, title examination, closing the transaction (whether or not performed by an attorney) and assumption of the risk under the title policy.

Massad: Know your closer. Work with a person who understands title insurance rules and procedures, and who has the breadth of experience to understand the structure of the transactions and the nature of underlying title and survey issues — someone who can help you work through solutions to problems when they arise.

TREB: What is Rule P-53? How does this regulation affect title insurance in Texas?

Liesman: Procedural Rule P-53 was passed and became effective in April of 2004. This rule was promulgated to enhance enforcement efforts to curb illegal kickbacks, referrals and rebates. Additionally, a revised version of P-53 may soon be finalized by the Commissioner of Insurance to incorporate the related statutory changes passed recently by the legislature.

Massad: Rule P-53 regulates promotional expenditures by Texas title companies. The recent revisions to the rule are intended to clarify which promotional activities are acceptable and which are prohibited by law. Many in the industry hope the changes will rein in the some of the marketing efforts that have focused on buying customers rather than selling them on our services.

TREB: Is Texas the highest premium state in the nation? How does this perception affect the title insurance business?

Liesman: It is a misconception to state that Texas has the highest title insurance rates. Most attempted comparisons are not of apples to apples. The rates in each state are set under guidelines and customs unique to that state. The all-inclusive premium in Texas includes the charges for multiple services including “title insurance,” while those services in most other states are generally separate and the “title insurance piece” carries its own charge. In those areas, there also may be separate charges for title abstracting, examination, escrow, settlement services, etc. There is no reliable actuarial evidence that confirms that the all-inclusive premium in Texas exceeds the collective fees charged in other states.

Massad: Title insurance is viewed by real estate professionals as a cost of doing business in the buying and selling of commercial properties. The price of title insurance is not driving the terms of commercial transactions in Texas. In Texas we charge nominal escrow fees (usually in the range of $200 to $250 in the absence of unusual circumstances) compared with companies in many other states that charge escrow fees of thousands of dollars. We do not charge a cancellation fee when a transaction is terminated, as companies in many other states do. Furthermore, our premiums represent a single charge for virtually all of our services (abstracting, examination, survey review, closing, and policy issuance), whereas many jurisdictions have separate charges for each of these services and products. Finally, Texas does not have either transfer or recording taxes, which are common in other states, If you look at all of the charges associated with closing in other jurisdictions and compare them with the charges in Texas, rather than comparing only basic policy premiums, you find that Texas is very competitive with other jurisdictions.

TREB: Currently, what is happening with re-issues, credits or discounts for prior policies?

Liesman: For many years, consumers in Texas have enjoyed a significant refinance credit on a loan policy issued subsequent to a prior loan policy. Additionally, current regulations provide other opportunities for new loan policies to be issued with substantive credits discounting the promulgated premiums based on certain fact situations.

Massad: Credit is available on a mortgagee policy for a loan to take up, renew, extend or satisfy an existing insured lien. The credit is a percentage of the base premium at the current rate on the payoff balance of the old loan. The credit is based upon the number of years since the issuance of the policy insuring the old loan — 40 percent if within 2 years; 35 percent if more than 2 years but less than 3 years; 30 percent if more than 3 years but under 4 years; and 25 percent if more than 4 years but less than 5 years. If the policy on the old lien was issued 5 years or more earlier, no credit is available. There is also a credit available on an owner policy if improvements are contemplated at the time the property is purchased, or subsequently added.

Texas also authorizes a mortgagee policy binder on interim construction loans, which permit a borrower to provide the construction lender with a binding commitment to insure (upon payment of the premium), but practically speaking, defer payment of a title policy premium until closing into a permanent loan.

In addition, there are numerous rate breaks and discounts available under certain fact situations, such as simultaneous issuance of owner and mortgagee policies, pass through of premium (with the consent of all parties) for simultaneous sale and resale of the identical property, and issuance of first and second liens on the same property. In addition, in the case of a mortgagee policy on a construction loan, the premium may be paid in installments tied to the issuance of the down date endorsements.

TREB: What endorsements are available in Texas? Why are most of them available for the lenders but not the owners? Which endorsements are available for lenders? Owners?

Massad: The following endorsements are currently available in Texas:

• For Mortgagees' Policies — adjustable rate mortgage loan; manufactured housing; revolving credit; environmental protection (generally available on residential only); balloon mortgage; tax amendment; confirmation of expired restrictions; first loss and last dollar; aggregation; PUD; restrictions, encroachments and minerals; access; contiguity; equity loan; reverse mortgage; leasehold mortgage; partial release/modification of lien; assignment of lien; survey coverage (other than shortages in area); and down date.

• For Owners' Policies — increased value; down date; leasehold owner; residential leasehold; restrictions, encroachments and minerals; access; non-imputation; contiguity; additional insured; manufactured housing; survey coverage (other than shortages in area); and special endorsement for policies issued to the U.S. government.

Texas also offers express insurance coverage for certain exceptions, determined on a case-by-case basis.

The disparity between endorsements available for mortgagees' policies versus owners' policies is driven by assessment of the risk. Greater coverage is afforded in mortgagee policies because the ultimate risk of loss in the event of a claim is significantly lower for a mortgagee policy than it is for an owner policy.

Liesman: Like the policies, endorsements are only promulgated by the Texas Department of Insurance through the hearing process. There are more endorsements available for lender policies because a loan policy and an owner policy are fundamentally different insuring products and lenders have their own requirements often stemming from federal banking regulations and oversight.

TREB: How should investors who have purchased portfolios with properties in various states (including promulgated rate, Filed rate and unfiled rate states) obtain title insurance?

Massad: Pick an independent title agent with a variety of nationwide contacts and the ability to write for several different underwriters. This gives the customer the ability to work with a single closer who will do the leg work in gathering the title work around the country, price the policies at the best rates in those jurisdictions which have competitive rates, select the best underwriters in the various jurisdictions, coordinate and supervise the title and survey work being done in all of the jurisdictions, and handle the closing as well as coordinate the recording of documents and issuance of title policies in the various jurisdictions.

Liesman: With multi-state portfolios, investors should understand that since Texas has promulgated forms that can only be issued by licensed title companies in Texas, they should search in the local markets of their properties for the title insurance provider with the best service record.

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