Groups Endorse Title Insurance Alternative

Two consumer groups are seeking to end California’s ban on a cheaper alternative to title insurance, a move that could save a typical homeowner hundreds of dollars when refinancing a mortgage.

The Los Angeles-based Community Financial Resource Center and the National Community Reinvestment Coalition in Washington have asked an administrative law judge in Sacramento to rule that it is legal to sell so-called lien protection insurance in California.

The one company that was selling lien protection policies on mortgage refinance loans in California -- Radian Insurance of Pennsylvania -- was slapped with a cease-and-desist order by the California Department of Insurance this year. The ban prohibited Radian from selling the policies in any state, not just California.

Radian appealed the decision. The administrative law judge is hearing arguments in the dispute and probably will decide next month whether lien protection coverage violates state law.

The consumer groups favor lien protection insurance because it is much cheaper than traditional title insurance, which is required by mortgage lenders because it protects them if problems develop over the title to a property because of an undisclosed lien -- arising from a tax debt, for example, or a local building permit dispute.

The typical title insurance policy on a $150,000 refinance loan costs $600 to $1,000, according to the reinvestment coalition’s legal filing. Radian’s product would cost about $325.

In the booming refinance business -- more than $1 trillion in loans was refinanced in 2001, according to the Mortgage Bankers Assn. -- that cost disparity amounts to more than $1 billion in additional costs shouldered by consumers, said John Taylor, chief executive of the reinvestment coalition.

“The rest of the country is looking to see what California does in this instance,” said Forescee Hogan-Rowles, president and chief executive of the Los Angeles organization. “This ruling could impact consumers in almost every state.”

“The insurance commissioner took a very strong position against what we feel is a consumer-driven product,” she said. “We want to see the administrative law judge overturn that position.”

The lack of alternatives to title insurance when refinancing a loan costs California consumers about $395 million a year, Taylor said.

At the heart of the dispute is a 1907 statute that bars title insurers from providing any other type of insurance in the state, said Scott Edelen, deputy insurance commissioner for the California Department of Insurance.

The majority of states have similar provisions, said Jim Maher, executive vice president of the American Land Title Assn., a Washington trade group for the title insurance industry. The ALTA is fighting Radian’s entry into territory typically reserved for title insurers.

The California Insurance Department ban on Radian’s product is based on the state’s ruling that lien protection insurance is simply title insurance in disguise. For Radian to offer it, Edelen said, the firm must give up its mortgage insurance business or get the state Legislature to change the law.

Radian argues that lien protection is a new product that is more like mortgage insurance than title coverage. But because it includes a lien provision and can be purchased in lieu of title insurance, California insurance regulators have banned it.

Radian is the only company offering this type of insurance on mortgage refinance loans. However, half a dozen insurers are offering similar, title-like policies on home equity loans and second mortgages, the ALTA’s Maher said. If the Radian suit goes in the title industry’s favor, the ALTA will begin to pursue these companies too, he said.

“We object to all of it, but in terms of allocating our limited resources, when Radian moved into the refinance arena, this caught our attention more rapidly,” he said. “When we finally resolve the Radian situation, assuming it’s favorable to our point of view, we will go back and raise objections to the other products.”