Credit unions have a good reason to be wary of title insurers with exclusivity agreements: they could be illegal.
The Credit Union National Association recently reminded credit unions to be aware of First American Financial Corp. v Edwards, a case that recently landed a spot on the Supreme Court’s agenda.
It’s a class action lawsuit against First American Corp. and its subsidiary, First American Title Insurance, that CUNA deputy general counsel Mary Dunn says could have “significant implications” for credit unions. The plaintiff, Cleveland, Ohio resident Denise P. Edwards, represents the consumers. She alleges that First American, the second-largest U.S. title insurer by market share, paid millions of dollars to title insurance agencies that then agreed to exclusively offer First American policies.
Edwards says the exclusivity agreement violates her consumer rights granted by the Real Estate Settlement and Procedures Act, a 1974 law giving homeowners the right to choose their own insurance and making kickbacks from title insurers illegal. Recently, Fidelity National Financial Inc. was held accountable for allegedly breaking that law and is paying $4.5 million to settle kickback allegations, according to the Wall Street Journal.
Banks and credit unions are sometimes the subject of a RESPA-related lawsuit. Under RESPA, credit unions must disclose any controlled business relationship, provide an accourate estimate of closing costs and meet many other requirements. For credit unions, the outcome of First American Financial Corp. v Edwards should indicate whether a private purchaser of real estate settlement can successfully sue if they’re not offered a choice in title insurance. A decision against Edwards could signal that these types of lawsuits will be more difficult for consumers to win.
The title insurance industry is very odd, isn’t it? It’s not a slew of title insurers competing for consumers’ business. It’s just a few large players catering to the lenders and often coordinating on setting premium prices. In other words, it’s an oligopoly driven by reverse competition. And title insurance is regulated at the state level, so prices and rules vary across the country.
In First American v. Edwards, First American is arguing that because all title insurance rates are the same in Ohio, which sets a flat rate, Edwards suffered no true damages. She would have paid the same price anywhere, the company says. So far, lower-level courts have ruled that the exclusivity agreement violates the spirit and intent of RESPA, which is designed to encourage more of that good old, market-driven competition within the title insurance industry.
The federal government even strengthened RESPA laws this year to require lenders to disclose the fact that homeowners have a right to shop around for title insurance earlier in the closing process.