Tuesday, September 16, 2008

Real Estate Reform - Why Indiana Needs It

With the meltdown in the subprime lending market and the continuation of scandals in the mortgage industry, the need for better regulation of the real estate industry should be at the top of the political agendas of the candidates for Indiana Governor and Attorney General. Unfortunately, only Linda Pence, Democratic candidate has made "mortgage fraud" a top issue. The issue of regulation of the real estate industry would certainly benefit from a more aggressive Attorney General. While Pence deserve kudos for recognizing real estate as an issue, she is only scratching the surface.

In 2006, Indiana created a new title insurance division within the Indiana Department of Insurance. I, along with another attorney, were named co-manager of that division. It was a regulatory effort akin to inventing the wheel. Title insurance in Indiana had essentially been unregulated. It was up to us to develop policies and audit practices for the industry. The title insurance industry not only welcomed the effort, the industry actually worked for the legislation funding the division with a charge on each title insurance policy.

We were able to put together a five person staff that had a combined 100 years of legal and real estate experience. Having developed a set of operating policies and audit procedures, we would get calls all over the country from regulators who wanted to come to Indiana and study what we were doing. While I took that interest as a compliment, I knew that we were a tiny piece of the puzzle and that Indiana's real estate regulatory effort was in desperate need of reform.

Here's the problem: A real estate transaction involves numerous players. You have realtors, mortgage brokers, lenders, appraisers, title insurers and title agents. The same transaction may involve four or more agencies regulating the players involved. The Department of Insurance regulates the title insurer and title agent. The Attorney General regulates realtors and appraisers. Mortgage brokers are regulated by the Secretary of State. Lenders are regulated by the Department of Financial Institutions.

It is a horribly inefficient regulatory set-up. One regulator may take an aggressive regulatory approach to wrongdoing in a real estate transaction while another regulator may let another wrongdoer in that same transaction off scott-free. Worse yet communication and coordination between the various real estate agencies was, and I'm sure still is, virtually non-existent. Often reading the Indianapolis Star was how we found out about investigations the other agencies were involved in, even though they often implicated people we were supposed to regulate.

The title insurance industry is most interested in enforcement of unfair competition laws, both state law and the federal Real Estate Settlement Procedures Act (RESPA). The industry was tired of being approached by realtors and mortgage brokers who demanded to be compensated in exchange for their business. Often that demanded compensation took the form of realtors or mortgage brokers telling title agents they had to pay for their advertising or hire one of their employees or pay them thousands of dollars for a sign on their car. If they didn't go along, the they would steer their business to the title agent down the street who would willingly pay the extortion.

Paying for real estate business, no matter in what form, is illegal under Indiana law and RESPA. It is illegal both for the payor and the payee. The Title Insurance Division was ready to enforce the law against title agents who knowingly gave the demanded compensation. But what the title insurance industry also needed was enforcement against realtor and mortgage broker demanding the illegal payment. Unfortunately, despite our urging, we were never successful getting the Attorney General's office to enforce unfair competition laws against realtors. In 2007, the Indiana General Assembly passed a bill specifically instructing the Attorney General to enforce RESPA. When told about the new law and the directive to enforce RESPA, AG officials informed us that it was not clear the Attorney General had the authority to enforce RESPA. RESPA though specifically talks about state Attorney Generals enforcing RESPA! I'm not sure how more clear the law could be.

We were not successful getting the Attorney General's office to pursue cases of mortgage fraud either. It might have been a lack of understanding of the complexities of a real estate transaction or perhaps it was simply not a priority. Nonetheless, I always made my very experienced staff available to help out the AG's people and the folks over at the Secretary of State who regulated mortgage brokers While the Secretary of State people were hampered by inexperience and a lack of understanding of real estate transactions and the tricks brokers pull, nonetheless, Todd Rokita's office deserves credit for making investigation of mortgage fraud a priority.

The mishmash of regulatory approaches and the lack of communication and coordination among the agencies will never be solved as long as there are different regulators for different players in the same real estate transaction. Indiana needs to bring all these regulatory efforts together under one roof, a real estate agency that has the experience and knowledge to bring a comprehensive regulatory effort that will be model for other states to follow. Indiana doesn't need to always be a follower. In the area of real estate regulatory reform, Indiana can be a leader.


RBH said...

There will be no change to the current climate until someone realizes that reverse competition in the title insurance industry creates an inexorable conflict of interest. With that conflict exists the root of the problem. Realtors need to go back to being realtors. Banks to lending. Title agents to title, and so on. Recognizing the independence in each of these market segments will help to insulate the real estate transaction from the type of greed and corruption that has contributed to a swelling increase of insurance claim losses, defalcations and indictments all across the country.

Indiana must enforce its anti-kickback rules and put controlled business arrangements on the shelf.

Paul, you had a Herculean task at the IDOI. I admire your courage and your understanding of the problem. We're fighting the same fight in Ohio.


Paul K. Ogden said...

RBH,thank your for your comment. I agree on the importance of independence i the market segments. But as far as title agents independence it is not important; it is vital.

As I always explained, title agents are the umpire in the real estate game. When you have an umpire owned or being paid by one of the players you're inviting trouble. Sure you can try to adopt rules to make sure the title agent calls the game fair, but there is always going to be pressure to favor the team that is giving you the paycheck.

Indiana not only needs to enforce anti-kicback provision, the legislature needs to adopt a set of statutes that deal specifically with title insurance. At the DOI we were stuck with trying to take regular insurance agent statutes and apply those laws to title insurance agents. As you know title insurance and other types of insurance has very little in common. It was like trying to fit a square peg in a round hole.

Yes, we did have a Hercuulean task at the DOI. But I had a great staff and enjoyed the job immensely, when we were allowed to do the job. Nonetheless, I wouldn't use the past tense...to quote a famous General, "I shall return." It's become more and more clear over the past few months, that the handwriting is on the wall. The only question is when.