Waiver of Lender Title Insurance Requirement on Certain Refinances

In an effort to reduce the costs associated with certain mortgage refinances, the White House recently announced a plan to introduce a pilot program whereby lenders may opt out of title insurance for certain mortgage refinances. Under the current system, lenders are required by law to obtain title insurance. The proposed plan is a pilot program to waive that lender’s title insurance requirement on certain “low-risk” refinance transactions. The refinances that qualify for this pilot program are those with loan-to-value ratios of less than 80% representing less risky loans. The program is estimated to save affected borrowers from $500-$1,500 in associated costs. This federal policy, which aims to cut costs for borrowers, has garnered mixed reviews from legal and financial institutions.

Those in support of the program argue that the refinances that qualify for the pilot program have a historically low rate of payout for insurance companies. The White House noted that title insurance premiums are paid out on roughly 3-5% of policies, meaning only 3-5% of the mortgages refinanced reveal prior encumbrances that require the insurance premium to be paid out. The remaining 95-97% of mortgage refinances do not need insurance. In comparison, other types of insurance can have payout numbers up to 70%. This data, according to groups in support of the waiver, reveals that title insurance may be an unnecessary protection in low-risk transactions such as a mortgage refinance.

Those in opposition of the program, notably the American Land and Title Association, argue that the consequences of the program outweigh the savings to borrowers. First, the attempt to save borrowers on closing costs comes at the expense of the lenders. Second, the title insurance industry is a large industry that contributes heavily to economic growth both financially and in terms of job creation. Furthermore, the vast majority of title companies are small businesses, which may result in significant loss to a business as a result of the program.