Garamendi to Consider Lifting Ban on Lien Protection Insurance

State Insurance Commissioner John Garamendi has rejected a decision by an administrative law judge who ruled that it was a violation of state statutes for companies to sell lien protection insurance as an alternative to title insurance policies.

Garamendi’s announcement was hailed by the mortgage insurer, Radian Guaranty, which has been trying to sell lien protection insurance to housing lenders for refinancings, second mortgages and equity loans. Radian’s insurance costs about half of what standard title insurance policies do.

The purpose of title insurance policies is to protect lenders and property owners against the financial consequences of a proven defect in the ownership of property, such as liens filed by contractors.

Garamendi said he would decide within four months whether sales of Radian’s policies are legal.

His move was greeted with disappointment by title insurance groups, which insist the Radian policies do not provide as much protection as their policies do. These groups say that Radian does not do as comprehensive a search for potential problems as title firms do.

The state Insurance Department, under Garamendi’s predecessor, Harry Low, ordered Radian to stop its sales on June 19, 2002, and nearly a year has been consumed so far in hearings on the question.

Administrative Law Judge Leonard L. Scott ruled in December that the sales violated existing statutes.

About $1 billion in title insurance is sold in California each year, at prices often of about $750 for a $250,000 loan, although package deals with lenders can reduce the individual price. There are two kinds of basic policies, one protecting lenders from any defects in the ownership of the property, the other protecting the buyer’s equity.

The present dispute involves the lender’s insurance. “The title insurers are fighting us tooth and nail because they recognize we’re selling better coverage at a smaller price,” said Radian’s general counsel, Howard Yaruss, on Wednesday.

But Michelle Sweet, spokeswoman for the American Land Title Assn., representing the standard title insurance companies, responded, “What Radian offers does not involve a full search of the record, nor the due diligence that title companies provide, and their coverage is not as extensive.”

Garamendi, in announcing his second look, said he would not comment for now on the merits of the contrasting arguments because “it is a pending legal case.”

He said he would decide “upon the record and additional evidence and testimony” provided by the Insurance Department staff and the various parties.