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You might be surprised to find out that most of their revenue comes from selling title insurance, not from "settlement fees" or other charges. In addition to their other roles, settlement companies are also "title insurance agents"—they sell title insurance policies issued by larger title insurance companies. In fact, 80-85% of the cost of the title insurance policy goes to the settlement company; only the remaining 15-20% goes to the insurance company who issues the policy.

Especially in areas with higher home prices (which mean higher title insurance costs), this is by far their largest source of revenue. So, even if they didn't charge a single other fee, they are still making money.

But they do charge other fees. Sometimes lots of them. That's how you get the settlement fee, title examination fee, doc prep fee, binder prep fee, courier fee, notary fee, attorney's fee, release procurement fee, wire fee, payoff fee, copy and fax fee, tax cert fee, and release recordation fee, to name a few. They're just different ways of saying "additional revenue for the settlement company."

Now, some of the fees charged by settlement companies are just passed through from another company. The cost of the title search or survey (both necessary to buy a house) gets passed on to the companies that perform those services. This isn't revenue to the settlement company—unless they mark it up!

Most people know they need to get title insurance when they buy a home, but aren't sure what it is or why they might need it.

Title insurance ensures that the abstractor and title company have done their jobs correctly in perfecting title to your new property. In fact, the reason so much of the premium goes to the title company is that they do all the work ahead of time to make sure there never is a claim. It also insures against title issues they couldn't know about. In short, title insurance gives you (and your mortgage lender) confidence that you really do own the house you just bought. (For more details on title insurance, visit Wikipedia or the American Land Title Association.)

In most states the cost ("premium") for title insurance is filed with the state. That means that for a given purchase price, all buyers will pay the same amount, no matter which settlement company they use. Settlement companies can't mark up or discount the premiums they charge.

"Enhanced" Coverage

Still, in recent years the title industry did invent a new way to make more money on title insurance. They created "enhanced" coverage. While it does offer some additional protections, the primary "enhancement" is that it costs about 20% more than what is now called "standard" coverage. (Just ask any title attorney if they paid for "enhanced" coverage on their last home purchase.)

Increasingly, settlement companies default to selling enhanced coverage unless buyers specifically ask for the standard policy. This is another way settlement companies make more money.

Between 1980 and 2000, power shifted from real estate brokers to real estate agents. Now, brokers must compete harder to attract and retain their agents. To do so, they have steadily increased the "split"—the portion of the sales commission the agent keeps. As brokers earn less and less on real estate, they have looked for other ways to make money.

Enter the ABA

In an Affiliated Business Arrangement (ABA), the real estate broker and settlement company form a third, jointly-owned company that becomes the title insurance agent. The settlement company still does the same work they would do for any settlement, but the title insurance policy is issued through the jointly-owned company. That company then keeps 80-90% of the premium (see How Settlement Companies Make Money). This revenue is split between the two owners of that company—the real estate broker and the settlement company.

The net result is that the settlement company just gave half of its largest source of revenue back to the real estate broker—a legal kickback. They do it to guarantee a steady stream of business from that broker and their agents. But it also means they have to make up for that lost revenue.

Bring on the Fees

Settlement companies with ABAs have to charge higher fees—settlement fees, title examination fees, doc prep fees, binder prep fees, courier fees, notary fees, attorney's fees—because they're only making half as much on title insurance, while doing just as much work.

Now, none of this would work if the broker's agents weren't asked to send their customers to the settlement company with the ABA. And that's what happens. Unless the buyer specifically objects (and how would they know to object?), the deal often goes to the ABA by default.

While these ABAs are specifically structured to stay within the bounds of the law, they are typically bad for buyers, and increasingly under scrutiny by regulatory agencies and consumer advocates.