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Remember that you can always buy your own title insurance from wherever you want. It's just that it's cheaper when it's simultaneously issued by the same company that is insuring the other side.
It's very common in our market for the seller to choose the title company and the vast majority of buyers go along with it. Not unusual at all.
Collusion of this sort would be a very significant violation of federal law.
I don't know how things are all over the country ... or even what changes have come about in the 20 years since I was doing title searches but this is how it went back then:
Our office got paperwork requesting a title policy/search/examination - so the first thing I did was call around for a "start". A start is simply the title company had already examined the property until the point where it issued the last policy and had guaranteed it then, so will guarantee the title to that point. In a state where property was frequently held for many generations without mortgages or insured title, it could save me days of doing a title search. The catch was that we were obligated to use that title company and I was not required (but usually did) to go further back in history than the date on the "start".
So in a short sale, it doesn't strike me as at all out of normal to use the title company requested by the seller.
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