Already overwhelmed by a decade of regulator scrutiny and a complex new state licensing law, title insurance producers in New York have a slew of new regulations to grapple with. Yesterday, Governor Andrew M. Cuomo announced a proposal that aims to slash title insurance rates by limiting ancillary charges and restricting the expenditures that title companies can give to their real estate partners.
The proposed regulation is the result of a New York Department of Financial Services (NYDFS) investigation that Cuomo’s office said “uncovered … significantly inflating title insurance premiums for consumers.”
Details about this investigation have not yet been made public. So far, the department has only said that the probe “revealed that some title insurers and title insurance agents mark up these searches three and four times their cost and otherwise charge consumers additional excessive fees,” and that “expenditures are routinely made by title insurance corporations and agents in an effort to secure title insurance business. These improper expenditures have been included in the calculation of title insurance rates and have saddled New York consumers with excessive title insurance premiums for years.”
“Our investigation uncovered that title insurance companies paid for lavish meals and entertainment on the dime of consumers, which inflated premiums. These new reforms will help significantly reduce costs for homeowners by trimming the fat and making sure that New Yorkers get what they pay for in the title insurance industry,” said Benjamin M. Lawsky, superintendent of the NYDFS, in a statement.
The NYDFS did not immediately respond to a request for more information on the scope and specific conclusions of the investigation.
Jeffrey A. Arouh, a prominent RESPA attorney and of counsel for New York-based law McLaughlin & Stern LLP, said he hopes the lawmakers will “provide some factual basis for this — but then again, it’s the government; you never know what’s coming next.
“I think it’s terrific that our governor and the superintendent of the Department of Financial Services are determined to make a big splash by putting out this regulation,” Arouh said, but added, “I wouldn’t really characterize this as a big deal.”
That’s because the proposed regulation isn’t really substantively different from what is already prescribed by Section 6409 D of New York’s Insurance Law, which provides for the filing of policy forms and rates, classification of risks and prohibitions on commissions and rebates, Arouh said.
“They have taken steps to identify with greater clarity what they mean by no inducements, and I’m sure it is generating some nice publicity for Gov. Cuomo and Mr. Lawsky,” Arouh said. “I don’t know that it deserves very much more than an acknowledgement than they are providing more clarity about what is meant in the existing statutory regime.”
Cuomo’s proposed regulation has two main components. First, the regulation will cap many ancillary charges; for example, companies may not charge more than 150 percent of their out-of-pocket costs for PATRIOT Act or bankruptcy searches; more than $50 for escrow fees; and not a penny more than actual costs for overnight mail service.
Doing this may reduce title insurance premiums by up to 20 percent for purchase transactions, and up to 60 percent for refinancing transactions, Cuomo said.
Arouh said until details of the investigation are made public, “I don’t know if this regulation will affect rates by the amount they are suggesting.
“I don’t know how they got to these numbers,” he said. “Yes, the elimination of markups will have some impact on the cost to the consumer, but I don’t know if it will be quite as much as I’m hearing them say.”
Still, Arouh said he regards the limits placed on ancillary charges as “a good thing.”
“What they are doing is taking away from the title agent and the title company the ability to make a profit on third-party charges or searches and make this more consistent with what they should be charging,” he said. “That’s a place where the title agent or company can include a markup of a significant amount, and that can affect title charges. I don’t think they should be making a profit on that, so I view that requirement as fair.”
Arouh noted that the issue of closing costs markups will already be affected by the Consumer Financial Protection Bureau’s new TILA-RESPA Integrated Disclosures rule, or TRID, which takes effect Aug. 1.
“Under the old system, without this regulation, they might have said to the consumer, ‘here’s an estimate of what you can expect your closing costs to be,’ then at closing, said, ‘here is what you are actually going to have to pony up in order to close,'” Arouh said.
“Under the new regime, the Closing Disclosure form must match the Loan Estimate, and that is going to make it harder for title agents to kick up the charges so much because they will be required to be consistent in order to maintain tolerances. That’s a good thing, although I’m not sure what the impact will be — but I’m sure they have thought this out.”
Under the second prong of the proposed regulation, a title insurance corporation, agent or other employee cannot offer or make, directly or indirectly, any rebate, payment or “any consideration or valuable thing” as an inducement for title insurance business.
Leaving no room for misunderstanding or lack of clarification, the regulation includes a long list of examples of such inducements, including meals and beverages; entertainment, including tickets to sporting events, concerts, shows or artistic performances; gifts, including cash, gift cards, gift certificates or other items with a specific monetary face value; travel and outings, including vacations, holidays, sports outings, gambling trips, shopping trips or trips to recreational areas, including country clubs; parties, including cocktail parties and holiday parties; open houses; continuing legal education or continuing education for which credits are provided for a reduced fee or no fee; sponsorships; advertising or marketing through any advertising or marketing medium; furniture, office supplies, telephones, telecommunications computers and other electronic devices and business equipment; automobiles, including leasing, renting, operating, or maintaining any of such items; use of a premises, unless a fair rental fee is charged that is equal to the market value in the premises’ geographical area; paying the fees or charges of any professional representing an insured, such as an attorney, engineer, appraiser or surveyor, or paying rent or all or any part of the salary or other compensation of any employee or officer of any current or prospective customer; charitable contributions; and political contributions.
Arouh reiterated that these activities are already prohibited by New York’s existing insurance law — and certainly by RESPA. But he said one aspect of the proposal could create problems.
“One part I was really kind of disheartened by was the requirement that title insurance corporations and agents must prohibit its title closers from accepting gratuities or additional payments,” Arouh said. “In New York, it has been the custom for as long as I have been practicing to give a title closer a few extra bucks. They are not highly compensated people. They go out of their way to get deals done, and do filings that sometimes lawyers have to do, and this is where closers can make a few extra bucks — but that is not going to come from consumers.”
The proposed regulation mandates that at least once every three years, title insurance producers file their rates to demonstrate that their rates comply with the law. In addition, all corporations must submit annual revenue and detailed expense schedules by May 30 each year.
The proposed regulations are subject to public comment.
“New Yorkers should not have to foot the bill for outrageous or improper expenses made by title companies just to refinance or close on their home,” Cuomo said in a statement. “Our administration will not stand for that kind of abuse in the title insurance industry, and these new regulations will help ensure that New Yorkers are protected from unfair charges and get the most bang for their buck.”
Although some may consider title insurance to be a somewhat obscure line of business, lawmakers in New York have taken a particular interest in the title insurance industry for more than a decade.
Around 2005, when the nation’s top title insurers settled charges of inducement and price-fixing practices for millions of dollars in several states, former Attorney General Eliot Spitzer led the charge to reduce title insurance premium rates and crack down on title companies allegedly engaging in illegal rebate and referral agreements with real estate agents, mortgage brokers, attorneys, real estate developers and others.
As a result, Spitzer fined Fidelity National Financial Group and First American Title Insurance Co. $2 million each for allegedly giving real estate developers free or discounted title insurance in other states in exchange for sending New York business their way.
In addition, the NYDFS approved a 15-percent rate reduction for the insurers with the largest market share in New York, including Fidelity, First American, LandAmerica Financial Group and Stewart Title Guaranty Co. LandAmerica filed for bankruptcy in 2008, and Fidelity acquired several of its largest units.
The companies targeted by Spitzer always denied any wrongdoing, and actually publicly called for increased government oversight of the New York title industry to level the playing field and eradicate the the bad actors who they felt were giving the entire industry a bad name.
But they didn’t get their wish until last year, when — for the first time in the state’s history — New York enacted licensing requirements for title insurance agents. Chapter 57, which was actually a portion of Cuomo’s budget bill, requires agents to meet qualification standards and undergo regular training. The requirements were signed into law on March 31, 2014, and took effect a few months later in September.
Around that time, the NYDFS supplemented the new law with an emergency regulation rule promulgating new requirements for title insurance providers involved in affiliated business arrangements (ABAs). Known as Insurance Regulation 206, the emergency rule provides that “A title insurance corporation shall not accept title insurance business referred directly or indirectly from an affiliated person unless the title insurance corporation has significant and multiple sources of business. A title insurance agent shall not accept title insurance business referred directly or indirectly from an affiliated person unless the title insurance agent has significant and multiple sources of business.”
Many title insurance producers expressed frustration at the somewhat vague, undefined provision of “multiple sources of business,” as they are unsure of exactly how much non-affiliated business they are required to have. Some have also argued that during the comment period for the title insurance licensing law, the state legislature rejected an express limit on the amount of affiliate business for title companies.
Nevertheless, the state moved ahead with these efforts, with the NYDFS remarking that the “lack of state regulation over title insurance agents made for an alarming weakness in New York law, and specifically New York law addressing title insurance rebating and inducement. Over the years, this gap in New York law and lack of regulatory oversight allowed these actors to freely engage in theft, abuse, charging of excessive fees and illegal rebates and inducements to the detriment of consumers, with little fear of prosecution. These abuses cost consumers of the state millions of dollars.”
The affected title insurance underwriters have not yet commented on the proposed regulation. The New York State Land Title Association (NYSLTA) issued a brief statement: “The New York State Land Title Association has been working cooperatively with the New York State Department of Financial Services to ensure that consumers are protected from unscrupulous actions, receive the benefits of greater transparency and work within an appropriate regulatory structure. In 2014, the Association provided important feedback on legislation establishing the licensing of title agents, and intend to provide valuable input on today’s proposed regulations.”
Reaction in the New York title industry will likely vary, Arouh said, depending on a company’s size and with whom it does business.
“In New York, because we didn’t have licensing before, you have a lot of companies with major direct operations and big agencies, and you also have a lot of small agencies,” he said. “I don’t think there is going to be a uniform reaction to this.”
The American Land Title Association (ALTA), the national trade group encompassing NYSLTA and all other states, said it is looking forward to learning more about the proposed regulation and encouraged everyone in the title insurance industry to submit public comment.
“We’ve seen reports that the New York State Department of Financial Services found that kickbacks have occurred in the real estate industry,” said Michelle Korsmo, ALTA’s CEO. “Those participating individuals should be held accountable to the full extent of the law for the sake of consumers and the real estate industry professionals who work to remain compliant with state and federal regulations.”
According to ALTA, the New York title insurance industry employs more than 9,600 professionals — ranging from administrative employees to real estate attorneys — and pays $283 million annually in wages.