New title insurance regulations in New York restrict the marketing practices of title insurance agencies and affect the operation of affiliated businesses.
The New York Department of Financial Services ("DFS") issued two final regulations on October 17, 2017 that follow a DFS investigation into the marketing practices and fees charged by title insurance industry members. The DFS stated that the investigation revealed that members of the title industry spend millions each year in "marketing costs" provided to attorneys, real estate professionals, and mortgage lenders in the form of meals, gifts, entertainment, and vacations and then include those expenses in the calculation of future title insurance rates. The DFS had already implemented emergency regulations to address those practices. The recent final regulations represent permanent guidelines on certain behavior the DFS deems prohibited and permissible under the state's title insurance statutes.
1. Inducements to Title Insurance and Limits on Ancillary Fees
DFS Insurance Regulation 208 identifies a non-exhaustive list of prohibited inducements and permissible marketing expenses. Section 228.2 of the regulation essentially repeats the anti-inducement provision found in Section 6409(d) of New York's title insurance laws, prohibiting a title insurance corporation or title insurance agent from "pay[ing] or giv[ing] any consideration or valuable thing . . . as an inducement for, or as compensation for, any title insurance business, including future title insurance business, and maintaining existing title insurance business, regardless of whether provided as a quid pro quo for specific business." To the extent the "valuable thing" is directed to any person or entity that acts as an agent, representative, attorney, or employee of the owner or mortgagee of real property, the regulation specifically prohibits a title insurance agency or title insurance company from providing any payment, expense, compensation or benefit associated with the following:
- Meals and beverages
- Entertainment, including tickets to shows or sporting events
- Gifts, including cash or gift cards
- Outings, such as vacations, golf trips, shopping trips or trips to country clubs
- Parties and open houses
- Providing assistance with business expenses of another person
- Use of premises, unless for a fair rental fee
- Paying fees or charges of any professional representing an insured in a transaction
- Providing free non-title services
The regulation does not, however, eliminate all marketing opportunities for title agencies. It lists expenses that the DFS deems permissible, and not a prohibited inducement, as long as the expenses are reasonable and customary, not lavish or excessive, paid without regard to insured status, not conditioned on the referral of title business, and offered with no expectation to purchase insurance:
- Advertising or marketing in any publication or media at market rates
- Advertising and promotional items of a de minimis value that include a predominantly affixed logo of a title agent or title corporation
- Promotional or marketing events, including complementary food and beverages, that are open to and attended by the general public
- Continuing legal education events, including complementary food and beverages, that are open to any attorney
- Complementary attendance at an event hosted by a title agency or title company, including food and beverages, as long as title insurance business is discussed, such events do not occur regularly, and at least 25 diverse individuals from unaffiliated, different organizations were invited to attend in person
- Charitable contributions made by check to the organization in the name of the title agency or company
- Political contributions
The New York regulations align with the recent trend among states to explicitly identify those activities regulators deem to constitute prohibited inducements to title insurance. Several states, including California, Colorado, and Florida, have implemented fairly stringent title insurance regulations with the stated aim of protecting consumers from perceived excessive or unfair fees. For instance, California law permits title agencies to provide branded promotional items but limits the cost of such items to $10 or less. Colorado regulations prohibit marketing services agreements, and Florida prohibits a title agency from paying for food, beverages, or room rentals at events for referral sources. In addition, in March 2017, Minnesota regulators took action against a title insurance agency and a real estate agent based on numerous free meals, hotel accommodations, and other perks provided by the title agency to the real estate agent in return for title insurance referrals. Just as title insurance companies and agencies in those states have had to adjust how they promote their businesses to comply with regulatory standards and in response to enforcement actions, companies in New York now have explicit parameters to ensure any marketing and promotional activities do not constitute impermissible inducements.
In addition to guidance on prohibited inducements, Section 228.5 of the new regulation establishes maximum charges for patriot, bankruptcy, municipal, or departmental searches, as well as flat fees for other services, including survey inspection and escrow services. Importantly, the regulations do not force title insurance companies and agencies to charge consumers only the out-of-pocket charges for many of those searches and services. For instance, for both a patriot search and a bankruptcy search, a title insurance corporation or agent may charge no more than 200% of the out-of-pocket cost paid for the search, or 200% of the fair market value of the search as charged by a non-affiliated third party. For a recording fee, a title insurance corporation or agent may not charge more than $25 per document plus the out-of-pocket cost charged by the governmental office. However, for overnight mail charges, fees are limited to out-of-pocket costs, and for escrow services, a title insurance corporation or title insurance agent may not charge more than $50 per escrow.
2. Affiliated Business Arrangements
DFS Insurance Regulation 206 focuses on title insurance agents, affiliated relationships, and required disclosures. In addition to reiterating the prohibition on inducements to title insurance business in affiliate relationships, new Section 35.4 of Regulation 206 imposes specific restrictions on title agencies and title companies with affiliates that refer business to title entities. Specifically, the regulations prohibit a title insurance agent or company from requiring an affiliated person to refer a specified amount of title business to the title entity. In addition, a title insurance agency or company that accepts business from an affiliated person must do the following:
- Function separately and independently from the affiliated person, including being staffed by its own employees
- Engage in all or substantially all of the core title services with respect to the affiliated business. ("Core title services" include evaluating the insurability of title based on the title search; collecting, remitting, or disbursing title insurance premiums, escrows, or other related funds; preparing, amending, marking up, and delivering a title commitment and title insurance policy; and clearing title exceptions)
- Make a good faith effort to obtain, and be open for, title insurance business from all sources and not only business from affiliated persons, including actively competing in the marketplace.
Those requirements are substantially similar to policy statement guidance issued in the 1990s by the U.S. Department of Housing and Urban Development under the Real Estate Settlement Procedures Act ("RESPA"). However, federal regulators have never incorporated the policy statement's standards into RESPA's regulations, and one federal circuit court has deemed the standards to be unconstitutionally vague. Regulation 206 makes the standards actual requirements for operating affiliated title businesses in New York, rather than mere factors for consideration when measuring an affiliated business's compliance with federal law.
Similar to requirements under federal law, Section 35.5 of the final regulations requires "an affiliated person that directly or indirectly refers an applicant for title insurance to a title insurance agent or title insurance corporation" to, "at the time of making the referral," provide certain disclosures pursuant to New York Insurance Law Section 2113(d) "in a separate writing to the applicant" and obtain "written acknowledgement of receipt from the applicant." The disclosures include, but are not limited to:
- Whether the affiliated person has a financial or other beneficial interest in the title insurance agent or corporation and is likely to receive a financial or other benefit as a result of the referral
- That the applicant is not required to use the services of the title insurance agent or corporation to which the applicant is referred and that the applicant may shop around to determine whether the applicant is receiving the best services and the best rate for those services
- That any compensation or other thing of value paid by the title insurance agent or corporation to the affiliated person is based on that person's financial or other beneficial interest in the title insurance agent or corporation, is not related to the amount of title insurance business that person refers to the title insurance agent or corporation, and the payment of such money or other thing of value does not violate New York insurance laws or RESPA
- The amount or value of any compensation or other things of value that the affiliated person expects to receive in connection with the services to be provided by the title insurance agent or corporation to which the applicant is being referred
- Whether the title insurance agent or corporation generates non-affiliated business from more than one source
Certain of those disclosures match required elements of the federal affiliated business disclosure form under RESPA. However, the New York disclosures go beyond what RESPA requires. Both RESPA and the New York regulation require separate affiliated business disclosures, although it is not clear whether the DFS would permit the New York disclosures to be combined with the RESPA affiliated business disclosure form. It also is not clear whether federal regulators would take issue with the New York-required disclosures being added to the federal RESPA form. Thus, if an affiliated person seeks to combine the federal and New York disclosures, it should evaluate whether a combined form would be acceptable under both sets of requirements.
While title insurance agencies and title insurance companies in New York may be used to the DFS's expansive historical interpretation of the anti-inducement statute in Section 6409(d) of New York Insurance Law, those entities may still find themselves adjusting their business practices to comply with the DFS's explicit guidance on inducements. Moreover, as affiliated business arrangements remain a popular business venture between real estate brokers, mortgage lenders, and title entities, the final regulations are a reminder that affiliated businesses must be structured carefully to ensure compliance with New York law.
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