New York’s DFS Issues New Regulations Affecting Title Insurance Marketing Practices and Affiliated Entities

New York’s Department of Financial Services (“DFS”) recently issued two regulations regarding title insurance “marketing costs” and affiliated entities that will affect the way title insurance underwriters and agents generate referrals and do business.   

Regulation 206  

The first regulation issued by the DFS—effective as of October 18, 2017—is entitled “Title Insurance: Title Insurance Agents, Affiliated Relationships, and Required Disclosures.” Its prohibitions are modeled after those found in the Real Estate Settlement Procedures Act (“RESPA”) and the Department of Housing and Urban Development’s 1996 Policy Statement on Sham Controlled Business Arrangements. This regulation primarily affects "affiliated persons," which include “an applicant for insurance or a person who acts as an agent, representative, attorney, or employee of the owner, lessee, or mortgagee, or of the prospective owner, lessee, or mortgagee of real property or any interest therein, or the applicant’s or other person’s spouse, when the person or spouse directly or indirectly” owns, controls or is under common control with or controlled by a title insurance underwriter or agent.  

The regulation prohibits title insurance underwriters and agents from paying any compensation, directly or indirectly, for the referral of title insurance business. It further specifies that title insurance underwriters and agents are barred from compensating title insurance applicants, or anyone acting on their behalf, that refer business to the underwriter or agent. However, it carves out exceptions for payments made for bona fide services rendered and/or any return on investment for one who has an ownership interest in the title insurance underwriter or agent. The regulation also requires that title insurance underwriters and agents that accept business from affiliated persons function separately and independently from the affiliated person (including having its own employees), engage in all or substantially all core title services with respect to the referred business, and make a good faith effort to obtain business from sources other than the affiliated persons. In short, the regulation requires that these affiliated persons are legitimate businesses and not just sham corporations created to circumvent kickback prohibitions.  

The regulation further provides that any referral from an affiliated person must include a written disclosure that sets forth, among other things, the affiliated person’s financial interest in the transaction and that the applicant has the right to use other title insurance underwriters or agents. Finally, the rule excepts title insurance agents that represent applicants in another capacity—such as attorneys—from these disclosure requirements so long as they still advise the applicant, in writing, that the applicant is not required to use the person as a title insurance agent.  

Regulation 208  

The second regulation is entitled “Title Insurance Rates, Expenses and Charges” and will take effect December 18, 2017. According to the DFS, “millions of dollars are spent by title insurance corporations and title insurance agents on inducements . . . provided to attorneys and other real estate professionals who order title insurance on behalf of their clients, in the guise of meals, entertainments, gifts, vacations, free CLE classes to select individuals, and the like, in exchange for the attorney or other professional referring title insurance business to that title insurance corporation or title insurance agent.” The DFS further found that these expenses “are then included in the calculation of the rates, resulting in consumers paying higher, excessive rates.” As a result, the regulation makes two prohibitions. First, it states that no title insurance underwriter, title insurance agent, or any other person acting for or on behalf of them, including any employee or independent contractor thereof (collectively, the “Prohibited Parties”) shall “offer or make any rebate, directly or indirectly, or pay or give any consideration or valuable thing, to any person or entity as an inducement 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.” Second, the regulation states that Prohibited Parties shall not:  

[P]rovide or offer to provide to any person, firm or corporation acting as an agent, representative, attorney or employee of the actual or prospective owner, lessee, mortgagee of the real property or any interest therein any payment, expense, compensation or benefit associated with the following:  

(1) Meals and beverages unless otherwise authorized under sub-division (c) of this section;
(2) entertainment, including tickets to sporting events, concerts, shows or artistic performances;
(3) gifts, including cash, gift cards, gift certificates, or other items with a specific monetary face value;
(4) outings, including vacations, holidays, golf, ski, fishing, and other sport outings, gambling trips, shopping trips, or trips to recreational areas, including country clubs; [or]
(5) parties, including cocktail parties and holiday parties, open houses[.]

The regulation further proscribes Prohibited Parties from paying certain business expenses on behalf of others. This regulation nonetheless makes an exception—found in the aforementioned sub-division (c)—for reasonable and customary amounts paid for advertising and marketing, “[p]romotional or marketing events including complementary food and beverages that are open to and attended by the general public,” “[c]ontinuing legal education events including complementary food and beverages that are open to any member of the legal profession,” and “[c]omplementary attendance offered by a title insurance corporation, title insurance agent as a host of a marketing or promotional event, including food and beverages available to all attendees so long as (a) title insurance business is discussed for a substantial portion of the event including a presentation of title insurance products and services, (b) such events are not offered on a regular basis or as a regular occurrence, and (c) at least twenty-five diverse individuals from different organizations not affiliated with the host attend or were, in good faith, invited to attend in person[.]” These expenses must not be “lavish or excessive.”  In that vein, title insurance underwriters and agents must report “all expenditures made for meals and beverages, entertainment, gifts, outings, parties, sponsorships, seminars and continuing education, charitable contributions, and political contributions as separate line items in supplemental expense schedules to the expense schedules submitted annually to the department’s statistical agent.”

Finally, this regulation sets caps on fees that title insurance underwriters and agents can charge consumers for residential closings. Specifically, Section 228.5 of the regulation states that these fees are limited to:

(1) For a Patriot search, 200% of the out-of-pocket cost paid for the search. A title insurance corporation or title insurance agent shall not charge a flat fee for a specified number of names searched. If no out-of-pocket cost is paid for the search, then the charge to the applicant shall be no more than 200% of the fair market value of the search as charged by a non-affiliated third party. If an affiliated third party conducts the search, then the search shall not be billed at more than 200% of the lesser of the amount charged by the affiliated third party and the fair market value of the search as charged by a non-affiliated third party; (2) For a bankruptcy search, 200% of the out-of-pocket cost paid for the search. A title insurance corporation or title insurance agent shall not charge a flat fee for a specified number of names searched. If no out-of-pocket cost is paid for the search, then the charge shall be no more than 200% of the fair market value of the search as charged by a non-affiliated third party. If an affiliated third party conducts the search, then the search shall not be billed at more than 200% of the lesser of the amount charged by the affiliated third party and the fair market value of the search as charged by a non-affiliated third party;
(3) Except as provided in paragraph (4) of this subdivision, for a municipal or departmental search, or any other search that is not included in the premium of the title insurance policy issued, 200% of the out-of-pocket cost. If no out-of-pocket cost is paid for the search, then the charge shall be no more than 200% of the fair market value of the search as charged by a non-affiliated third party in that county. If an affiliated third party conducts the search, then the search shall not be billed at more than 200% of the lesser of the amount charged by the affiliated third party and the fair market value of the search as charged by a non-affiliated third party in that county; (4) For a municipal or departmental search that is conducted and billed by a municipality, 100% of the fair market value of the search as charged by a non-affiliated third party in that county plus the charge by the municipality; (5) For a recording fee or charge, $25 per document plus the out-of-pocket cost charged by the county clerk, county register, or other governmental office; (6) For a survey inspection, $75 plus the out-of-pocket costs charged by the survey inspector. The cost of a survey shall be billed as a pass through; (7) For overnight mail charges, the out-of-pocket cost; and (8) For escrow services, $50 per escrow.

For a copy of these regulations, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com or Clarissa Gomez at cgomez@riker.com.