[Federal Register Volume 61, Number 183 (Thursday, September 19, 1996)]
[Rules and Regulations]
[Pages 49398-49400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24069]
[[Page 49397]]
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Part IV
Department of Housing and Urban Development
_______________________________________________________________________
24 CFR Part 3500
Real Estate Statement Procedures Act; Statement of Enforcement
Standards: Title Insurance Practices in Florida; Final Rule
Federal Register / Vol. 61, No. 183 / Thursday, September 19, 1996 /
Rules and Regulations
[[Page 49398]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 3500
[Docket No. FR-4114-N-01]
Office of the Assistant Secretary for Housing-Federal Housing
Commissioner; Real Estate Settlement Procedures Act; Statement of
Enforcement Standards: Title Insurance Practices in Florida; RESPA
Statement of Policy 1996-4
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Statement of policy.
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SUMMARY: This Statement advises the public of the enforcement standards
HUD applies to determine whether certain practices involving title
insurance companies and title insurance agents comply with the Real
Estate Settlement Procedures Act (RESPA). Although this Statement
specifically addresses issues and practices that HUD reviewed in the
State of Florida, its general principles may apply by analogy to other
geographic and settlement service areas.
This Statement discusses HUD's interpretation of two exceptions:
Section 8(c)(1)(B) involving ``payments of a fee by a title company to
its duly appointed agent for services actually performed in the
issuance of a policy of title insurance;'' and Section 8(c)(2)
involving the ``payment to any person of a bona fide salary or
compensation or other payment for goods or facilities actually
furnished or for services actually performed.'' HUD is publishing this
Statement to inform the public of its interpretation of the law.
EFFECTIVE DATE: September 19, 1996.
FOR FURTHER INFORMATION CONTACT: David R. Williamson, Director, Office
of Consumer and Regulatory Affairs, Room 5241, telephone: (202) 708-
4560. For legal enforcement questions, contact Peter S. Race, Assistant
General Counsel, Program Compliance Division, Room 9253, telephone:
(202) 708-4184. (These are not toll free numbers.) For hearing and
speech-impaired persons, this number may be accessed via TTY (text
telephone) by calling the Federal Information Relay Service at 1-800-
877-8339. (This number is toll free.) The address for the above listed
persons is: Department of Housing and Urban Development, 451 Seventh
Street, SW, Washington, DC 20410.
SUPPLEMENTARY INFORMATION:
General Background
Section 8(a) of the Real Estate Settlement Procedures Act (RESPA)
prohibits any person from giving or accepting any fee, kickback, or
thing of value for the referral of settlement service business
involving a federally related mortgage loan. (See 12 U.S.C. 2607(a).)
Section 8(b) of RESPA prohibits any person from giving or accepting any
portion, split or percentage of any charge made or received for the
rendering of a settlement service other than for services actually
performed. (See 12 U.S.C. 2607(b).) Two exemptions to section 8's
prohibitions against compensated referrals in RESPA covered
transactions involve payments for title insurance services actually
performed. Section 8(c)(1)(B) specifically exempts payments of a fee
``by a title company to its duly appointed agent for services actually
performed in the issuance of a policy of title insurance.'' A more
general provision, section 8(c)(2), exempts the ``payment to any person
of a bona fide salary or compensation or other payment for goods or
facilities actually furnished or for services actually performed.''
(See also 24 CFR 3500.14(g)(1).)
In enacting RESPA, Congress stated its intent that section 8 of
RESPA did not prohibit payments by title insurance companies for
``goods furnished or services actually rendered, so long as the payment
bears a reasonable relationship to the value of the goods or services
received by the person or company making the payment.'' (H. Rep. No.
1177, 93d Cong., 2nd Sess. 1974 at 7-8 (hereafter ``the Report'').) The
Report stated that ``to the extent the payment is in excess of the
reasonable value of the goods provided or services performed, the
excess may be considered a kickback or referral fee proscribed by
Section [8].'' The legislative history of section 8(c)(1)(B) also noted
that the ``value of the referral itself is not to be taken into account
in determining whether the payment is reasonable.'' (Report at 8.) The
Report specifically elaborated on the exemption for payments made by
title insurance companies to duly appointed agents for services
actually performed in the issuance of a policy of title insurance and
stated:
Such agents, who in many areas of the country may also be
attorneys, typically perform substantial services for and on behalf
of a title insurance company. These services may include a title
search, an evaluation of the title search to determine the
insurability of the title (title examination), the actual issuance
of the policy on behalf of the title insurance company, and the
maintenance of records relating to the policy and policy-holder. In
essence, the agent does all of the work that a branch office of the
title insurance company would otherwise have to perform.
Report at 8.
On November 2, 1992, HUD issued regulations that, among other
things, gave guidance concerning title agent services under RESPA.
These regulations relied in part on the legislative history. Section
3500.14(g)(3)\1\ of the regulations provides an example of the type of
substantial or ``core'' title insurance agent services necessary for an
attorney to receive multiple fees in a RESPA covered transaction. It
states:
\1\ All citations in this Statement of Policy refer to recently
streamlined regulations published on March 26, 1996 (61 FR 13,232),
in the Federal Register (to be codified at 24 C.F.R. 3500 et seq.).
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For example, for an attorney of the buyer or seller to receive
compensation as a title agent, the attorney must perform core title
agent services (for which liability arises) separate from attorney
services, including the evaluation of the title search to determine
the insurability of the title, the clearance of underwriting
objections, the actual issuance of the policy or policies on behalf
of the title insurance company, and, where customary, the issuance
of the title commitment, and the conducting of the title search and
closing.
Appendix B to the regulations provides additional guidance on the
meaning and coverage of RESPA. Illustration 4 provides a factual
situation in which an attorney represented a client as an attorney and
as a title insurance agent and received fees for each role in a
residential real estate transaction. In its comments on Illustration 4,
HUD stated that the attorney was double billing his clients because the
work he performed as a ``title agent'' was work he was already
performing for his clients as an attorney. The title insurance company
was actually performing the title agent work and providing the attorney
with an opportunity to collect a fee as a title agent in exchange for
referrals of title insurance business. HUD also stated that for the
attorney to receive a separate payment as a title insurance agent, the
attorney must ``perform necessary core title work and may not contract
out the work.''
To qualify for a section 8(c)(1)(B) exemption, the attorney title
insurance agent must ``provide his client with core title agent
services for which he assumes liability, and which includes, at a
minimum, the evaluation of the title search to determine insurability
of the title, and the issuance of a title
[[Page 49399]]
commitment where customary, the clearance of underwriting objections,
and the actual issuance of the policy or policies on behalf of the
title company.'' (See 24 CFR part 3500, Appendix B, Illustration 4.)
In another example, Illustration 10 of Appendix B, a real estate
broker refers title insurance business to its own affiliate title
company. This company, in turn, refers or contracts out all of its
business to another title company that performs all the title work and
splits its fees with the affiliate. HUD stated that because the
affiliate title company provided no substantive services for its
portion of the fee, the arrangement between the two title companies
would be in violation of section 8 of RESPA. This illustration showed
that the controlled business arrangement exemption did not extend to
``shell'' entities that did not perform substantive services for the
fees it collected from the transaction. (See 24 CFR part 3500, Appendix
B, Illustration 10.)
Section 19(a) of RESPA authorizes the Secretary to interpret RESPA
to achieve the purposes of the Act. Section 19(c) of RESPA authorizes
HUD to investigate possible violations of RESPA. During the course of
its RESPA investigations, HUD applies the facts revealed by the
investigation to the statute and regulations in determining whether a
violation exists.
After receiving complaints of possible RESPA violations, HUD, in
1993, initiated an investigation of practices by some title insurance
companies and some title insurance agents in the State of Florida. On
September 21, 1995, HUD sent a letter and document entitled ``Findings
of HUD's Investigation of Florida Title Insurance Companies and
Statement of Enforcement Standards'' to certain title insurance
companies in Florida. In November 1995, HUD met with Florida title
insurance companies and received input from them on the enforcement
standards. On June 19, 1996, HUD sent additional guidance to the
particular companies that received the September 21, 1995 letter.
Statement of Policy--1996-4
To give guidance to interested members of the public on the
application of RESPA and its implementing regulations to these issues,
the Secretary, pursuant to section 19(a) of RESPA and 24 CFR
3500.4(a)(1)(ii), hereby issues the following Statement of Policy.\2\
In issuing this Statement, HUD is not dictating particular practices
for title insurance companies and their agents but is setting forth
HUD's enforcement position for qualification in Florida for exemptions
from section 8 violations.
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\2\ This Statement provides additional guidance to the 1995
standards issued to the particular companies and, to the extent
there are any inconsistencies, supersedes those standards.
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Generally, it is beneficial for title insurance companies and their
agents to qualify under the section 8(c)(1)(B) exemption since HUD does
not normally scrutinize the payments as long as they are ``for services
actually performed in the issuance of a policy of title insurance.''
(HUD will, however, continue to examine payments to agents that are
merely for the referral of business such as gifts or trips based on the
volume of business referred.) If the practices of a title insurance
company or its agent do not qualify under the section 8(c)(1)(B)
exemption, the company and the agent may still qualify under section
8(c)(2). Under a section 8(c)(2) standard, HUD will examine the amount
of the payments to or retentions by the title insurance agent to see if
they are reasonably related to services actually performed by the
agent.
A. Definitions
For purposes of this statement, the terms listed below are defined
as follows:
1. ``Title Insurance Agent'' means a person who has entered into an
agreement with a title insurance company to act as an agent in
connection with the issuance of title insurance policies, and includes
title agents, title agencies, attorneys, and law firms.
2. ``Core title services'' are those basic services that a title
insurance agent must actually perform for the payments from or
retention of the title insurance premium to qualify for RESPA's section
8(c)(1)(B) exemption for ``payments by a title company to its duly
appointed agent for services actually performed in the issuance of a
policy of title insurance.''
In performing core title services, the title insurance agent must
be liable to his/her title insurance company for any negligence in
performing the services. In considering liability, HUD will examine the
following type of indicia: the provisions of the agency contract,
whether the agent has errors and omissions insurance or malpractice
insurance, whether a contract provision regarding an agent's liability
for a loss is ever enforced, whether an agent is financially viable to
pay a claim, and other factors the Secretary may consider relevant.
``Core title services'' mean the following in Florida:
a. The examination and evaluation, based on relevant law and title
insurance underwriting principles and guidelines, of the title evidence
(as defined below) to determine the insurability of the title being
examined, and what items to include and/or exclude in any title
commitment and policy to be issued.
b. The preparation and issuance of the title commitment, or other
document, that discloses the status of the title as it is proposed to
be insured, identifies the conditions that must be met before the
policy will be issued, and obligates the insurer to issue a policy of
title insurance if such conditions are met.
c. The clearance of underwriting objections and the taking of those
steps that are needed to satisfy any conditions to the issuance of the
policies.
d. The preparation and issuance of the policy or policies of title
insurance.
e. The handling of the closing or settlement, when it is customary
for title insurance agents to provide such services and when the
agent's compensation for such services is customarily part of the
payment or retention from the insurer.
3. A ``pro forma commitment'' is a document that contains a
determination of the insurability of the title upon which a title
insurance commitment or policy may be based and that contains
essentially the information stated in Schedule A and B of a title
insurance commitment (and may legally constitute a commitment when
countersigned by an authorized representative). A pro forma commitment
is a document that contains determinations or conclusions that are the
product of legal or underwriting judgment regarding the operation or
effect of the various documents or instruments or how they affect the
title, or what matters constitute defects in title, or how the defects
can be removed, or instructions concerning what items to include and/or
to exclude in any title commitment or policy to be issued on behalf of
the underwriter.
4. ``Title evidence'' means a written or computer generated
document that identifies and either describes or compiles those
documents, records, judgments, liens, and other information from the
public records relevant to the history and current condition of the
title to be insured. Title evidence does not, however, include a pro
forma commitment.
B. Qualification Under Section 8(c)(1)(B)
To qualify for an exemption as an agent in Florida under section
8(c)(1)(B), the payments to (or retentions by) a title insurance agent
must be ``for services actually performed in the issuance of a
[[Page 49400]]
policy of title insurance.'' HUD interprets this language as requiring
a title insurance agent to perform core title services, as defined
above, in order for title insurance company payments to the title
insurance agent to qualify for this exemption. These ``core title
services'' describe the type of services that Congress stated would
come within this exemption, that is, the type of work that a branch
office of the title insurance company would otherwise have to perform
in the issuance of a title insurance policy. Thus, as applied to
practices in Florida, for a title insurance agent to be able to retain
the maximum agency portion of the risk premium payment allowed under
Florida law, the title insurance agent must actually perform ``core
title services,'' and generally may not contract out those services.
HUD recognizes, however, that there may be a legitimate temporary
need (such as surges in business) for the title insurance agent to
contract out some part of the core title services to an independent
third party, not affiliated with the title insurance company. In such
cases, payments to these agents still qualify under section 8(c)(1)(B).
However, there is no qualification for the exemption if such
contracting out of core title services is done on a regular basis.
HUD also will not consider a title insurance agent to be an agent
for purposes of section 8(c)(1)(B) and to have actually performed (or
incurred liability for) core title services when the service is
undertaken in whole or in part by the agent's insurance company (or an
affiliate of the insurance company). For example, if the title
insurance company provides its title insurance agent with a pro forma
commitment, typing, or other document preparation services, the title
insurance agent is not ``actually performing'' these services. As such,
the title insurance agent would not be providing ``core title
services'' for the payments to come within the section 8(c)(1)(B)
exemption. HUD acknowledges, however, that title insurance companies
often provide their own title insurance agents with general advice and
assistance on a particular unusual question or concern on an individual
case by case basis, and this type of assistance would not affect the
scrutiny of the payments to the title insurance agent under this
exemption.
Within the section 8(c)(1)(B) context, moreover, title insurance
companies may provide their title insurance agents with title evidence,
as defined above. HUD acknowledges that title insurance companies have
invested in title plants and may sell title evidence to their title
insurance agents. In doing so, however, title insurance companies
should not charge fees that reflect a payment for the referral of the
title insurance order. (See 24 CFR 3500.14(b).) By this, HUD interprets
the section 8 requirements to mean that the title insurance company
must charge its title insurance agents a fee for title evidence that is
not a disguised referral fee given in exchange for the referral of
title business. It is evidence of a thing of value given for referrals
if the title insurance company is not charging fees for title evidence
that cover its costs of producing the title evidence or if the title
insurance company charges less for title evidence to be used for a
commitment or policy issued on behalf of the title insurance company
than on another company's behalf.
In performing core title services, a title insurance agent is
likely to use employees. If a title insurance company supplies
employees or has control over or directs the work of employees of the
title insurance agent, then the title insurance agent is not actually
performing the core title services. In such a case, HUD will review the
services provided by the insurance company to the agent for sufficiency
under section 8(c)(2).
C. Qualification Under Section 8(c)(2)
If a title insurance agent does not perform ``core title services''
to qualify for the exemption under section 8(c)(1)(B) of RESPA, that
agent may receive payment for services actually performed pursuant to
section 8(c)(2), so long as the payment is reasonably commensurate with
the reduced level of responsibilities assumed by the agent.
With respect to practices under Florida's title insurance statute,
it is HUD's enforcement position that it is difficult to justify the
payment (or retention) of a significant portion of the title insurance
risk premium to a title insurance agent who fails to perform and assume
responsibility for the title examination function. Likewise, if the
title insurance company provides other services, or carries out the
title insurance agent functions, or provides or controls ``part time
examiners,'' HUD may scrutinize the net level of retention realized by
the agent to determine whether the agent's compensation from the
insurer reflects a meaningful reduction from the compensation generally
paid to agents in the area who perform all core title services. The
level of such reduction in compensation must be reasonably commensurate
with the reduced level of responsibilities assumed by such person for
the services provided and the underwriting risks taken. The value of a
referral, however, is not to be taken into account in determining
whether the payment bears a reasonable relationship to the services
rendered. (See 24 CFR 3500.14(g)(2).)
D. Unearned Fees
Under the RESPA regulations, when a person in a position to refer
title insurance business, such as an attorney, real estate broker or
agent, mortgage lender, or developer or builder, receives a payment for
providing title insurance agent services, such payment must be for
services that are actual, necessary, and distinct from the primary
services provided by such person. (See 24 CFR 3500.14(g)(3).) Thus, if
an attorney is representing a consumer in a home purchase and also
acting as a title insurance agent, he or she may not receive duplicate
fees for the same work.
If a title insurance agent obtains third party services, such as
the provision of title evidence, and does not add any additional value
to the service provided by the third party, but increases the charge to
the consumer for that service and retains the difference, then HUD
views the amount that the person retains as an unearned fee in
violation of section 8(b) of RESPA. (See 24 CFR 3500.14(c).)
Dated: September 6, 1996.
Nicolas P. Retsinas,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 96-24069 Filed 9-18-96; 8:45 am]
BILLING CODE 4210-27-P
