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Ohio Department of Insurance Considering New
Controls on Title Insurance Agencies'
"Affiliated Business Arrangements"
Robert H. Katz
Jeffery E. Smith
Bricker & Eckler LLP
September 2006
In recent months the Ohio legislature has dealt with the issue of predatory lending practices.
This resulted in SB 185 that amended several sections of Ohio law including sections of Ohio’s Insurance Laws that regulate the title insurance business.
In response to these legislative changes, as well as the Ohio Department of Insurance’s (ODI) own experiences dealing with title insurance agents and agencies, ODI is considering new controls on “affiliated business arrangements.”
An “affiliated business arrangement” is a relationship where the title agency is seeking to align with other parties or persons who can direct or influence the consumer’s decision where to purchase title insurance and other ancillary real estate closing services. Such arrangements can produce a revenue source for the business affiliate via the ownership interest, that otherwise would not be available to the business affiliate.
Currently, ODI will accept for licensing a business entity that is jointly owned by a title insurance agent and other persons or entities that are in a position to recommend or influence the placement of title insurance activity. A joint ownership creates financial incentives that inure to persons or entities that can influence, direct or control the transaction of title insurance and other ancillary services.
A proposed rule being considered by the ODI will regulate such controlled activity. The basis for the regulation is the statutory prohibition that certain persons or entities are barred from receiving commissions or acting as a title agent. ODI believes that the nature of title insurance is such that the ultimate consumer has little or no input into the title insurance transaction, even though it is the consumer who pays the expenses and premiums of title insurance.
Other parties such as real estate sales personnel, mortgage brokers, lenders and developers look to title insurance as an extra source of revenue they can earn because of their influence over the consumer. The ODI believes these practices lead to conflicts of interest and questionable sales activity. The ODI has seen the federal government aggressively policing these areas via RESPA guidelines. The ODI is looking to align title insurance practices with that of RESPA.
The proposed rules allow the Director of the ODI to deny a title agency license to an entity under the “control” of a “prohibited person.”
Key definitions in the rule are:
“Prohibited person” - This tracks the listing in ORC 3953.21(B). This list is: bank, trust company, bank and trust company, other lending institution, mortgage service company, brokerage, mortgage guaranty company, escrow company, real estate company, including builders and developers or any subsidiaries thereof or any individuals so engaged.
“Control” is very broadly defined and is presumed to exist if a person or entity has a 10% or greater interest in the title insurance agency.
“Family Control” is defined to exist based upon a very broad listing of family relationships.
“Rebuttable presumption”- the ODI reserves the right to challenge any disclaimer of control filed by an otherwise prohibited or family person or entity.
Next, the proposed rule sets forth a series of criteria which defines a sham business relationship. Many of these mirror existing RESPA guidelines. The ODI will challenge an agency’s operations that are a pretext for splitting commissions, when the remuneration is based upon the volume of business referrals. Further, the ODI makes the point that the only permissible method of compensation is only dividends based upon legitimate and proportional ownership interest.
The ODI has addressed the issue of existing agency relationship by a limited grandfathering provision. If any change is made to an agency structure after this proposed rule is effective, then the ODI will expect full compliance with this and other rules.
An important distinction appears to remain in that the prohibited persons listing includes subsidiaries but not affiliates. This tracks the current statute. Those relationships that exist because there is an organizational structure that has the ownership of the title agency with a non-prohibited person or entity, i.e., a non-bank/non-financial institution and the actual persons involved in the title agency are not also engaged as an officer or director of a prohibited person, appear to be a continuing safe harbor. Publicly-owned organizations will have an easier time establishing this safe harbor as compared to a closely-held entrepreneurial organization controlled by one person.
In addition to the proposal described above, the ODI will be considering additional title agency rules that arise out of SB 185 specifically. The topics for this rule or group of rules include:
Setting guidelines including amounts for the required E & O and/or Surety coverage for the title agency.
Providing guidelines and contents of the notice to consumers to be delivered and maintained by a title agent.
Provide guidelines for annual audit of title agents.
Provide guidelines for required record retention responsibility of a title agent.
This is a developing area of the insurance business that will continue to receive increased regulatory attention.
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