Articles of Interest
Reporting requirements could escalate with proposed California regulations
The Legal Description - July 15, 2008
Aiming to “fill in the gap” of current state regulations governing rebates, commissions and affiliated business arrangements, California Department of Insurance Commissioner Steve Poizner announced June 17 the release of two new proposed regulations that will up the ante on reporting standards in the state, and considerably tighten the regulations concerning controlled business arrangements.
In a statement regarding the rebate and commission regulations, Poizner said that although current law prohibits inducements and provides for “reasonable” expenditures for entertainment purposes, the statute does not “set explicit standards for reasonable expenditures that do not constitute an inducement. The proposed regulations fill that gap.”
The new regulations also purport to address a process to monitor compliance with the statute that could prove to be expensive.
Concerning AfBAs, the proposed regulations are designed to “enhance competition in the title insurance marketplace by promoting the regulation of title insurance business particularly closed title orders generated from controlled business sources.”
The proposal includes a requirement that a license applicant indicate at the time of application its intent to “limit controlled business to no more than 50 percent of an applicant’s closed title orders.”
Poizner announced the impending regulations at the 2008 California Land Title Association convention in San Diego in April. He has given the industry until mid-August to provide comments on the regulations, and has set aside two full days in August to host hearings to engage an open discussion on the feedback.
ALTA CEO Kurt Pfotenhauer characterized the regulations as “extensive” and said they will require much review and analysis.
“We will work closely with the California Land Title Association (CLTA) to analyze the impact of the proposed changes on the industry and, along with CLTA, expect to submit formal comments,” Pfotenhauer told The Legal Description.
Craig Page, CLTA executive vice president and counsel, echoed Pfotenhauer’s comments concerning the extensiveness of the new regulations and said his organization would submit formal comments through the regulatory process as soon as the analysis was complete.
Spokespersons for the underwriters have also reported that they are conducting internal analyses of the new regulations from financial and operational viewpoints and will be submitting comments prior to the hearings.
In presenting the regulations, the department acknowledged that there could be serious costs incurred to comply.
AfBA compliance expensive
The goal of the department’s proposed AfBA regulations is to “enhance competition in the marketplace by promoting the regulation of title insurance particularly closed title orders generated from controlled business sources.”
The proposed regulations would require an indication of the intent to actively compete at the time of application, including the intent to limit controlled source businesses to no more that 50 percent of an applicant’s closed title orders.
“The new regulations will set forth that failure to establish an intent to actively complete at the time of application shall be grounds for denial of the application for license, certificate of authority or permit,” the department noted in its analysis.
The department is also calling for making specific the reporting requirements for the 90-day annual report by all title licensees and the 30-day report made thereafter by title insurers by clarifying requirements such as submission address, the month and calendar date by which reports must be filed and the requirements for verification by chief executive officers or their designees.
“These new regulations clarify and specify what underwritten title companies and title insurer underwriters need to report to the Department of Insurance by expressing what is required in the content of these reports, together with the quality and character of the verifications, which will enhance the reliability and quality of the data provided, which should enhance the ability of the department to compare reports, records and other information received by the department in its enforcement of the statute.”
The new regulations also propose that records be maintained for seven years. In addition to the added reporting burdens to the industry, the regulations call for a program to disseminate information more widely to the public.
“These new regulations will specify that each licensee shall disclose its controlled business source arrangements in all information generally disseminated to the public in this state, including its Internet Web site and any newspapers or other publications by which the licensee advertises,” the analysis says. “As a result, the purchasers of title insurance services, who often rely upon the recommendations of trusted advisors when purchasing such title services, should not be misled as to the nature of the services they are purchasing.”
The potential cost of implementing the new regulations is estimated by the department at $500,000 for business development and re-engineering, and $750,000 for system development and implementation costs.
“The proposed regulations could force title insurers and underwritten title companies to revamp their business plans related to reliance upon controlled business sources,” the department’s analysis states. “Some may need to develop new strategies for accessing the marketplace or for ownership and other affiliated business arrangements, or may need to re-engineer their business plans to comply with these regulations.”
The proposal clearly raises the bar on current federal RESPA statutes governing AfBAs, but the overview of the new regulations makes it clear that RESPA does not preempt tougher state laws, noting “federal law specifically provides that no provision of state law or regulation that imposes more stringent limitations on AfBAs shall be construed as being inconsistent with RESPA.”
$25 limitation proposed
Following in the footsteps of other states, such as Texas’ regulation P-53, and Washington State’s recently imposed limitations, the new California regulations purport to limit the expenditure of food, beverages, entertainment, educational programs and promotional items to $25 per year, in the aggregate, on behalf of or benefiting an individual.
According to the department, the purpose of the regulation is threefold:
(1) to delineate the standards for reasonable expenditures that are deemed not to constitute an inducement for the placement or referral of title business within the meaning of Insurance Code 12404(d);
(2) to discourage a title insurer, underwritten title company or controlled escrow company from paying, directly or indirectly, any commission, compensation or other consideration to any person as an inducement for the placement or referal of title business; and
(3) to monitor and ensure the prompt and comprehensive reporting of expenditures by title marketing and sales representatives employed by, or independent contractors of, companies made on behalf of and/or benefiting a person, as defined in Insurance Code Section 12404(b)(I).
If expenditures are made, the reporting and record documentation is onerous. The companies are required first to file a Notice of Appointment “appointing each and every title marketing and/or sales representative as the marketing and/or sales representative of the title insurer, underwritten title company and controlled escrow company.”
Before April 1 of each year, the company would be required to file a report, verified by the CEO, evidencing any expenditures made by the marketing or sales representatives. The report must include 11 specific items from names and addresses, to full descriptions of time, place, date and description of the expenditure, plus maintenance of copies of all receipts, invoices, bills, statements or other documentation.
“The rationale for this amendment is to make clear the obligations of licensees to comply with reporting requirements and to discourage illegal rebates,” the department said.
Should an employee violate the $25 expenditure rule, the companies are required to report the expenditure within 30 days, along with the name of the offending party.
Many entities are expected to respond to the proposals, and The Legal Description will provide a complete analysis of both regulations in the coming weeks.
