Articles of Interest
Enforcement provisions challenged in proposed CBA regs
The Legal Description - August 14, 2008
Hearings are underway in California this week, addressing four regulations proposed by the California Department of Insurance Commissioner addressing controlled business arrangements, rebates and commissions, data reporting, and enforcement issues.
Tuesday, the department reviewed comments and heard testimony on the proposed CBA regulations, which the department said 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.”
Comments provided to the department questioned the necessity of the “onerous” reporting requirements and challenged the commissioner’s statutory authority to impose certain penalties. Several entities also asked for a clarification in the rules between a “request” for a title insurance policy and a “closed” title order, so that orders that are eventually cancelled are not part of the reporting requirement.
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.”
“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.”
Reporting requirements 'onerous'
Speaking for many of the companies in the title industry, the California Land Title Association focused on the cost of implementing the proposed regulation, with the department estimated at $1 million.
“As a result of these significant estimate costs, the CLTA respectfully suggests that the department should consider implementing only those provisions (or portions of such provisions) that will provide significant assistance in its regulatory oversight of controlled business activities and are not duplicative or substantially similar to information currently provided to the department in separate filings or reports required by existing statutory law,” said CLTA Executive Vice President and Counsel Craig Page.
Specifically, Page said the proposed regulation would add another layer of reporting by a title insurer for each underwritten title company licensee with whom they have an agreement.
“No significant reason exists for the duplicative process to be required by the title insurance underwriter,” Page said, since the underwritten title company itself would already be reporting such information.
In addition, he noted that the reporting requirements are especially onerous for title insurers as many of the underwritten title companies maintain relationships with more than one underwriter making it difficult for an underwriter to determine which escrow files pertain to the reporting insurer versus other policies issued on behalf of another insurer.
In addition, the proposed regulation would force the title company to provide its underwriter with client lists, both controlled and otherwise.
"This information is clearly proprietary in nature for the underwritten title company and could put it at a competitive disadvantage with its underwriter that may have direct operations competing in the same county,” Page noted.
CLTA also recommended eliminating any reporting burden regarding source of order information from those licensees who do not engage in controlled business activities; removing the reporting requirement for licensees that certify that they maintain no controlled business source arrangements; doing away with the maintenance of source of title business records for those licensees that provide certification that less than 5 percent of their business emanates from CBAs; and reducing the recordkeeping requirement to no more than five years.
Focus on enforcement
Comments submitted to the department on behalf of First American Title Insurance Co. focused primarily on the enforcement provisions of the regulation, opining that the reporting provisions were “generally consistent” with the statutory authorities on which they are based, while the enforcement mechanisms are not.
“Four of the five enforcement provisions seek to impose penalties that are not authorized by the legislature in this context, and which improperly draw from statutory sources entirely unrelated to controlled business source activity—including one (Ins. Code Section 791.19) that is expressly inapplicable to title insurers,” said David Cheit, attorney with Sevens & O’Connell LLP writing on behalf of First American.
Specifically, Cheit notes that Ins. Code Division 2, Part 6, Chapter 1, Article 4.5 provides that the failure to comply with regulations is grounds for denial of license, revocation of license or “other disciplinary action determined by the commissioner in accordance with procedures prescribed by law.”
“The phrase ‘prescribed by law’ means that this provision authorized the commissioner to enforce Article 4.5 using only the disciplinary procedures already made applicable by statute, and does not authorize the commissioner to create new enforcement powers by regulations, as this proposal improperly seeks to do.”
Cheit said that the proposed regulations purport to authorize an order to cease and desist, but in doing so, “impermissibly draw on a separate statutory enforcement process that has nothing to do with controlled business source reporting or measuring competitive behavior of regulated entities.”
According to Cheit, there is no indication that the legislature intended its enforcement mechanisms from one context to be exported to the completely different context of CBA reporting.
“Accordingly, while subdivision (A) is generally consistent with the commissioner’s authority to the extent that it identifies the denial, suspension or revocation of a license as possible consequences for violations of the regulations, it exceeds the commissioner’s authority to the extend that it seeks to import and expand the ‘Stop Order’ powers that the legislature enacted for use in cases of threatened insolvency.”
First American called first for the deletion of Subdivision (B) which purports to link the penalties relating to rebates and commissions in Article 6, to the controlled business context of Article 4.5.
“However, the referenced penalty has only been authorized by the legislature for use in enforcing Article 6,” Cheit argued. “Any reference to that penalty in regulations enforcing Article 4.5 is redundant at best and invalid at worst.”
First American also called for the deletion of Subdivision (C), which creates a civil penalty it says is not authorized by the legislature and Subdivision (D), which creates another form of penalty that is linked the cease and desist orders enabled by Subdivision (A), and which the company believes is equally invalid.
