- July 08, 1996
- All Stewart Title Offices and Agents in Florida
As requested by the Department of HUD, attached is a copy of a letter from the Department dated June 19, 1996, and a copy of the following:
Real Estate Settlement Procedures Act Interpretation
Statement of Enforcement Standards
Title Insurance Practices in Florida
As in the past, questions concerning RESPA matters should be directed to the National Legal Department in Houston.
U.S. Department of Housing and Urban Development
Office of the Assistant Secretary for Houston
Federal Housing Commissioner
Washington, D.C. 20410-8000
June 19, 1996
Mr. Charles Birmingham
Vice President and State Counsel
Stewart Title Guaranty Company
3401 West Cypress Street, Suite 202
Tampa, Florida 33607
Dear Mr. Birmingham:
On September 21, 1995, the Department of Housing and Urban Development sent your company a document entitled "Finding of HUD's Investigation of Florida Title Insurance Companies and Statement of Enforcement Standards." Subsequently, on November 8, 1995, HUD staff met with members of the Florida title insurance industry. Based on those discussions and input from Florida state officials and others, we are enclosing a "Statement of Enforcement Standards: Title Insurance Practices in Florida", which provides additional guidance to the September Statement and notice of HUD's enforcement standards. We request that you carefully review this document and provide copies to your agents.
With the issuance of this Statement the Department has elected to concentrate on post September 1995 compliance, and, therefore, is closing its file on the investigation of the earlier activities of your company. In doing so, the Department is making no judgment on those practices and reserves the right to reinstitute its investigation, if necessary, as part of future enforcement action.
We are continuing to work closely with officials from the State of Florida and will continue to closely monitor compliance with the Real Estate Settlement Procedures Act by the title insurance industry in Florida. While we are hopeful of voluntary compliance by underwriters and agents in Florida, the Department is prepared to take appropriate enforcement action if necessary.
Thank you for your anticipated cooperation.
Nicolas P. Retsinas
Assistant Secretary for Housing
Federal Housing Commissioner
Real Estate Settlement Procedures Act Interpretation
Statement of Enforcement Standards:
Title Insurance Practices in Florida
This Statement deals specifically with issues and practices that HUD reviewed in the State of Florida although its general principles may apply by analogy to other geographic areas.
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. 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. 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 C.F.R. §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 ." 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 giving guidance concerning title agent services under RESPA. These regulations relied in part on the legislative history. Section 3500.14(g)(3) (streamlined cite) [61 Fed. Reg. 13,232 (1996) [to be codified at 24 C.F.R. 3500 et seq.]] 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:
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 valuation 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 covering 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, 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 title insurance agent to receive a separate payment as a title 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 commitment where customary, the clearance of underwriting objections, and the actual issuance of the policy or policies on behalf of the title company". 24 CFR Part 3500, Appendix B, Illustration 4.
In another example, Illustration 10, 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 which 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. 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, in 1993 HUD initiated an investigation of practices by some title insurance companies and some t 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, the Department met with Florida title insurance companies and received input from them on the enforcement standards.
This Statement provides additional guidance to the 1995 standards and, to the extent there are any inconsistencies, supersedes those standards. In issuing this Statement, HUD is not dictating particular practices for title insurance companies and their agents but is setting forth the Department's enforcement position for qualification in Florida for exemptions from Section 8 violations. 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 8(c)(2). Under an 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.
For purposes of this statement, these terms shall mean 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 basis 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 agency contract, whether the agent has errors and omissions insurance or malpractice insurance, whether a contract provision regarding and 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, which 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, where it is customary for title insurance agents to provide such services and where the agent's compensation for such services is customarily part of the payment or retention from the insurer.
3."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 which 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 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 8(c)(1)(B) and to have actually performed (or incurred liability for) core title services where the service is undertaken in whole or in part by the agent's insurance company (or an affiliate of the insurance company). For example, in situations where 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 8(c)(1)(B) exemption. However, HUD acknowledges 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. 24 CFR 3500.14(b). By this, HUD interprets Section 8's requirements to mean that the title insurance company must charge its title insurance agents a fee for title evidence which 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, in cases where 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. 24 CFR 3500.14(g)(2).
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. 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. 24 CFR 3500.14(c).
/s/ Nicolas Retsinas, Assistant
Secretary for Housing, Federal
THIS BULLETIN IS FURNISHED TO INFORM YOU OF CURRENT DEVELOPMENTS. AS A REMINDER, YOU ARE CHARGED WITH KNOWLEDGE OF THE CONTENT ON VIRTUAL UNDERWRITER AS IT EXISTS FROM TIME TO TIME AS IT APPLIES TO YOU, AS WELL AS ANY OTHER INSTRUCTIONS. OUR UNDERWRITING AGREEMENTS DO NOT AUTHORIZE OUR ISSUING AGENTS TO ENGAGE IN SETTLEMENTS OR CLOSINGS ON BEHALF OF STEWART TITLE GUARANTY COMPANY. THIS BULLETIN IS NOT INTENDED TO DIRECT YOUR ESCROW OR SETTLEMENT PRACTICES OR TO CHANGE PROVISIONS OF APPLICABLE UNDERWRITING AGREEMENTS. CONFIDENTIAL, PROPRIETARY, OR NONPUBLIC PERSONAL INFORMATION SHOULD NEVER BE SHARED OR DISSEMINATED EXCEPT AS ALLOWED BY LAW. IF APPLICABLE STATE LAW OR REGULATION IMPOSES ADDITIONAL REQUIREMENTS, YOU SHOULD CONTINUE TO COMPLY WITH THOSE REQUIREMENTS.
- Bulletins Replaced:
- Related Bulletins:
- Underwriting Manual:
- 17.04 Real Estate Settlement Procedures Act (RESPA)
- Exceptions Manual: