Licensing Title Agents

In plain vanilla form, here is how a controlled business works. A title agent or underwriter is approached by a mortgage broker. They form an LLC, which becomes an agent of an underwriter. The new LLC can therefore insure title and issue title policies. The business for the LLC, that is, the transactions that it can insure, comes from the customers that the mortgage broker brings in. To obtain a title examination or abstract of title, and to produce a title commitment, the LLC enters into a contract or production agreement with the title agent, but the title commitment, policy and closing are all issued or conducted by the LLC. These arrangements horrify the government because they seem to provide a way to legitimately 'kick back' or split the title premium. In other words, the mortgage broker in our example (it could be a realtor, developer or attorney) could receive a part of the title premium for doing no work other than directing their customer's business to the LLC that they jointly own with the title company (agent or underwriter). HUD and the State Insurance Department have issue regulations that govern the formation and operations of controlled businesses. For example, the LLCs have to be real businesses with capital invested, offices, employees, and sales people to solicit business from other customers. The members of the LLC are also required to disclose their interest in the business to the consumer.

Fears and Concerns

Understanding the controlled business is essential to understanding the fears and concerns that the prospect of title agency licensing has caused.

The non-attorney title agent, that is an individual or company whose principal is not an attorney but who is an agent for a title underwriter, has a few concerns regarding licensing. First, the non-attorney agent does not want to be put at a disadvantage by the attorney title agent. The non-attorney agent wants the attorney title agent to have to meet the same regulatory requirements to obtain a license as the non-attorney agent ' the same examinations, the same proof of knowledge experience, and good character, and the same regulatory environment especially including the loss of a license by the same regulators in the event of a regulatory violation. Second, the non-attorney title agents want to eliminate controlled businesses, especially combinations of other title agents and underwriters, because controlled businesses are anti-competitive and take business off the table and food out of the mouths of their children. Most of all, non-attorney agents do not want agency licensing to be used by attorney agents to 'rid' the business of the non-attorney agent by creating a regulatory environment that would favor amending Sections 484 and 495 of the Judiciary Law to remove the exclusion for title insurance from the provisions of the law specifying that real estate is the province of licensed attorneys only.

Attorney title agents have a different set of concerns. First, they do not to be regulated by the Insurance Department. They want regulation to remain where it is, with the grievance committees in various judicial departments. Attorney agents and prospective attorney agents also want to be exempted to some degree from examination, certification and licensing requirements. Many feel that having a law degree and being subjected to the loss of the license to practice law through a Grievance Procedure overseen by the judicial departments offers adequate protection to the public against their malfeasance. Finally, the attorney title agent wants to be sure that the licensing bill does not so define and restrict controlled business such that attorneys would be prohibited from doing title work for their own clients. After all, the attorneys take the position that who is better to determine the quality of the title than the client's own attorney? The non-attorney agents, on the other hand, cite Ethics Opinions 595 and 626 (which do not have the force of law), which state that a law firm may not issue title policies for its own clients. As one can see, the non-attorney title agent and the attorney title agent are not exactly on the same page. They are not even reading the same book.

Controlled business owners are not happy with the prospect of being put out of business by the agency licensing bill. They contend that they provide the consumer with one place where the consumer can obtain every service necessary to complete a real estate transaction, from viewing and selecting a property, to obtaining a mortgage, to obtaining title insurance. Controlled businesses contend that they can make the real estate process work more seamlessly, more efficiently and at less cost to the consumer. Title agents, both attorney and non-attorney who are not involved in controlled businesses beg to differ. They see money going out of their pocket and the consumer being gouged.

When Warring Factions Agree

Two factors unite the attorney-title-agents, the non-attorney title agents and the controlled business warring factions. First is their fear of letting the State in the door. No one wants voluntarily to open themselves up to regulations and the financial and conduct audits to which regulation leads, not to mention the inevitable increase in licensing fees. Second, and perhaps more important, is the fear that all title agents have of the intentions of title underwriters. The title underwriters, whose policies are issued by agents, are the only entities currently licensed by the State of New York. They are heavily regulated, taxed and in the current political environment, subjected to class actions suits and myriad investigations that result in million-dollar fines and bad press headlines (for us, at least). Title agents all suspect that title underwriters want them out of the business so they, the underwriters, can have the entire pie all to themselves. Truth be told, at some deep subconscious strategic level, the non-underwriters probably have a point. Ours, for better or worse, is a capitalist system and every company wants a monopoly. However, the successful capitalist is a realistic capitalist. Underwriters cannot be everywhere, nor can they do everything. The wise underwriter understands that title agents are a necessary part of the real estate and title business and these underwriters try to profit by signing up as many good agents as they can. On the other side of the table, the title agents look askance at the underwriters and argue that because they signed up so many title agents, the underwriters brought too many bad apples into the business. The underwriters counter that the business cannot be a closed shop, and that the pie is big enough for all concerned. Everyone concedes that a bit of honest competition keeps everyone on their toes and the consumer well served. It's really a matter of whose ox competition is goring at that particular time.

Title Underwriters

The title underwriters have been eerily silent throughout the debates. To the best of my knowledge, no underwriter has come out in favor of or opposed to agent licensing. Under the surface, the underwriters fervently hope that the licensing bill will do something about the 'bad' controlled businesses out there. Underwriters, like all large businesses, dislike uncertainly. Currently, the rules regarding controlled business exist, but they are enforced unevenly, if at all. When enforcement activity occurs, it is the underwriters who thus far have borne the cost of the fines and penalties. The underwriters' true hope from the agency licensing bill is the same as all of the other parties: to obtain a enforceable way to get the bad actors, ie, the actors, whether attorneys, non-attorneys, underwriters, or controlled businesses who 'buy' their business through kick-backs of whatever stripe, out of the business.

Conclusion

Despite the conflicting interests of the parties, a look at recent events suggests that regulation may be in the interest of all. Twice in 2005, the New York Insurance Department, at the petition of the title underwriters (who by the way, were definitely not united) has reduced title premiums. The first reduction occurred as a result of redetermining the break point for mortgage refinances. The second occurred when as a part of reaching a settlement with the Attorney General over blended rates (don't ask), most of the title underwriters obtained approval temporarily to reduce their rates, by 15%, for owners' policies of $1 million or less. None of the other actors ' the attorney agent, the non-attorney agent, nor the controlled businesses ' were at the table when the premiums were reduced. In the past, the non-underwriter actors could always depend upon the underwriters to seek to raise premiums. That era has come to a close. There are many who think that the current 'rot in Denmark' is due to too much money in the system. The proposed solution is to wring the excess out. The State Department of Insurance is charged with insuring that the licensed title underwriters are profitable and do not become insolvent. The underwriters can only absorb so much of a premium decrease. The State Insurance Department, in regulating underwriters, can impose its will upon title agents. The 85/15 premium split is not sacrosanct if it means that such a split puts a regulated and licensed underwriter on the verge of insolvency.

The profitability climate is not warming for those in the title business; there is a definite chill in the air. If title agents of whatever stripe want to prevent the next ice age, they may want to have a place at the table where the temperature decline is to be determined. State bureaucracy being what it is, the agent's voice will be louder if the bureaucrats have a stake in their constituency's survival. And that means being regulated. It is the interest of all parties that We (and that is the royal 'we' of attorney title agents, non-attorney title agents, controlled businesses and underwriters) find a way to surmount Our fears and agree upon a system of title agency licensing. For if We do not, We will find Ourselves and Our livelihoods on the scrapheap of history as others determine Our ways of doing business, Our lives and Our futures.

Marvin N. Bagwell is Vice President and Eastern Divisional Counsel for United General Title, based in White Plains.

Whatever happened to the title agents licensing bill? At one point, it 'had to happen.' Innumerable meetings were held. Forests were felled to provide the paper to print and distribute various drafts of proposed bills. Lincolnesque letters and articles were written and published. E-mails clogged up thousands of mailboxes. And now silence. There may very well be a bill on the Governor's desk in the near future. This article represents an attempt to explain why the agent-licensing bill is not there yet. The opinions expressed are the author's own, have no official sanctions and do not advocate any particular version of the bill.

'Controlled Business'

Let's start by defining our terms, the most important of which is 'controlled business.' For title purposes, a 'controlled business' is a joint venture (JV) or affiliated business arrangement (ABA) that contains as its members a company or individual that is: 1) a licensed title underwriter or an agent for a licensed title underwriter (title agent); and 2) another party who is actively involved, works in and derives income from the real estate industry. The other party could be an individual realtor, a mortgage broker, or an attorney, or it could be large, well-known companies or firms comprised of the foregoing. The second party has business that it controls, and that it could direct to a title agent or underwriter. However, instead of directing that business to a title agent or to an underwriter, the business provider directs the business to the new 'controlled business' of which it is a member. Pure, unadulterated 'controlled businesses' are an obvious way to kick back or split the title premium. Governmental regulators and many in the real estate industry view controlled businesses as being anti-competitive because they take business off the table and thereby lead to higher fees, expenses and charges to the consumer who ultimately pays for everything. Hence the rules for establishing controlled business are rigorously imposed by the Department of Housing and Urban Development (HUD) under RESPA (In particular, Section 8 of Real Estate Settlement and Procedures Act, 12 USC 2601, et. seq.) and by the New York State Insurance Department pursuant to opinions issued under Section 6409(d) of the Insurance Law, which is commonly referred to as the anti-kickback law. Truth be told, and as everyone involved in the real estate industry knows, while the statutes and regulations are rigorous, enforcement is anything but.

In plain vanilla form, here is how a controlled business works. A title agent or underwriter is approached by a mortgage broker. They form an LLC, which becomes an agent of an underwriter. The new LLC can therefore insure title and issue title policies. The business for the LLC, that is, the transactions that it can insure, comes from the customers that the mortgage broker brings in. To obtain a title examination or abstract of title, and to produce a title commitment, the LLC enters into a contract or production agreement with the title agent, but the title commitment, policy and closing are all issued or conducted by the LLC. These arrangements horrify the government because they seem to provide a way to legitimately 'kick back' or split the title premium. In other words, the mortgage broker in our example (it could be a realtor, developer or attorney) could receive a part of the title premium for doing no work other than directing their customer's business to the LLC that they jointly own with the title company (agent or underwriter). HUD and the State Insurance Department have issue regulations that govern the formation and operations of controlled businesses. For example, the LLCs have to be real businesses with capital invested, offices, employees, and sales people to solicit business from other customers. The members of the LLC are also required to disclose their interest in the business to the consumer.

Fears and Concerns

Understanding the controlled business is essential to understanding the fears and concerns that the prospect of title agency licensing has caused.

The non-attorney title agent, that is an individual or company whose principal is not an attorney but who is an agent for a title underwriter, has a few concerns regarding licensing. First, the non-attorney agent does not want to be put at a disadvantage by the attorney title agent. The non-attorney agent wants the attorney title agent to have to meet the same regulatory requirements to obtain a license as the non-attorney agent ' the same examinations, the same proof of knowledge experience, and good character, and the same regulatory environment especially including the loss of a license by the same regulators in the event of a regulatory violation. Second, the non-attorney title agents want to eliminate controlled businesses, especially combinations of other title agents and underwriters, because controlled businesses are anti-competitive and take business off the table and food out of the mouths of their children. Most of all, non-attorney agents do not want agency licensing to be used by attorney agents to 'rid' the business of the non-attorney agent by creating a regulatory environment that would favor amending Sections 484 and 495 of the Judiciary Law to remove the exclusion for title insurance from the provisions of the law specifying that real estate is the province of licensed attorneys only.

Attorney title agents have a different set of concerns. First, they do not to be regulated by the Insurance Department. They want regulation to remain where it is, with the grievance committees in various judicial departments. Attorney agents and prospective attorney agents also want to be exempted to some degree from examination, certification and licensing requirements. Many feel that having a law degree and being subjected to the loss of the license to practice law through a Grievance Procedure overseen by the judicial departments offers adequate protection to the public against their malfeasance. Finally, the attorney title agent wants to be sure that the licensing bill does not so define and restrict controlled business such that attorneys would be prohibited from doing title work for their own clients. After all, the attorneys take the position that who is better to determine the quality of the title than the client's own attorney? The non-attorney agents, on the other hand, cite Ethics Opinions 595 and 626 (which do not have the force of law), which state that a law firm may not issue title policies for its own clients. As one can see, the non-attorney title agent and the attorney title agent are not exactly on the same page. They are not even reading the same book.

Controlled business owners are not happy with the prospect of being put out of business by the agency licensing bill. They contend that they provide the consumer with one place where the consumer can obtain every service necessary to complete a real estate transaction, from viewing and selecting a property, to obtaining a mortgage, to obtaining title insurance. Controlled businesses contend that they can make the real estate process work more seamlessly, more efficiently and at less cost to the consumer. Title agents, both attorney and non-attorney who are not involved in controlled businesses beg to differ. They see money going out of their pocket and the consumer being gouged.

When Warring Factions Agree

Two factors unite the attorney-title-agents, the non-attorney title agents and the controlled business warring factions. First is their fear of letting the State in the door. No one wants voluntarily to open themselves up to regulations and the financial and conduct audits to which regulation leads, not to mention the inevitable increase in licensing fees. Second, and perhaps more important, is the fear that all title agents have of the intentions of title underwriters. The title underwriters, whose policies are issued by agents, are the only entities currently licensed by the State of New York. They are heavily regulated, taxed and in the current political environment, subjected to class actions suits and myriad investigations that result in million-dollar fines and bad press headlines (for us, at least). Title agents all suspect that title underwriters want them out of the business so they, the underwriters, can have the entire pie all to themselves. Truth be told, at some deep subconscious strategic level, the non-underwriters probably have a point. Ours, for better or worse, is a capitalist system and every company wants a monopoly. However, the successful capitalist is a realistic capitalist. Underwriters cannot be everywhere, nor can they do everything. The wise underwriter understands that title agents are a necessary part of the real estate and title business and these underwriters try to profit by signing up as many good agents as they can. On the other side of the table, the title agents look askance at the underwriters and argue that because they signed up so many title agents, the underwriters brought too many bad apples into the business. The underwriters counter that the business cannot be a closed shop, and that the pie is big enough for all concerned. Everyone concedes that a bit of honest competition keeps everyone on their toes and the consumer well served. It's really a matter of whose ox competition is goring at that particular time.

Title Underwriters

The title underwriters have been eerily silent throughout the debates. To the best of my knowledge, no underwriter has come out in favor of or opposed to agent licensing. Under the surface, the underwriters fervently hope that the licensing bill will do something about the 'bad' controlled businesses out there. Underwriters, like all large businesses, dislike uncertainly. Currently, the rules regarding controlled business exist, but they are enforced unevenly, if at all. When enforcement activity occurs, it is the underwriters who thus far have borne the cost of the fines and penalties. The underwriters' true hope from the agency licensing bill is the same as all of the other parties: to obtain a enforceable way to get the bad actors, ie, the actors, whether attorneys, non-attorneys, underwriters, or controlled businesses who 'buy' their business through kick-backs of whatever stripe, out of the business.

Conclusion

Despite the conflicting interests of the parties, a look at recent events suggests that regulation may be in the interest of all. Twice in 2005, the New York Insurance Department, at the petition of the title underwriters (who by the way, were definitely not united) has reduced title premiums. The first reduction occurred as a result of redetermining the break point for mortgage refinances. The second occurred when as a part of reaching a settlement with the Attorney General over blended rates (don't ask), most of the title underwriters obtained approval temporarily to reduce their rates, by 15%, for owners' policies of $1 million or less. None of the other actors ' the attorney agent, the non-attorney agent, nor the controlled businesses ' were at the table when the premiums were reduced. In the past, the non-underwriter actors could always depend upon the underwriters to seek to raise premiums. That era has come to a close. There are many who think that the current 'rot in Denmark' is due to too much money in the system. The proposed solution is to wring the excess out. The State Department of Insurance is charged with insuring that the licensed title underwriters are profitable and do not become insolvent. The underwriters can only absorb so much of a premium decrease. The State Insurance Department, in regulating underwriters, can impose its will upon title agents. The 85/15 premium split is not sacrosanct if it means that such a split puts a regulated and licensed underwriter on the verge of insolvency.

The profitability climate is not warming for those in the title business; there is a definite chill in the air. If title agents of whatever stripe want to prevent the next ice age, they may want to have a place at the table where the temperature decline is to be determined. State bureaucracy being what it is, the agent's voice will be louder if the bureaucrats have a stake in their constituency's survival. And that means being regulated. It is the interest of all parties that We (and that is the royal 'we' of attorney title agents, non-attorney title agents, controlled businesses and underwriters) find a way to surmount Our fears and agree upon a system of title agency licensing. For if We do not, We will find Ourselves and Our livelihoods on the scrapheap of history as others determine Our ways of doing business, Our lives and Our futures.

Marvin N. Bagwell is Vice President and Eastern Divisional Counsel for United General Title, based in White Plains.