The latest consent order from the Consumer Financial Protection Bureau with Meridian Title Corp. gave industry members a lot to think about their relationships with industry partners and how they disclose those relationships. Several industry experts shared their thoughts with The Legal Description regarding how they see this order potentially impacting the industry going forward.
Lessons for companies with relationships
The consent order certainly should give pause to any agent with any close ties to other parties in the transaction, even their underwriter.
“Yet again, the net is cast even wider,” said Deborah Bailey, senior partner, Gilroy Bailey Trumble LLC. “This is scary because just when you think you have figured out the CFPB and which direction they are going, along comes the Meridian consent order and they are going in another direction. Now they are looking at the relationships a little further out. They are looking at what relationships does the settlement agent have beyond the actual entity and looking at the ownership link between any other entity for possible violations.”
Chuck Cain, executive vice president-Agency Development, WFG National Title Insurance Co., said the consent order creates more questions than it answers.
“Fundamentally, it raises the issue of sibling entities,” he said. “Arsenal and Meridian don’t have the same holding company per se, but they have commonality of ownership interests. An awful lot of title insurance underwriters, their retail offices are not owned by the underwriter per se, they are owned by the holding corporation. It begs the question that if you are in a retail office, owned by a financial holding corporation and you are writing the title insurance on the holding corporation’s title insurance [must you disclose?]
“I think what this settlement argues, or at least raises the question, ‘In that circumstance, does that retail operation, wholly owned by the holding company, have to provide what is effectively an affiliated business disclosure?’ ” Cain continued, noting that although having a retail operation wholly owned by an underwriter may be a different situation, many retail operations are owned by the same holding company as the title underwriter.
He said in light of the consent order, it was important for agents with relationships to evaluate.
“I think where there is a relationship among sibling entities, and I use that term very broadly because in this case Meridian and Arsenal are not sibling entities of the holding corporation, they have common ownership, so whether it’s sibling entities of the holding corporation or they have some commonality of ownership, I think you have to take a real good look at this settlement and decide whether it’s worth the money that you need to be up front, as Meridian is going to be compelled to do, in regard to disclosure of placement of the title insurance with an underwriter that is a sibling or with a commonality of ownership.”
Gilroy said it may be important for agents who have these types of relationships to add a sentence to their disclosure to further expand and explain to consumers that the “Individuals who have ownership in the title agency, may have an ownership interest in the title insurer.”
“I think ultimately what needs to come from this is [for agents to look at] when they give disclosures, how they give disclosures, to whom and why they give discloures,” said David Townsend, president and CEO of Agents National Title Insurance Co. “[This] needs to be addressed early on in the process, as far as when the order is made, if you intend to put it on an affiliated business’ paper, you should alert the consumer at that point.”
Cain agreed, noting that is a practical problem that would need to be addressed.
“One thing, which is a practical problem, as I read through the settlement, is that if you are going to give a disclosure to the consumer as to placement of title insurance, quite often the title agency doesn’t have any access points to the consumer until well into the transaction. It’s usually, especially in Meridian’s case in Indiana, going to be generally referred by a real estate professional or a lender,” he said. “They have all of the access information. How do you create an automated process to be able to get that disclosure out in a timely fashion so that the consumer knows you are placing or you are looking to place with Brand X?”
Potential impact on independent agents
The potential impact to the industry could reach a lot farther than those agencies with sibling or common ownership relationships. It could have an impact on all agents and their underwriters.
“I think that paragraph seven, talking about how the agent selects the underwriter, going forward it’s going to get looked at,” Townsend said. “It could be as far reaching as, let’s say an underwriter has mandatory minimums for an agent and that agent hasn’t met their minimums for that year and it’s a more expensive policy premium on Underwriter A than it is Underwriter B, but they haven’t met their minimums for A and they write the policy on Underwriter A because they have certain minimums to meet. Are they really doing the right thing in the eyes of the consumer? Are they getting the best price or terms?
“I think in a lot of cases, the terms issue has been mitigated by the standardization of the ALTA forms,” he continued. “However, on specific underwriting matters, each one is different. But price is really going to get looked at as to why the agent chose that underwriter. In states where all things are equal, like Texas and Florida, who have promulgated rates, it’s a little bit different. But in states where underwriters file different rates, it’s going to be looked at very carefully.
“If you read Paragraph 7 like that, I think it’s very broad and it’s sending a message to underwriters that they better make sure their agents are offering the right price for the right reason,” Townsend said. “And also, agents need to make sure that they are providing the consumer with the right policy at the right price.”
He also noted that the premium splits between underwriters and agents may be looked at now.
“Think of it this way, Underwriter A ends up being $20 higher than Underwriter B, but the agent has a better split with Underwriter A and makes more money selling Underwriter A’s paper than Underwriter B’s,” Townsend said. “The agent has a choice there. How is this going to affect splits, too? I’m not trying to open up a can of worms, but a lot of that in Paragraph 7 goes to why is the agent choosing who they are choosing?”
Cain noted that “title agents, routinely, on a daily basis, if they have multiple underwriting contracts, will place transactions with a specific underwriter because of the underwriting guidelines.”
“It’s not just a matter of the price,” he said. “They may be cheaper, they may be higher, they may be the same price, but agents want to be sure they provide the best insurance and insurance that is capable of insuring the transaction so the transaction can be consummated.”
He said that if the bureau does push in this direction, the title industry may be in a similar situation as to what lenders have gone through over the course of the last 10 years. In particular, third-party originators — mortgage bankers and mortgage brokers — if you have six different investors, why did you sell this loan to that investor?
“I guess the open-ended question is, ‘Is there some fiduciary responsibility of the title agent in regard to the insured as to the placement of the title insurance if title insurance agents are policy issuing agents for an underwriter and essentially all the authority they have is to issue policies subject to the underwriting guidelines and the terms of their agency agreement?’ ”