A bill that originally sought to repeal provisions of the state’s Insurance Code that prohibit title business referrals from certain persons who have a financial interest in the title insurance entity to which the person refers the title business in Utah has been amended to adopt the federal RESPA statute as state law governing affiliated businesses. The bill has passed both the Utah House and Senate, and has been opposed by consumer advocacy groups.
The bill, SB 121, is being sponsored by Sen. Daniel Hemmert and Rep. Mike Schultz. It originally sought simply to repeal Section 31A-23a-503 of the Insurance Code regarding affiliated businesses. The bill now adds section 31A-23a-1101, Affiliated Businesses in Title Insurance.
The bill defines affiliated business as “the gross transaction revenue of a title entity’s title insurance business in the state that is the result of an affiliated business arrangement.” It defines affiliated business arrangement as “the same as that term is defined in 12 U.S.C. Sec. 2602, except the services that are the subject of the arrangement do not need to involve a federally related mortgage loan.”
The Division of Real Estate would be tasked with enforcing the new statute. An affiliated business arrangement between a person and a title entity would be considered to have violated Section 8 of RESPA for purposes of state law if:
- “The title entity does not have sufficient capital and net worth in a reserve account in the title entity’s name; or
- More than 70 percent of the title entity’s annual title insurance business is affiliated business on or after the later of two years after a title entity begins an affiliated business arrangement or June 1, 2012.”
In addition, “the division would be able to find that an affiliated business arrangement between a person and a title entity violates Section 8 of RESPA after evaluating and weighing the specific factors in light of the specific facts before the division.” Among other things, it would have to determine whether the title entity:
- Is staffed with its own employees to conduct title insurance business;
- Manages its own business affairs;
- Has a physical office for business that is separate from any associate’s office and pays market rent;
- Provides the essential functions of title insurance business for a fee, including incurring the risks and receiving the rewards of any comparable title entity; and
- Performs the essential functions of title insurance business itself.
The bill defines essential function as:
- “Examining and evaluating, based on relevant law and title insurance underwriting principles and guidelines, title evidence to determine the insurability of a title and which items to include or exclude in a title commitment or title insurance policy to be issued;
- Preparing and issuing a title commitment or other document that disclosesthe status of the title as the title is proposed to be insured; identifies the conditions that must be met before a title insurance policy will be issued; and obligates the insurer to issue a title insurance policy if the conditions described in Subsection (6)(b)(ii) are met;
- Clearing underwriting objections and taking the necessary steps to satisfy any conditions to the issuance of a titleinsurance policy;
- Preparing the issuance of a title policy; or
- Handling the closing or settlement of a real estate transaction when it is customary for a title entity to handle the closing or settlement; and the title entity’s compensation for handling the closing or settlement is customarily part of the payment or retention from the insurer.”
If the title entity contracts with another person to perform a portion of the title entity’s title insurance business, the division would have to determine whether the contract is with an independent third party and provides payment for the services that bears a reasonable relationship to the value of the services or goods received.
The division also would have to determine whether the person from whom the title entity receives referrals under the arrangement also sends title insurance business to other title entities.
Title entities would have to submit to the division before March 1 every year a report certified by an officer of the title entity that contains the following information for the preceding calendar year:
- The name and address of any associate that owns a financial interest in the title entity;
- For each associate identified, the percentage of the title entity’s affiliated business that is the result of an affiliated business arrangement with the associate;
- A description of any affiliated business arrangement the title entity has with a person other than an associate previously identified in the report;
- The percentage of the title entity’s annual title insurance business that is affiliated business;
- Proof of sufficient capital and net worth; and
- Any other information required by the division by rule.
The division would be authorized to conduct a public or private investigation as the division considers necessary to determine whether a person has violated a provision of the statute. The division also would be authorized to impose a sanction against a title entity or person previously licensed as a title entity for an act committed while licensed and violated the proposed statute, including RESPA Section 8. The division would be able to:
- Impose an educational requirement;
- Impose a civil penalty in an amount not to exceed $5,000 for each violation;
- Suspend revoke or place a title entity on probation;
- Issue a cease-and-desist order; and
- Impose any combination of sanctions described in the proposed law.
The bill passed the Senate on a 26-1-2 vote March 4. It passed the House 39-32-4 on March 12.
The Utah Consumer Advocacy Network, the Utah Association of Title Professionals, and the Utah Association of Mortgage Professionals all have voiced their opposition to the bill, even in its revised form.
On March 7, Lauren Patterson, president of the Utah Association of Mortgage Professionals wrote to the Utah House Business and Labor Committee, stating, “We believe it is crucial for the real estate industry and for real estate markets for title companies to be true fiduciaries, and we believe this means they must be impartial and neutral third parties in the transactions in which they administer. We believe there is a dangerous and unnecessary conflict of interest that exists if a real estate brokerage or builder is in control of the title company/settlement agent for the transaction.”
It also voiced its disappointment that it was not contacted regarding the proposed law.
“We are in regular contact with the Utah legislature when bills are being considered that impact our industry,” Patterson wrote. “If the Utah legislature believes it to be necessary to make changes to laws affecting the mortgage lending or real estate industries, we respectfully request to be contacted and included in the process and ask that there be a more methodical approach in seeking the input and involvement of all persons and groups affected by such changes.”
Tyler Turner of the Utah Association of Title Professionals, wrote, “Utah’s Controlled Business in Title Insurance Law (Utah’s CBTI Law) is a 35-year-old consumer protection law that has been effective in preventing AfBAs from operating in Utah, very much to the benefit of the Utah consumer. Utah’s CBTI Law works together with other laws to create protective separations between title insurance agencies, mortgage lenders, builders, and real estate brokerages, for the purpose of avoiding unnecessary conflicts of interest that pose very real threats to consumer welfare.
“SB 121 repeals Utah’s CBTI Law to allow real estate brokers and builders to own and control the title insurance agencies where they will direct (steer) their customers to close real estate transactions by exploiting and misusing their fiduciary relationships,” he continued. “AfBAs are anti-competitive alliances that only work if they can successfully exercise control over consumer choice, an unethical strategy exposed by the AfBA’s favorite buzzword: CAPTURE-RATE.
“Some of the things you are being told about Utah’s CBTI Law by the bill promoters are misleading. The idea that Utah’s current law is somehow ‘protectionist’ and ‘anti-competitive’ is not true and turns the ‘free market’ argument on its head. Under the current law ANYONE can enter the title business in Utah. There are only limitations if a person has conflicts of interest that would prevent them from being fair to consumers. These conflicts of interest are the same ones that justify the separation of licensees in real estate. Simultaneously holding a title/escrow license and a real estate broker/agent license is not allowed, and for good reason. So, how/why does it make sense to allow for common ownership of the two businesses? Utah’s CBTI Law is an effective and reasonable consumer protection law. On the other hand, the AfBAs that SB 121 will authorize are notorious for stifling competition and driving up costs to consumers. That is a fact that you cannot afford to ignore.”