Bank affiliations with title insurance agencies present an opportunity to develop a new marketing and delivery channel for the title insurance business. Developing this marketing channel can be beneficial for all participants in the industry; however, it requires cooperation, education, effort, and adjustment by all parties to create a successful business model. Here are some key issues to consider.
Resolve Legal Uncertainties
Before significant bank joint ventures or title agency activities can occur, legal uncertainties must be resolved. Banks, by their nature, are conservative and will not engage in an activity unless it can meet bank regulatory requirements and notice provisions. Often, a legal opinion is required to show specific authority for engaging in an activity. Additionally, federal laws that require particular structures or state laws that raise additional operational concerns can be disincentives for banks to participate in title insurance activities.
To date, only a few states have significant levels of banks participating in title insurance activities. Some have been in the business for more than ten years, but most have been in the business for three years or less. An informal survey of state banking associations showed only 16 states where banks currently engage in title insurance. This certainly does not represent the mainstream of the banking industry and highlights the opportunities to develop new markets. While these pioneers have been successful in their operations, the impact of much larger participation is yet to occur.
Lingering doubts on the effect of the Gramm-Leach-Bliley Act of 1999 (Public Law 106-102) (GLB) continue. The complex sections on state regulation, federal preemption, regulatory safe harbors, and title insurance carve out are enough to make any Washington lawyer’s head spin. However, a strong argument exists that the net effect of GLB is to allow title activities, but push the activities into a financial subsidiary.
Reaching a consensus on this issue is important if all participants (title companies, lawyers, and banks) are to have equal opportunities to build strong marketing alliances. In an environment of continued uncertainty, only those providers who are willing to take the risk and defend the legitimacy of their actions will succeed in the long term.
Like many other business ventures, those who pioneer and develop a successful model are most likely to succeed. As banks continue to enter the title business and form joint ventures, they are more likely to do so with those companies that have built a constructive model and have a proven track record. Additionally, it is inconsistent for title companies to build joint ventures in some states, but oppose bank affiliations in others.
Because national banks and state-chartered banks derive their powers from different sources, a separate analysis of each is necessary. The legal considerations regarding authority for national and state-chartered banks may be different.
National Banks. Financial subsidiaries of national banks are authorized to act as insurance agents for all types of insurance, including title insurance, in any state (GLB Section 121).
Apparent confusion arises since GLB provides a "carve-out" regarding authority of national banks. Section 303 generally prohibits a national bank from selling or underwriting title insurance, yet provides a number of exceptions. These include activities in states where state-chartered banks are specifically authorized to offer title insurance and where "grandfathered" activities exist. Grandfathered activities occur where national banks have engaged in title insurance activities through Section 92 (12 U.S.C. Section 92) from a place with a population of 5,000 prior to the passage of GLB. For general insurance sales, Section 92 authority was not extinguished, but continues. However, GLB Section 303 now limits this in-bank sales with regard to title insurance. After the passage of GLB, national bank title insurance activities are essentially pushed out into a financial subsidiary or placed in a separate subsidiary of a financial holding company.
The insurance agency activities authorized for financial subsidiaries under Section 121 are not subject to the limitations that apply to the national bank itself under GLB Section 303. Section 303(a) provides that "In general, no national bank may engage in any activity involving underwriting or sale of title insurance." It is an important distinction to make that the general restriction on title insurance activities by national banks does not reference and does not apply to a financial subsidiary which is expressly authorized to conduct activities that are not permissible for the national bank itself.
This interpretation of GLB has been reached in two administrative decisions. OCC Corporate Decision No. 2000-14, September 2000, holds that the provisions of GLB authorizing financial subsidiaries of national banks to engage in all insurance activities, including title insurance, preempts contrary New Jersey state law. Similarly, the Kansas Insurance Department, in a letter issued February 1, 2000 to Gold Bank Corporation, Inc., holds that the GLB preempts certain provisions of Kansas-controlled business statutes that would otherwise prevent the holding company’s financial subsidiary from engaging in title insurance activities.
Recently, the Sixth Circuit Court of Appeals decided an important case on the issue (Association of Banks In Insurance, et. al, v Duryee, 2001, FED APP. 0385P [(6th Circuit)] known as the Huntington Bank case. The case challenged Ohio statutes that limited the ability of banks to sell title and other types of insurance. Importantly, the Sixth Circuit case occurred before GLB, but arguments post GLB were made. The decision rests both on pre- and post- GLB grounds. In both instances, the Ohio statutes that interfered with national bank authority pre- and post- GLB were overturned. This decision should go a long way in clarifying the ability of national banks post-
GLB to sell title insurance through subsidiaries.
State Bank Provisions. State bank authority to engage in insurance activities, including title insurance, is subject to various state laws that limit their authority thereby causing uncertainty. The effect of federal preemptions for state banks is less straightforward. In addition to resolving any uncertainty over federal preemption for national bank financial subsidiaries, it is equally important to resolve any state-imposed conflicts for state-chartered banks.
In response to GLB Section 121(d), the FDIC has adopted regulations (12 CFR, Part 362) to clarify the insured state-chartered bank’s authority to engage in financial activities through a subsidiary that are permitted to a national bank. These activities include insurance as well as title insurance. However, many states continue to have "anti-affiliation statutes" that prohibit affiliations with insurance activities, as well as "controlled business" statutes that further attempt to limit bank opportunities in the insurance arena generally and title insurance specifically. Both types of statutes have been preempted for national banks through litigation (e.g., Barnett Banks v. Nelson; and Duryee); however, the preemptive powers of the FDIC Act for state-chartered banks have not been litigated as frequently.
While only a few states specifically authorize state-chartered banks to offer title insurance, virtually all states have statutes that grant state banks parity with national banks. These "wild card" statutes are generally seen to provide state-chartered banks the same authority as national banks and their subsidiaries.
Sorting out the conflicts for a state-chartered bank among states’ wild card, anti-affiliation, and controlled business statutes and measuring the impact of federal preemption under the FDIC rule will be important for state-chartered banks to realize the same opportunities as national banks in the title insurance arena. Legislation in many states is needed to remove these preempted and conflicting statutes. Until the clean-up is completed, banks will continue to begin joint ventures through subsidiaries, but at a higher cost to obtain the legal opinions necessary to meet bank regulatory burdens.
The Real Estate Settlement Procedures Act imposes significant concerns for any bank title insurance activities. At the heart is RESPA Section 8(a), that 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. Section 2607(A)). Subsequently, RESPA was amended to permit certain controlled business arrangements that were defined to mean an arrangement in which: (A)
a person who is in a position to refer business incident to or a part of a real estate settlement service involving a federally related mortgage loan, or an associate of such person, has either an affiliate relationship with or a direct or beneficial ownership interest of more than one percent in a provider of settlement services; and (B) either of such persons directly or indirectly refers such business to that provider or affirmatively influences the selection of that provider.
HUD adopted a regulation (12 C.F.R. 3500.15) which provides that a controlled business arrangement is not a violation of Section 8 and allows referrals to an affiliated settlement service provider so long as: 1) the consumer receives a written disclosure of the nature of the relationship and an estimate of the affiliate’s charges; 2) the customer is not required to use the controlled entity; and 3) the only thing of value received from the arrangement, other than payment for services rendered, is a return on ownership interest.
Thus, a financial institution and its joint venture partners, whether attorneys, other banks or title companies, must be careful to ensure that all three conditions are met in structuring joint ventures for the sale of title insurance.
The consumer disclosure and consumer choice provisions are essentially operational issues. These operational issues are easily addressed with appropriate disclosures and loan processing procedures. The payment for services rendered and ownership interests bear on the structure of any joint venture arrangement.
Structuring Joint Ventures
A number of issues regarding structure, ownership interest, and banking law restrictions are important to structuring a viable title insurance activity for bank subsidiaries.
Venture Types. Several models for joint ventures are beginning to emerge. These include single bank agencies, attorney or title company joint ventures, and multi-bank agencies. Each are suited to different environments and particular circumstances. Most large banks, or multi-bank holding companies with significant volumes, will prefer ownership of their own agency. However, this may not be the exclusive method since some large banks will decide to diversify their holdings by participating in several multibank agencies. Smaller banks (under $1 billion in assets) are unlikely to form their own bank agency simply because of the volume needs of the business entity. These smaller banks are more likely to form a simple joint venture with their local bank attorney or an existing title agency. Alternatively, smaller banks have begun to form multibank title agencies. These multibank agencies have the advantage of spreading the cost of operations over a larger participant pool and increasing volume to share overhead expenses.
Organizational Type. While any form of organization (corporation, limited liability company, partnership, or limited partnership) can be used, most ventures elect the LLC form. Some type of entity is essential for a bank since a limitation on liability is a required element of a business activity. The LLC form then allows for avoidance of a layer of federal and state corporate taxation and allows the profits or losses to flow back to the venture participants directly.
It should be noted that federal tax law allows limited liability companies (like partnerships) to have great flexibility in valuing and adjusting distributions, even at year-end. However, this adjustment would likely violate the controlled business provisions of RESPA.
Ownership Interest. Structuring the ownership interest of a joint venture, particularly a multibank venture, is particularly important. Because RESPA’s Section 8 does not allow distributions based upon actual volume (the services rendered rule), the distribution can be based only upon the ownership interest. For most banks, structuring its ownership interest in proportion to its expected participation level is a major consideration. The ownership interest can be based upon virtually any criteria but is often tied to bank assets, historical loan volume, or some combination of the two factors. This permits the joint venture to be structured so that bank return should approximate bank participation. Otherwise, joint venture partners will either have more or less incentive to actually use the joint venture agency.
Structuring the ownership interest correctly on the front end is essential since RESPA does not let the LLC adjust distributions based on actual volume. In addition, RESPA would also prevent the organization from restructuring its ownership interest on any regular basis if the purpose was simply to adjust distributions to referral volume.
Bank Regulatory Concerns. Bank regulatory issues impact the structuring of joint ventures, and several key factors must be met. The activities of the joint venture must: 1) be limited to those activities in which banks are permitted to engage; 2) the bank must be able to prevent the joint venture from engaging in activities that do not meet the foregoing standard; 3) the bank’s loss exposure must be limited as a legal and accounting matter; 4) the bank must not have open-ended liability for the obligations of the enterprise and 5) the investment must be convenient and useful to the banks in carrying out activities otherwise permissible for the bank.
In addition, the bank may need to create and qualify a financial subsidiary (meeting a well- capitalized, well-managed, and satisfactory CRA requirement). Regulatory requirements include notice to or prior approval from banking regulators and compliance with state insurance licensing laws.
Marketing Title Insurance
Bank entry into title insurance activities opens a new opportunity to provide much greater marketing resources to the title insurance industry. Surveys show that consumers simply do not understand the title insurance product. Banks can provide marketing support and a level of consumer education that has not previously been available in the industry. Therefore, bank affiliations will help resolve this lack of understanding, but only with the assistance and expertise of existing providers.
Like bank entry into other insurance fields, banks are not in a position to either reinvent the industry, nor to build organizations from scratch. They must rely on the expertise of professionals, either through joint ventures or through purchasing existing agencies in order to quickly enter the market. Title companies and existing agencies that are prepared to develop business models and marketing materials, and provide loan officer training will be essential to any successful venture.
In 1999, Congress recognized in the Gramm-Leach-Bliley Act that the market for financial services—banking, securities, and insurance —had been changed by technology and market forces. GLB adopted a new regulatory structure to adjust to that change. Title insurance is a part of that overall financial system.
Bank entry into the title insurance business will create new opportunities and can be successful for all participants—companies, agents, lawyers, and financial institutions—but only with the involvement and support of those already in the industry.
Timothy L. Amos is senior vice president and general counsel of the Tennessee Bankers Association in Nashville. This article is an excerpt from his presentation at the 2000 ALTA® Federal Conference, in Washington, DC. Tim can be reached at 615-244-4871 or firstname.lastname@example.org.