This past year’s refinancing boom has been generous to the title industry. However, even at a time when the real estate industry is growing, the political environment for the title insurance industry has begun to focus on the cost to the consumer and is surprisingly hostile at the Federal level. In this article I will provide an update on the most pressing legislative issues facing our industry: educating Capitol Hill on the value of title insurance, Government Sponsored Enterprise (GSE) reform, predatory lending and RESPA reform, and interest on business checking. ALTA® has many more issues both legislative and regulatory, and members can check our Web page (www.alta.org) for action updates on these maters. However, the following issues will be the key focus of the 2002 ALTA® Federal Conference.
Fox in the Henhouse
"I know how we can cut the cost of buying a house by between a quarter and a third for people that are buying a house. And the way to do it is to do something about title insurance…". With this lead Senator Phil Gramm (R-TX), Ranking Republican on the Senate Committee on Banking, Housing and Urban Affairs, urged the new Secretary of HUD, Mel Martinez, to undertake an evaluation of title insurance in Federal housing programs to change title insurance requirements.
What effect will Gramm’s remarks have on our industry? While the title insurance industry is increasingly becoming a real estate information services industry, the most important aspect of our basic product, title insurance rates, is regulated by state insurance departments. Product-development changes in the forms and policies, which are our basic product, are also regulated by the states. Nevertheless, Gramm’s statement shows that Federal legislators and regulators do play a role and affect our industry. In past years we have dealt with business-structure issues, such as bank entry into the title business, that have affected our business structure, service delivery, and our margins. Based on Senator Gramm’s remarks, the Federal government and the government- sponsored enterprises (GSEs) can now begin to deal with the ultimate utility and price of our product. The Federal government can directly affect our business operations in surprising respects through (1) explicit requirements to use title insurance in Federal programs and by the GSEs, (2) interpretations of Federal statutes, such as RESPA, and (3) legislation changes and interpretations affecting our business environment, such as the Interest on Business Checking legislation, which can directly affect the treatment of our escrow accounts.
Educating the Hill
This increases the need for active involvement by the industry in ALTA® efforts to educate the members of Congress and their staff who act on key issues in the area. Although this is a continuing process, ALTA® has made extra efforts this year, given Senator Gramm’s perspective. We have stepped up our education programs on Capitol Hill. Rep. Marge Roukema (R-NJ) and Rep. Mark Green (R-WI), respectively chair and vice chair of the House Financial Services Committee, graciously helped ALTA® to arrange briefings of members and staff of the House Financial Services Committee in February. Bert Rush, senior vice president of First American Title Insurance Company of Santa Ana, CA, and Elizabeth Zajic, vice president, and district manager, senior counsel for First American Title Insurance Company, Washington, D.C., accompanied me in briefing the House staff on title insurance practices, with an emphasis on claims and regional differences. With the assistance of Senator Paul Sarbanes (D-MD), chair of the Senate Banking Committee, the group also briefed the staff on the Senate Banking Committee side as well.
Senator Gramm’s remarks could still lead to an increased focus on title insurance requirements in Federal programs at HUD, the Veterans Administration, Fannie Mae, and Freddie Mac. Currently program requirements at these agencies vary. There is no Federal statute that requires any of these entities to require title insurance on properties purchased or insured. In general, Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Veterans Administration do not require title insurance. Rather, they require title "evidence," which can include title insurance but also includes title evidence such as attorney opinions. Freddie Mac requires title insurance for ARMs and for foreclosures. Consequently, actual Federal requirements to buy title insurance are very limited. However, even those requirements can be altered and modified, and products like mortgage impairment can be used. Currently pending legislation to restrict the activities of the GSEs could arguably limit that alternative.
Would GSE Reform Help?
Last year and again in April this year, Rep. Richard Baker (R-LA), who now chairs the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises of the House Financial Services Committee, introduced legislation to limit the activities of Fannie Mae and Freddie Mac. The legislation would create an independent Board, the Housing Finance Oversight Board (the Board), to be housed in the Executive Branch. The Board would replace the Office of Federal Housing Enterprise Oversight (OFHEO), HUD, and any other Federal agency exercising regulatory authority over Fannie Mae or Freddie Mac.
From ALTA®’s standpoint the key provision in the bill is Section 110 of the current version. It provides that the Board will have authority to approve all "new activities" and to review all ongoing activities of the GSEs. The bill provides that the GSEs may not commence a new activity without Board approval. The Board may approve GSE involvement in a new activity after giving interested parties an opportunity to comment on the proposed activity. The Board would look at several factors. It would review (1) whether the new activity is authorized under the relevant charter act or other Federal law (2) whether the GSE can conduct the new activity in a safe and sound manner and (3) whether the new activity is in the public interest.
A new activity is defined as "any program, activity, or business process providing financing or other services related to the origination of conventional mortgages (including purchasing, servicing, selling, and lending on the security of such mortgages)" that (1) is ‘significantly different’ from programs, activities, or business processes that have been approved under this Act or that were approved or engaged in before the date of enactment of the 1992 Act, or (2) represents an expansion, in terms of dollar volume or number of mortgages involved, above limits expressly contained in any prior approval. The good news to the title industry is that the phrases "program," "activity," "business process," and "significantly different" are not defined. This language might prevent the GSEs from engaging directly in title insurance.
The language could also arguably affect the major marketplace issue currently facing the industry— mortgage impairment. As we assess the effects of developing mortgage impairment products in the marketplace, we also need to question whether the GSEs can omit title insurance or an attorney’s opinions on loans they purchase or hold. A willingness to accept some lesser form of title assurance for the promise of the seller-servicer to repurchase the loan in the event of any title problems could arguably be deemed "significantly different" from current activities.
In any case, Congress is not likely to pass this legislation in the coming year. As Title News goes to press, the House and Senate Financial Services Committees, which have jurisdiction over most of the statutes regulating the title insurance and settlement industry, are focused on Enron reforms. Accountability to stockholders and workers’ retirement savings are pressing and important public policy questions. The House Financial Services Committee is working on legislation to deal with these issues. Solutions will gain political mileage for politicians, so the environment will affect the timing of issues affecting the title insurance industry. Such issues will dominate the debate of the House and Senate Committees. A spokesman for Rep. Richard Baker indicates that the congressman will "turn his attention back to GSE reform after the Enron debate is completed."
Even if Congress develops a legislative solution for Enron, the shift in congressional focus to corporate accountability and disclosure will still shape the GSE debate. On April 8, 2002, Armando Falcon, director of the Office of Federal Housing Enterprise Oversight Board, said that OFHEO would conduct a comprehensive review of the GSEs financial disclosures. Rep. Baker’s attention will also turn to those issues in the House of Representatives. While Senator Chuck Hagel (R-NE), a member of the Senate Banking Committee, which has jurisdiction over the issue, has asked key leaders in the Senate to review this issue, they have declined to involve the Senate in the matter this year.
Much of the focus on the GSEs will be at the regulatory level. ALTA® Federal Conference attendees will hear Jimmie Barton, deputy director of the Office of Federal Housing Enterprise Oversight Board, describe current regulatory controls over the GSEs. Participants will also have an opportunity to hear Jamie Gorelick, vice chair of Fannie Mae, discuss the outlook for Fannie Mae.
Could Congress Eliminate Title Insurance?
Fannie Mae, Freddie Mac, and HUD have very detailed requirements for title evidence in their respective seller/servicer guidelines or regulations. However, these detailed regulatory requirements are unlikely to be dealt with in legislation. Consequently, attendees at the ALTA® Federal Conference will ask their members of Congress to co-sign letters to HUD, asking for congressional review before changes are made to the regulatory requirements.
Fannie Mae and Freddie Mac charters, which provide the Federal authority establishing these entities, do not address title insurance. There is no statutory requirement to purchase title insurance. Consequently, there is nothing to eliminate. However, as a business decision, Fannie Mae and Freddie Mac are generally encouraged to limit their risk. They do so by requiring lenders doing business with them to comply with requirements of sellers/servicers’ guidelines established by the entities and applicable law. Lenders warrant that they are complying with Federal and state law and specific provisions of the entities selling and servicing contracts. Essentially, lenders make three warranties: the validity of the mortgage, priority of the lien, and enforceability of the mortgage. Specifically, a seller of loans warrants that the mortgage conforms to all GSE requirements, is a valid lien on the underlying property, and is enforceable. If the mortgage is a first lien, the seller warrants that the property is free and clear of all encumbrances and liens that would have priority over the mortgage lien (except for real estate taxes and special assessments that are not yet due and payable); and that the property is free and clear of all mechanic’s and materialmen’s liens, and there are no outstanding rights that could result in any such liens being imposed on the property.
If any of these title-related warranties is untrue, the secondary market agencies may require the seller to repurchase the mortgage, whether or not the lender had actual knowledge of any problems. In addition, the secondary market entities may require the lender to indemnify and hold Fannie Mae harmless against all losses, damages, and legal fees resulting from a breach of warranty.
Federal agencies such as FHA and VA also require some type of title "evidence." There is no explicit requirement for a title insurance policy for FHA loans. HUD/FHA regulations require "satisfactory title evidence" for mortgage liens and deeds in lieu of foreclosure, which may be in the form of a title insurance policy. Such satisfactory title evidence may include any one of several different alternatives such as a fee or owner’s policy of title insurance a mortgagee’s policy of title insurance supplemented by an abstract and an attorney’s certificate of title an abstract of title prepared by an abstract company or individual engaged in the business of preparing abstracts of title and accompanied by the legal opinion as to the quality of such title signed by an attorney experienced in examination of titles a Torrens or similar title certificate or evidence of title conforming to the standards of a supervising branch of the Federal government or a state government. Instead of instituting foreclosure actions, the lender may acquire property from a mortgagor owning a single property, and it transfers a good marketable title accompanied by satisfactory title evidence to the FHA Commissioner. On the HUD/VA Addendum to the Uniform Residential Loan Application, the lender must also certify that the security instrument has been recorded and is a good and valid first lien on the property described.
The VA does not require a lender making a VA loan or a veteran-borrower to obtain title insurance. In fact the VA has a "local custom and practice" standard that allows title to the estate to be that which is acceptable to informed buyers, title companies, and attorneys in the community where the property is located.
What can be done? ALTA® members attending the Federal Conference will ask their representative to send a letter to Federal agencies to notify their member of Congress if the agency changes the requirements for title evidence. An increased level of congressional "interest" could serve to make these Federal agencies think twice before they change their requirements.
Interest on Business Checking
Legislation to allow banks to offer interest to businesses holding checking accounts is proceeding through Congress. The most recent version, a bill passed by the House on April 9, provides that effective two years from the date of enactment, banks will be allowed to pay interest on business checking accounts. Under 1930s laws, banks cannot pay interest on business checking accounts. Large banks have been able to give their commercial clients interest by conducting "sweeps" of money from the noninterest-bearing accounts into interest-bearing vehicles, six times a month. Supporters have said that smaller institutions often are prevented from conducting such sweeps because of legal barriers and a lack of technology.
How will this affect our business? The bill may affect bank and title agency escrow relationships, since it would lift the current "Regulation Q" prohibition against banks paying interest on escrow funds. The bill would effectively eliminate certain well-established financial benefits and checking services that large depositors now receive from banks in lieu of interest. These services are provided in accordance with current guidance under Regulation Q. For example, Regulation Q provides that offering the following services without charge is not the payment of interest:
1. Armored car services; short-term overdraft privileges; full endorsement stamps; printed checks; safe-deposit boxes and night-depository facilities; preparation of reports required of a bank by a municipality; loans at preferential interest rates; and maintenance of a permanent record of all checks and deposits.
To assure that the current provision of services by banks in accordance with Regulation Q and identical legal treatment would be continued even if the legislation passes, ALTA® has sought a series of amendments to clarify that current law will continue. ALTA® was successful in assuring that the Federal Reserve has indicated "they don’t have a dog in this fight."
Rep. Judy Biggert (R-IL) offered an amendment in the Financial Institutions Subcommittee consideration of the Interest on Business Checking legislation to address this issue. A version of this amendment was adopted in the full Financial Services Committee consideration of H.R. 974, Interest on Business Checking in March 2001. During the fall, with the support of Greg Kosin, chair of the ALTA® Government Affairs Committee, we received the support of two congressmen, Ken Bentsen (D-TX) and Don Manzullo (R-IL), on the House Financial Services Committee. Indeed, both legislators signed letters to Chairman Mike Oxley of the Financial Services Committee urging him to support modifications to the bill. Additionally, Congressman Jim Maloney (D-CT) sent the very same letter to Chairman Chris Dodd of the Senate Banking, Housing and Urban Affairs Subcommittee on Securities and Investment.
In House action on April 9, 2002, with the help again of Rep. Biggert, ALTA® was successful in achieving adoption of several modifications to the amendment in H.R. 1009, the Business Checking Freedom Act. ALTA® member lobbying is essential to hold this amendment in the full U.S. Senate. Again, Senator Gramm is influencing the debate. The amendments may be dropped because of opposition by Senator Gramm’s financial services staff to the House-passed amendments.
Consequently, ALTA® members will carry a draft letter to Senators Gramm and Sarbanes to Capitol Hill asking that Section 7 of HR 1009 be retained in any future Senate action.
Predatory Lending and RESPA
State and Federal legislators and regulators have undertaken a variety of efforts to address abusive lending practices that have led low-income borrowers into unsuitable loans. Because the default and foreclosure rates of predatory loans are very high, politicians have attempted to develop a variety of solutions to address these issues.
Surprisingly, from the ALTA® perspective, a possible solution to the problem of predatory lending that has been mentioned at the Federal level is new exemption from RESPA Section 8 for creditors who provide a package of settlement services at a guaranteed price. This new exemption would allow lenders to ask settlement service providers such as title insurance companies and agencies to pay referral fees to get into the package or to reduce the price of their services to get into the guaranteed price package. Either approach is likely to reduce title industry margins as we face our customer demands. This solution is also being promoted by interest groups, such as the Mortgage Bankers Association of America and the Consumer Mortgage Coalition, and included among recommendations in a "HUD-Treasury Report on Predatory Lending."
Why is this a popular solution? HUD Secretary Mel Martinez said of his recent closing materials, "If I’m a lawyer and the secretary of HUD and I’m not reading this junk, you know there’s work to be done fixing the system." That is why he intends to address the problem of consumer confusion at settlement by RESPA reform.
"We’re going to do something," Martinez said. "The problem has been an unwillingness by prior administrations to make the tough choices—to crack down on kickbacks and to make the disclosure system simpler and understandable for home buyers."
Given the resources of a Federal agency, Martinez established an internal HUD Task Force to review this issue. Many HUD staff are predisposed to approve packaging because they hear the message from the lender community, and they believe that packaging will force down consumer prices. However, they are currently evaluating whether HUD has authority to actually provide a new exemption to Section 8.
Rep. Mike Oxley (R-OH), chair of the House Financial Services Committee, which has jurisdiction over RESPA reform, recently stated that the committee would focus on reform when its work on deposit insurance and Enron-related legislation was completed.
"One of the goals of our committee, before I die, am term limited, or am run out of office, is to reform RESPA," Oxley indicated.
In addition, Rep. John LaFalce (D-NY), ranking member of the House Financial Services Committee, wrote to HUD on March 26, 2002. In that letter, ranking member LaFalce raised the concern that HUD would be exceeding its statutory authority if it proposed a broad exemption to Section 8 in the form of a proposed rule.
ALTA® is supporting Congressional review of this issue, writing to both HUD and Rep. LaFalce to indicate that HUD does not have statutory authority to provide a new exception to Section 8. By exercising its authority in this area, Congress has provided ALTA® members with an opportunity to convince their member of Congress that Section 8 reform may well affect their business margins.
Could Reform Affect Title Fees?
Another solution to predatory lending suggested, by some interest groups and recommended by HUD and the Treasury Department, is to include currently excluded points and fees, such as title insurance, in the "trigger" calculation for determining whether or not a loan becomes a high-cost loan. Under HOEPA (Home Owners Equity Protection Act), lenders are required to provide additional disclosures to consumers who obtain these high-cost loans.
Currently HOEPA defines a high-cost loan as a loan where the total points and fees payable by the consumer at or before closing will exceed the greater of (1) eight percent of the total loan amount, or (2) $400 (indexed for inflation). Also under current law, "fees or premiums for title examination, title insurance, or similar purposes" are included within the definition of "points and fees," and then excluded if the charge is reasonable, the creditor receives no direct or indirect compensation, and the charge is paid to a third-party unaffiliated with the creditor.
Congress and the Federal regulators have formally asked for guidance on these issues, and ALTA® has alerted them to industry concerns on technical issues that have arisen with respect to predatory lending issues. Our emphasis has been on maintenance of the current exclusion under HOEPA for "residential mortgage transactions; maintenance of the current title-charge exclusion from the calculation of points and fees that can lead to categorization as a high-cost loan; preventing potential liability on closers who "allow" the collection of unnecessary credit insurance premiums; and narrowing the circumstances under which home mortgage documents may be invalid to allow room for correction of scriveners’ errors and recording information.
ALTA® submitted statements with the House and Senate Banking Committees, the Office of Thrift Supervision, and the Federal Reserve Board when they considered these issues. As a result, in December of last year, the Federal Reserve Board issued amendments to Regulation Z implementing HOEPA that maintained the current treatment of points and fees for title and closing services. This was a major victory for ALTA®, given the pressure by the consumer groups and other trade associations, including RESPRO, to include points and fees in the HOEPA test.
In addition, Senator Paul Sarbanes (D-MD), chair of the Senate Banking Committee, held hearings during January 2002 on predatory lending. Title insurance was not mentioned during the Senate hearings, although the Mortgage Bankers Association of America did use the opportunity to discuss packaging as a solution to predatory lending. Further, we expect that Sarbanes’s legislative solution will affect our points and fees. There has been a movement toward swift passage of predatory lending legislation at the state level. Several states have, in recent months, written, introduced, and passed stiffer regulation of the sub-prime market. However, the American Association of Retired Persons has floated a Model State Statue called the Home Loan Protection Act for the benefit of those states without concrete language. Through ALTA®’s hard work, this sample language, following the lead of HOEPA, excludes title insurance fees from the high-cost-loan test, provided those fees are "reasonable and paid to an unaffiliated third-party."
As you can see, each of theses issues could have an impact on the title industry. Each is extremely complicated and requires constant monitoring by staff and ALTA® members. We need to continue to educate members of Congress and their staff about the value of title insurance and how these issues will affect our businesses. If you know any of the members of Congress mentioned in this article or are willing to help in this legislative arena, I look forward to working with you.
Ann vom Eigen is ALTA®’s legislative/ regulatory counsel. She can be reached at 1-800-787-2582 or email@example.com. ALTA® would like to acknowledge the work of ALTA® counselors, Sheldon Hochberg, Steptoe and Johnson, and Phil Schulman, Kirkpatrick & Lockhart, on the information in this article pertaining to GSE reform and the Federal agencies.