by William J. McAuliffe, Jr.
The issues of controlled business and nonbanks trying to get into the title business were the focus of this decade in ALTA®’s history.
The Evils of Controlled Business
"Unless prompt corrective action is taken, problems of controlled business across the nation threaten to increase settlement costs for homebuyers while undermining the quality of title insurance." This was the message that came out of an ALTA® seminar, held on November 13, 1979, in Washington, D.C., for congressional and federal agency personnel.
A controlled business arrangement was defined as one where certain real estate professionals, such as brokers, lenders, attorneys, builders, or developers, used their position of influence regarding the consumer’s selection of a title insurance provider to financially benefit themselves rather than the homebuying consumer.
In a December 12, 1979, Washington Post article on costs relating to land titles, certain controlled business arrangements were said to smell “a lot like kickbacks.”
In a letter of response to this article, ALTA® President Robert C. Bates, executive vice president, Chicago Title Insurance Company, Chicago, IL, said that controlled business arrangements "are as harmful as the payment of outright kickbacks prohibited by Congress under Section 8 of RESPA." He stated that the American Land Title Association® clearly and unequivocally opposed controlled business arrangements, and HUD should issue regulations to eliminate the problem. The Federal Home Loan Bank Board, lenders, and attorneys disagreed with ALTA® on this issue.
Nevertheless, on July 28, 1980, HUD issued an Interpretative Rule under Section 8 of RESPA, which stated that controlled business may be a violation of Section 8.
HUD defined controlled business as "an arrangement whereby a person in a position to refer settlement business (typically a real estate broker, mortgage lender, attorney, etc.) has an ownership interest in a settlement service provider, refers business to that provider, and shares in the profits of that provider through direct or indirect distributions."
Robert C. Bates, by letter, informed the HUD Secretary that ALTA® supported the Interpretative Rule.
In September 1981 the House Housing and Development Subcommittee held hearings on controlled business. ALTA® President James L. Boren, Jr., president, Mid-South Title Insurance Corporation, Memphis, TN, and four other title insurance agents appeared before the committee. They described the evils of controlled business and the need for comprehensive legislation to address this problem.
On March 29, 1982, at a meeting of the National Realtors Association, President Ronald Reagan stated that the administration was “taking action to remove restrictions on controlled business so as to allow real estate brokers, among others, to establish subsidiaries to provide “additional services, such as title insurance, that are necessary to complete the purchase of a home.” This was one of his proposals to revive the housing market.
ALTA® put out a “red alert” notifying members of the administration’s controlled business position. ALTA® members were asked to communicate with President Reagan, HUD Secretary Samuel Pierce, and their congressional delegations. Over 300 ALTA® members wrote to President Reagan expressing their outrage at his controlled business position.
On March 31, a Washington Post article, under the headline "Reagan Urges Realtor ‘Kickbacks’ on Referrals to Title Companies" stated that the administration’s proposal may "provide a bonanza for real estate companies by taking business from independent title insurers and money from the homebuying consumer without doing anything for the devastated housing market.” The Post article concluded by stating that the title insurance industry was particularly susceptible to anticompetitive practices “because so few homebuyers know enough about it to shop around for the lowest prices."
In a March 31 letter to President Reagan, ALTA® President Fred B. Fromhold, president, Commonwealth Land Title Insurance Company, Philadelphia, PA, expressed ALTA® members’ "shock and dismay" at President Reagan’s controlled business position. Fred Fromhold further stated: "We find it impossible to understand how opening the floodgates to the payment of kickbacks or to tie-in relationships between brokers and title companies can have any possible impact on stimulating the housing market." President Fromhold concluded his letter by stating that the administration’s proposed action would only create a market in which business would have to be bought rather than earned.
In response to President Fromhold’s letter, HUD Assistant Secretary Phil Abrams disagreed with the ALTA® position. He stated "that administration officials met with interested groups to discuss the issue and concluded “the removal of the prohibition against controlled business relationships will stimulate competition within the settlement services industry."
The National Association of Realtors held a press conference disassociating themselves from the President’s remarks on controlled business. Julio Laquadra, president of the Realtors, said his industry “didn’t seek the change and, in his opinion, only a few real estate brokers would enter the title insurance business.”
On April 1, Housing Subcommittee Chairman Henry Gonzalez (D - TX) opened a hearing on housing and community development programs expressing his strong opposition to the administration’s stance to authorize controlled business and kickbacks. Chairman Gonzalez stated, “It is astonishing that the administration responds to a disaster in the housing market by saying ‘let them have kickbacks’ which is not unlike royal sentiments like ‘let them eat cake.’ A new program of kickbacks won’t do any thing for housing.”
On May 18, HUD issued a notice withdrawing the RESPA Section 8 Controlled Business Interpretative Rule in which HUD had stated that controlled business may be a violation of Section 8.
Subsequently the Housing Subcommittee rejected the administration’s position and approved legislation that when a real estate professional with an ownership interest in a title insurance agency refers business to that agency, the agency was required to obtain 80% of its business on the basis of the competitive merits of its product, service, and rate.
In 1982 a National Association of Insurance Commissioners’ (NAIC) task force was considering a Model Title Insurance Act. The task force had an advisory committee made up of title insurers and agents, ALTA®, the American Bar Association, and bar-related title insurance companies. The advisory committee recommended that the Model Act (1) prohibit a title insurer or title agent from obtaining more than 20% of its gross business from controlled business, (2) require a company in business to reach the 20% limitation in fours years, and (3) exempt attorney agents and transactions in a county less than an unspecified population from any controlled business.
On October 6 the ALTA® Board of Governors approved a resolution on controlled business, which provided in part as follows:
NOW THERFORE, be it resolved that the Board of Governors of the American Land Title Association® hereby (1) confirms that it is the association’s highest priority to take all appropriate steps within its power to preserve and promote fair competition for title insurance services and, in the furtherance of that goal, to take, on the most expeditious basis practicable, appropriate steps to eliminate the anti-competitive and anti-consumer effects resulting from the payment of kickbacks and referral fees and other types of controlled business arrangements that the association is seeking to have prohibited by appropriate federal and state legislative or regulatory action, (2) directs the president of the association to appoint immediately a Special Committee on Controlled Business to explore, on an urgent basis, what appropriate further steps can be taken to advance the association’s objectives in this regard, which special committee shall advise the association’s Executive Committee as soon as possible of its recommendations, and (3) directs that the president take appropriate steps to ensure that the association’s views on the adverse competitive impact of allowing producers of title business to become so-called soliciting agents be promptly communicated to the Pennsylvania Insurance Department.
In December 1982 the NAIC adopted a Model Title Insurance Act. It included a provision, lobbied for by ALTA®, limiting controlled business of underwriters and agents to 20% of gross revenue in any calendar year.
The ALTA® Special Committee on Controlled Business met for the first time on January 6, 1983. The committee recommended that (a) ALTA® intensify its effort of dealing with controlled business at the federal level and at the state level in liaison with affiliated title associations and (b) a committee of seven underwriter CEOs and seven title insurance agents be formed to develop an ALTA® Model Title Insurance Act by amending the NAIC Title Insurance Act and present a proposed act to ALTA® members at the 1983 Mid-Winter Conference.
A committee of title insurance underwriters and title insurance abstracters and agents, chaired by ALTA® President-Elect Donald P. Kennedy, president, First American Title Insurance Company, was appointed.
The committee submitted its Model Act to the ALTA® Board of Governors, which approved it on March 17, 1983. The ALTA® act amended the controlled business section of the NAIC Act by providing an attorney exception and a competitor’s right of action.
Chairman Kennedy reported that ALTA® members should use the Model Act as a framework, and they should be aware that on a number of points it did not represent a unanimous view within the title industry.
In March 1983 ALTA® President Thomas McDonald lobbied in favor of a federal bill containing a provision that a title company affiliated with real estate professionals through an ownership interest obtain at least 80% of its business from sources other than from referrals by those parties.
In April 1983, the House Housing and Community Development Committee rejected the ALTA®-backed limitation on controlled business by a vote of 21 to 10. Thereafter the committee voted to exempt controlled business arrangements from the antikickback provisions of Section 8 of RESPA provided that, among other provisions, the consumer was informed at the time of referral of the existence of the controlled business arrangement and the consumer was not required to use any particular provider of settlement services. In addition, the committee voted to permit states to impose more stringent limitations on controlled business. This legislation was adopted by the House as part of a housing bill.
As a result of this action by the House, title industry efforts to obtain a percentage limitation on controlled business were directed toward state legislators and regulators.
In July 1983 a meeting was held of representatives of affiliated associations and ALTA® members for the purpose of ascertaining the status of the controlled business problem in the various states and to obtain their views on ALTA® assistance in those states. Participants were informed that ALTA® was ready to assist them in their pursuit of state legislation or regulations that addressed this problem.
On November 30, 1983, President Reagan signed into law amendments to RESPA Section 8 concerning controlled business. The changes provided that controlled business arrangements were exempt from Section 8 if:
at or prior to the referral, a good faith effort was made to disclose the controlled business arrangement to the consumer whose business is referred and that consumer was provided a written estimate of the charges generally made by the settlement service provider to which the business is referred;
the consumer is not required to use any particular settlement provider; and,
the only thing of value that is received from the arrangement is the return on the ownership interest involved in the controlled business arrangement.
Banks Want to Enter Title Business
In 1982 the Federal Home Loan Bank Board (FHLBB) issued proposed regulations on service corporations that, in part, would enable federally chartered savings and loan service corporations to operate as title insurance underwriters. At the time, service corporations were permitted by the FHLBB to have an ownership interest in title insurance agencies.
In a 32-page document ALTA® urged the FHLBB to delete title insurance from its list of underwriting insurance activities of its proposed regulations for service corporations. ALTA® also urged the FHLBB to reconsider permitting service corporations to act as title agents.
On October 15, President Reagan signed the Depository Institutions Act into law. This act contained a number of provisions of importance to the land title industry. One restricted bank holding companies from engaging in the business of insurance "as a principal, agent or broker."
Later that month the FHLBB officially withdrew a proposed regulation that would have permitted service corporations to engage in title insurance underwriting. The FHLBB stated that it was following the mandate of Congress as stated in the Conference Report accompanying the Depository Institutions Act. This withdrawal was due, in part, to the vigorous lobbying by ALTA®.
On March 4, 1983, a law was signed in South Dakota permitting state-chartered banks in South Dakota to own insurance companies. It allowed an out-of-state bank holding company to acquire or charter a state bank, which in turn could own an insurance company. This law was inconsistent with Title VI of the Depository Institutions Act that limited bank holding companies from participating in the business of insurance. It was referred to as the "South Dakota loophole." The question of federal preemption arose, namely did state law take precedence over a federal statue that prohibited banks from engaging in insurance activities?
In a Senate Banking Committee hearing on bank holding company activities, Senator Chic Hecht (R-NV) expressed his concern with self-dealings and conflict of interest when a bank "has an ownership interest in a title company." Federal Reserve Chairman Paul Volcker responded by stating that the business of insurance should be supervised through the auspices of the Federal Reserve Board. Treasury Secretary Donald Regan, speaking on behalf of the administration, stated that banks should be permitted to provide insurance and other services through holding companies.
At the request of the Federal Reserve Board, Senate Banking Committee Chairman Jake Garn (R-UT) introduced S. 1532. It would place a temporary moratorium, until December 31, 1983, on acquisitions of thrifts and banks by nonbanks (such as finance, mortgage, and insurance companies and investment banks) and would stop the expansion of certain nonbank powers, such as bank holding companies entering into the business of insurance, authorized under state law.
A companion House bill, H.R. 3413, introduced by Charles Schumer (D-NY), placed a December 31, 1984, moratorium on such activities.The Reagan Administration proposed legislation that specifically authorized banks and savings and loan holding companies to be able to engage in the insurance business as an underwriter, broker, or agent.
ALTA®, in a letter to President Reagan, Treasury Secretary Regan, and Federal Reserve Board Chairman Volcker, voiced the title industry’s adamant opposition to the financial services deregulation scheme. ALTA® stated that any such deregulation package must not "brush aside the problems of conflict of interest, credit tie-ins, and excessive concentration of economic and financial resources."
As a result of ALTA®’s lobbying efforts ALTA® met with Treasury Department officials on August 16, 1983, at their request. The ALTA® representatives urged the administration to support the federal moratorium legislation to give Congress an opportunity to examine the complex questions involved in structuring the financial marketplace of the '80s and to develop sound public policy to accommodate the consumer’s best interests. The Treasury officials reiterated the administration’s commitment to deregulate the financial marketplace.
ALTA® took its lobbying efforts to Capitol Hill. In a letter to Senator Heinz (R-PA), a principal sponsor of the federal moratorium approach, ALTA® stated that several large bank holding companies had "thumbed their noses" at congressional banking policies and had circumvented federal banking law by means of lobbying several state legislatures, in particular South Dakota, to enact legislation that enabled state-chartered banks to engage in insurance activities that were barred to bank holding companies.
While a number of initiatives were introduced in 98th Congress on this issue, there was no congressional action taken before the end of the first session.
In March 1984 hearings were held by the Senate Committee on Banking, Housing and Urban Affairs on the deregulation of financial institutions. ALTA® President Donald P. Kennedy said that ALTA® supported the continued separation of the banking and insurance industries. He urged the committee to go beyond the "present-day limitations on bank holding companies’ insurance activities and prohibit banks and other lending institutions from establishing affiliated title insurance entities that will issue policies on their own mortgage loans."
On October 12, 1984, the 98th Congress adjourned without completing deliberations on financial services deregulation legislation.
In early 1985, ALTA® President Jack Rattikin, Jr., president, Rattikin Title Insurance Company, Fort Worth, TX, submitted extensive comments to the Federal Deposit Insurance Corporation on a proposed rule that would enable FDIC member banks, an affiliate, or a "bona fide subsidiary" to engage in insurance and real estate types of activities provided that certain restrictions were adhered to. He stated that ALTA® was unalterably opposed to the proposal and that banks, through their affiliates or bona fide subsidiaries, should not be permitted to offer title insurance services.
On July 12, 1985, ALTA® Government Affairs Committee Chairman, C. J. McConville, president, Minnesota Title Insurance Company, Minneapolis, MN, testified before the FDIC. He focused on the conflict of interest implications when a bank is granted power to offer title insurance.
In a surprising turn of events, Treasury Secretary James Baker, in his testimony before the Senate Banking Committee, stated that the administration was "not pushing Congress" to approve expanded insurance and real estate powers for bank holding companies. He indicated that the administration would rather “switch than fight” on the expanded powers issue.
On August 1, 1985, the Federal Reserve Board denied the application of Citigroup, a bank holding company, to buy a South Dakota state-chartered bank. The purpose of the proposed acquisition was to enable Citigroup to engage in various insurance activities through the state-chartered bank.
In testifying before the House Banking Subcommittee on Financial Institutions Supervision, Regulation and Insurance, ALTA® President Jack Rattikin, Jr., stated that the land title industry supported legislation that would close the so-called “South Dakota loophole,” thus making it clear that bank holding companies could not engage in the business of bank and insurance activities.
In the fall of 1986 the Office of the Comptroller of the Currency (OCC) ruled that a national bank may act as an agent in the sale of title insurance because it was related to "its express authority to make loans secured by real property." This was a precedent-setting ruling from the OCC. It posed major concerns for the title industry.
In late 1986 the OCC issued an Interpretive Letter on title insurance that would allow national banks to act as agents in the sale of title insurance in any community, regardless of population, if such activities were undertaken in transactions involving the bank’s loans.
The ALTA® Government Affairs Committee recommended to the ALTA® Board of Governors that every effort be expended to convince the OCC that the Interpretive Letter was an error from a legal banking policy and consumer perspective. The Board agreed and approved considering a lawsuit against the OCC if persuasion became unlikely of success.
In early November 1986, the Federal Reserve Board adopted a comprehensive revision to provisions of Regulation Y that dealt with permissible insurance activities for bank holding companies. A key provision granted bank holding companies or their subsidiaries the right to act as insurance agents if the holding companies or subsidiaries were headquartered in towns under 5,000 in population. The insurance industry wanted the right restricted to bank holding companies only (not their subsidiaries) with corporate headquarters in towns of less than 5,000. ALTA®’s policy was to object to any bank-related expansion into the business of insurance.
On February 6, 1987, the OCC issued a ruling that included expanding the authority of national banks to underwrite title insurance in addition to engaging in agency operations.
A special meeting of the ALTA® Board of Governors was held on April 21, 1987, to consider this development. The Board agreed to bring a lawsuit against the OCC as soon as possible but only after a meeting was arranged, if possible, with the OCC that would seek to set aside the objectionable rulings. In addition ALTA® staff was directed to determine if legislation could be obtained to reverse the rulings and to initiate a grassroots effort in support of such legislation among the ALTA® membership.
On May 8, ALTA® representatives met with the chief counsel of the OCC and members of his staff. But it was a frustrating meeting. All the policy and factual objections raised by ALTA® were rejected as not critical to the underlying legal determination as to whether title insurance was an incidental banking power. As a result, the ALTA® Board of Governors met to discuss litigation, with the Texas Land Title Association as a possible coplaintiff.
In July 1987, ALTA® and the Texas Land Title Association jointly filed a lawsuit in the U.S. District Court in Austin, TX, to invalidate rulings of the OCC that permitted national banks or their operating subsidiaries to act as title insurance agents and underwriters. ALTA® contended that the OCC Interpretative Letters written in July 1986 and February 1987 exceeded statutory authority laid down by Congress.
In commenting on the lawsuit, ALTA® President John R. Cathey, president, The Bryan County Abstract Co., Durant, OK, said: "The OCC did not even consider that there would be significant conflict of interest problems created if banks were allowed to act as title insurance agents in their own mortgage loan transactions, and we could have brought these problems to the attention of the OCC if they had published their proposed ruling for public comment. Moreover, the OCC rulings are wrong as a matter of law and fly in the face of Congress’ 1982 legislative determination that insurance is not ‘closely related to banking’."
In September, William T. Finley, Jr., counsel for ALTA® and TLTA in the OCC litigation, informed OCC and HUD that national banks, with OCC approval, have been engaging in an activity that violated the Real Estate Procedures Act (RESPA). By letter dated October 20, 1987, HUD informed the OCC that it violated the antikickback section of RESPA by allowing national banks to lease office space to title insurance agencies where the rent paid by the agency was based on the volume of title business referred to it by the bank. The OCC responded that it would “give careful consideration to the advisability of providing information to national banks on this matter."
In 1988 ALTA® continued to support federal legislation that would end bank insurance activities.
Of concern was that ALTA® learned, through a Freedom of Information Act request, that Citibank had filed an application with the OCC to establish a subsidiary to issue title insurance policies.
In March 1988 the Senate approved a banking bill that was a significant lobbying victory for the title industry. It contained an exception for any national bank “lawfully engaged” in title insurance activities as of March 2, 1988, so long as the activities were limited to the state in which the bank was located and the bank was not acquired after that date by an out-of-state bank holding company. ALTA® believed that such restrictive language had a significant effect on it’s lawsuit against the OCC and had postponed the OCC’s approval of the Citibank application to enter the title industry.
On August 4, 1988, the House Banking Committee approved a bill that placed tighter restrictions on banking expansion into insurance. Unfortunately Congress adjourned without acting on this legislation.
In December 1988 ALTA®’s Board of Governors agreed that the application by Citibank to establish a national title insurance underwriter must be opposed and that the Finley law firm should develop a litigation strategy in case the OCC was permitted by the courts to approve the application.
At the same time, the Board of Governors agreed that the Finley firm should prepare comments for ALTA® in response to the Federal Reserve Board’s notice of its proposed rescinding of its regulations dealing with state regulation of state-chartered bank subsidiaries. By such action the Federal Reserve Board would reassert its regulatory authority over state-bank subsidiaries.
On December 13, 1988, ALTA® filed a complaint in the U. S. Court of Appeals for the District of Columbia against the Federal Reserve Board in connection with its order approving First Wisconsin’s acquisition of a title insurance agent in Milwaukee.
There will be more on this issue in the next issue of Title News.
ALTA® Education Expands
Educating members has always been a part of the services offered by ALTA®. It was done through articles in Title News, at conventions, and at seminars.
Education took a giant step forward when on September 1, 1980, Hart McKillop of Winter Haven, FL, an ALTA® Honorary Member, gave all of his stock in the Land Title Institute to The Land Title Institute, Inc., a nonprofit corporation organized by ALTA® in the District of Columbia. He had created the Institute in 1970 to provide educational correspondence courses for title company employees nationwide. Hart McKillop had 50 years of experience in most of the aspects of the title industry. He had been director of continuing education for Lawyers Title Insurance Corporation. The ALTA® Board of Governors, by resolution sent to Hart, expressed its appreciation of his gift. TheInstitute continued to be run from Winter Haven until 1989 when it was relocated to ALTA® headquarters in Washington, D.C.
The Land Title Institute is now an educational subsidiary of the American Land Title Association®. It has evolved into an organization that offers comprehensive title industry training through various mediums.
An E & O Insurance Company is Formed
Abstracters and title agents across the country had been troubled for some time prior to 1988 by recurring errors and omissions insurance problems brought about by abrupt market changes. Dramatic swings in prices and availability led the American Land Title Association® to look for a better alternative that would bring long-term stability for title professionals seeking E&O coverage.
After considering several different approaches, ALTA® leaders decided that the most effective solution would be to create the Title Industry Assurance Company, TIAC, an independent risk-retention group whollyowned by members of the association to be chartered in Vermont. TIAC issued its first policy in June of 1988 and has been continuing to insure more and more title professionals since that time.
Since title professionals own and govern TIAC, TIAC has the knowledge and expertise to customize coverage for the special needs of its insureds. Managed by insurance professionals, TIAC has provided a stable and competitive market since 1988.
The Next Decade: 1989-1998
Look for the article on the next decade in our history in the September/October issue of Title News. If you missed a decade during the year, you can find all the history on ALTA®’s Web site under the special 100th Anniversary Section.
|William J. McAuliffe, Jr. was executive vice president of ALTA® from 1965-1984. He is serving as historian and advisor to ALTA® during the 100th anniversary celebration. He can be reached at firstname.lastname@example.org.|