by William J. McAuliffe, Jr.
The issue of banks and bank holding companies trying to sell title insurance continued to be a challenge for ALTA® this decade. Add to that the emergence of mortgage products that were actually title insurance, and the industry faced some serious competition.
We shall vigorously challenge" any attempt by the Office of Comptroller of the Currency (OCC) to approve an application by Citibank to engage in title insurance. This is what ALTA® told the OCC in early 1989 after we learned of such a possibility. ALTA® contended that title insurance was not "incidental" to banking as used in the National Bank Act.
On March 3, 1989, the Federal Reserve Board approved the application of Merchants National Corporation, a bank holding company, to permit state banks owned by Merchants to resume insurance activities. The Board concluded that the insurance prohibitions of the Banks Holding Company Act did not apply to activities engaged in directly by state banks affiliated with the bank holding company. The issue of whether banks and bank holding companies could engage in insurance activities surfaced on a new front almost daily. Thus the ALTA® Government Affairs Committee thought it was important that ALTA® members become conversant not only with the policy arguments for and against such bank activity but also with the legal framework that controlled the policy debate.
Upon the Committee's recommendation in June 1989, ALTA® President Charles O. Hon, III, president and treasurer, The Title Guaranty & Trust Company of Chattanooga, Chattanooga, TN, authorized Sheldon Hochberg to prepare an article on this subject for Title News. His article "Banks, Bank Holding Companies and Title Insurance: A Non-Technical Guide Through the Labyrinth of Applicable Law and Regulation" appeared in the July/August 1989 Title News. In the conclusion of the article it is stated that "… the federal and state regulatory regimes applicable to bank and bank holding company insurance activities are complex and many questions regarding their scope and applicability are still in the process of resolutions."
In 1986 the OCC issued an interpretative ruling that a national bank may act as an agent in the sale of title insurance in any community, regardless of population, if such activities were undertaken in transactions involving the bank's loans. Based on that ruling, on June 20, 1989, the OCC approved the application of Chase Manhattan Bank to establish two subsidiaries to sell title insurance policies in connection with residential and commercial real estate loans originated by Chase affiliates. Prior to the OCC ruling, national banks had not ever engaged in the title agency business. ALTA® and the New York State Land Title Association filed suit, ALTA® et. al. v. Clarke, in this matter against the Comptroller of the Currency in federal court in New York.
The OCC contended that banks could sell title insurance under authority to engage in activities "incidental to banking" as provided in the National Bank Act. ALTA® and NYSLTA contended that the National Bank Act prohibited national banks from selling insurance, except in communities of 5,000 or less.
On August 15, 1991, the trial court denied the motion of ALTA® and NYSLTA for summary judgment in the Clarke case. The court deferred to the OCC's interpretation of the banking statute, which the agency applied after making the critical finding that Congress had not clearly addressed the issue of whether Section 92 of the National Bank Act encompassed title insurance.
ALTA® and NYSLTA Filed an Appeal
On January 7, 1992, oral argument was held on the appeal in the United States Court of Appeals for the Second Circuit. The appeal was pivotal as it was the best remaining chance for ALTA® and NYSLTA to exclude national banks from title insurance agency activities. Our major points were that Section 92 of the National Bank Act was the exclusive provision granting insurance agency powers to national banks, and it prohibited national banks from engaging in title insurance agency activities except in communities of 5,000 or less, and that selling title insurance was not incidental to banking.
On June 15, 1992, in ALTA® et. al. v. Clarke, the Court of Appeals for the Second Circuit reversed the decision of the lower court and decided in favor of ALTA® and NYSLTA. The Appeals Court concluded that 12 U.S.C. 92, which authorized a national bank "located and doing business in any place the population of which does not exceed five thousand inhabitants" to act as an agent for "any fire, life or other insurance company" impliedly prohibits national banks in places with more than 5,000 inhabitants from selling insurance, including title insurance.
In September 1992 Chase Manhattan Bank filed a petition for a Writ of Certiorari with the United States Supreme Court in this case. On June 14, 1993, the Supreme Court denied certiorari in Clarke and thus left in place the Appeals Court decision denying national bank authority to sell title insurance in locales with populations above 5,000.
On May 3, 1994, the U.S. District Court for the Southern District of New York issued a Final Judgment and Decree stating that: The June 20, 1989, ruling of the OCC approving the application of Chase Manhattan Bank to engage in the insurance agency business through two operating subsidiaries exceeds statutory authority, and is null and void; and Chase Manhattan must terminate all activities engaged in pursuant to this ruling.
When on November 17, 1988, the Federal Reserve Board approved the acquisition of Milwaukee Title Insurance Services, a title agency, by First Wisconsin Corporation, a bank holding company subsequently named Firstar Corporation, ALTA® challenged the approval by filing a lawsuit against the Board in the U.S. Court of Appeals for the D.C. Circuit.
This action by the ALTA® Board of Governors was further evidence that the industry would not ignore continued attacks by regulators.
On November 3, 1989, in the Firstar litigation, counsel for ALTA® argued before a three judge panel of the U.S. Court of Appeals for the D.C. Circuit that Firstar could not engage in title insurance agency activities through an operating subsidiary. The court ruled against ALTA® in this litigation.
The decision was based on the principles of Chevron, the leading decision on when the courts should defer to federal agency interpretations of statutes, which the states are charged with implementing. The court stated: "Even if we were to find the statute to be ambiguous with respect to whether title insurance agency activities are grandfathered under Exemption G (of the Garn-St. Germain Depository Institutions Act of 1982), this court must defer to the agency's construction of the statute."
In late 1989 ALTA® received reports that the Federal Reserve Board was considering rescinding its policy of allowing operating subsidiaries of state banks to engage in the same activities permitted their parent companies under state law. ALTA® testified in favor of the rescission.
But subsequently it was reported that the Federal Reserve Board would not go forward with this rescission because of a decision in the Merchants National litigation. In that case, on November 29, 1989, the second U.S. Court of Appeals in New York upheld a Federal Reserve Board ruling that the agency does not have the power to regulate the activities of state-chartered bank affiliates of bank holding companies. The court held that such state-chartered subsidiaries can engage in any insurance activities that are permitted under state law.
In addition to seeking a solution via litigation to the problem of banks entering the title insurance business, in 1990 the title insurance industry looked to federal legislation to restrict the expansion of banks into the insurance field.
On April 4, 1990, the House Financial Institutions Subcommittee held a hearing on the Merchants National case. ALTA® President Richard Toft, chairman, Chicago Title Insurance Company, Chicago, IL, submitted a letter on behalf of the title industry to Subcommittee Chairman Frank Annuzio (D-IL) in which he stated: "While we believe that this decision should be reviewed and reversed by the Supreme Court, if the Court does not reverse the lower court's decision, it is imperative that Congress act to eliminate this loophole."
After encouraging success in early 1991 on the House of Representative's side, ALTA® and others in the insurance industry saw efforts fall short late in the year to enact federal legislation to prohibit banks from entering the insurance business. In January 1993 the Federal Deposit Insurance Corporation proposed removing regulations that had been in effect since 1946 prohibiting banks from acting as sureties and guaranteeing title to real property. ALTA® was concerned about this development and filed comments on the proposed regulation, urging "that the FDIC explicitly prohibit bank underwriting of title insurance directly from a bank or from a subsidiary."
In 1993 the D.C. Court of Appeals in IIAA v. Ludwig upheld the government's administrative determination that a national bank in a "small town" can sell insurance nationwide from that small town. Mr. Ludwig, in 1993, had replaced Mr. Clarke as Comptroller of the Currency.
In 1996 the Supreme Court in Barnett Bank made it clear that a state may not prohibit a national bank located and doing business in a small place from selling any forms of insurance, including title insurance. This decision nullified the application of many states' antiaffiliation laws prohibiting banks and their affiliates from having insurance affiliates. The Supreme Court recognized that states remained empowered to regulate national bank activities. The Court noted, however, that a state may not "prevent or significantly interfere" with a national bank's ability to exercise any of its federally authorized powers, including the power to sell title insurance.
In 1996 the 104th Congress adjourned without enacting legislation broadening insurance powers for national banks or curbing the authority of the OCC to broaden bank powers.
ALTA® Modifies its Position
At its meeting in January 1997, the Board of Governors discussed the recommendation of the Government Affairs Committee that ALTA® might want to consider modifying its position on bank powers. As a result the Board of Governors adopted the following resolution on financial services affiliation: ALTA® does not oppose financial services affiliation provided that state regulation of insurance is preserved through absolute functional regulation and that adequate consumer safeguards are adopted, either at the federal or state level, or at both levels. On January 14, 1997, the OCC asked for comments on its proposed preemption of a Rhode Island statute providing for consumer protections on the sale of insurance by banks. One month later, ALTA® joined three other agent organizations in filing comments opposing the OCC's preemption of the Rhode Island law. In a letter to the OCC concerning this matter, ALTA® President Dan R. Wentzel, chairman and CEO, North American Title Company, Walnut Creek, CA, stated:
"The title insurance industry believes that state regulation of insurance is the linchpin of the insurance regulatory process. This attempt by the OCC to preempt a strong state insurance law specifically enacted to protect consumers when banks sell insurance is premature, outside the scope of the OCC's authority and poor public policy."
On May 14 Wentzel testified before the House Committee on Banking and Financial Services and stated in part as follows: "All members of the national insurance community, both underwriters and agents, have historically supported separation between banking and insurance. In the title insurance sector, support for this separation has been especially strong. This reflects that fact that title insurance is a mortgage-based product.
Title insurance is almost always purchased in conjunction with a real estate loan transaction, and paid for only once. There is no renewal and no after-sale market. As a result, there is an opportunity for a banking institution to create a captive market for title insurance products, virtually eliminating other competition. In taking advantage of their unique title insurance marketing position, a banking institution can seriously jeopardize the interest of consumers with respect to both price and product. For example, several years ago a consortium of savings and loans caused the failure of their captive title insurer, when they used reserves to shore up their institution.
ALTA® has successfully litigated against bank entry into the title insurance industry, challenging the OCC's determination that sale of title insurance was incidental to banking, and winning in the second circuit in ALTA® v. Ludwig.
That said, ALTA® is now prepared to support financial modernization in the form of affiliations involving banking and insurance entities, conditioned on strict state functional regulation and adequate consumer protection. As with other insurance trade associations, this support is more a recognition of the reality of the marketplace, following the Barnett Supreme Court decision, rather than a change in perspective.
ALTA® members continue to believe that bank participation in the sale and underwriting of title insurance creates significant problems that must be addressed. We believe these problems can be dealt with most effectively by permitting banks to engage in title insurance activities only through bank holding company affiliates, and by requiring that those activities be subject to consumer protection law and regulation. We strongly believe that bank holding company affiliates engaging in title insurance activity must be supervised on a functional basis by state agencies historically engaged in such regulation, and most capable of doing so.
ALTA® believes that limiting title insurance sales and underwriting to affiliates will minimize the threat to both bank and insurer solvency, promote functional regulation of insurers, and help keep a level playing field.
ALTA® also believes that every entity engaged in the sale or underwriting of title insurance should comply with RESPA and other specific state regulatory requirements, such as insurance reserves, consumer protection, antikickback, and controlled business statutes."
There will be more on the issue of banks in the title insurance business in the next issue of Title News.
ALTA® Contends That "TOP" is Title Insurance
Late in the summer of 1994, the Norwest Mortgage Title Option Plus Program, or TOP, became a concern to ALTA®. Norwest was the second largest lender in the country. ATI Title Company was a subsidiary of Norwest. Borrowers who obtained a mortgage from Norwest were solicited by ATI to obtain TOP. TOP informed the lender who was in title, according to the real estate records, and any lien of record. Norwest advertised that consumers would save at least 10% of the cost of lender's title insurance by using TOP. TOP provided no title protection to the borrower. It was not subject to rate or coverage regulation, reserve requirements, oversight by state agencies, or premium tax. Norwest/ATI contended that TOP was not insurance. ALTA® and others said that it was title insurance, and strongly objected to it as being anticonsumer. The program was approved by Freddie Mac and in December by Fannie Mae subject to various conditions.
In 1995 and 1996 the major areas of title industry activity concerning Norwest's TOP program occurred at the state level. ALTA® assisted state title associations and individuals to bring the TOP program under individual state regulatory supervision. In 1995 fourteen state insurance regulators advised Norwest that the TOP program constituted insurance/title insurance in their jurisdictions.
On November 2, 1992, HUD issued its regulations on RESPA. They were effective December 1, 1992. In early December ALTA® held a seminar in Washington, D.C., concerning the RESPA regulations. During the seminar a number of questions were raised concerning the regulations.
At the January 1993 meeting of the ALTA® Board of Governors, James R. Maher, ALTA® executive vice president, stated that the regulations were ambiguous and inconsistent, and made it difficult to formulate an industry position.
The Board designated an ALTA® Committee on RESPA to formulate policy recommendations regarding proposed changes in HUD's regulations or interpretation of those regulations. Each national underwriter was to appoint one member, and three agent members were to be appointed.
In response to concerns expressed by several agent members and at least one underwriter who had been accused of violating Section 8 of RESPA by refusing to recompense surveyors when transactions failed to close, Jim Maher outlined ALTA®'s concerns in this area in a letter to HUD. He concluded that "HUD should enlighten everyone as to what its enforcement policy in an area like this will be rather than singling out people who have engaged in a practice long accepted but now suddenly characterized by HUD as violative of federal criminal law."
HUD requested title industry input on defining "core title agent services" in RESPA. ALTA® consensus on whether to provide that input and what the content should be was difficult to achieve. Nevertheless, the Board of Governors, at its March 1993 meeting, approved a statement entitled "Suggested Language for Clarifications to New RESPA Regulations." It was forwarded to HUD along with a cover letter from ALTA® President Richard J. Oliver, president, Smith Abstract & Title Inc., Green Bay, WI, and Immediate Past-President Richard A. Cecchettini, president, Old Republic National Title Insurance Co., Minneapolis, MN, and stated in part: ALTA®'s position represents an interpretation of, and a reaction to, the RESPA regulations as adopted on November 2, 1992, and does not necessarily represent how title people feel about the appropriateness of the federal government regulating the title insurer-agent relationship.
HUD's enforcement policy should be sufficiently flexible to allow for legitimate differences in local/regional business practices. In addition the validity of the regulations was challenged in a lawsuit brought by the Mortgage Bankers Association and CRISIS, a coalition of independent settlement service providers.
Federal Legislation to Amend RESPA was Proposed
By letter dated March 1, 1993, the Chairmen of the full Banking and Housing Subcommittees in the Senate and the House sent a letter to HUD Secretary Henry Cisneros urging the Secretary "to undertake a thorough review of the final RESPA rule." On January 4, 1994, ALTA® staff and ALTA®'s outside counsel met with senior HUD staff and legal counsel to discuss ALTA®'s position regarding RESPA regulations. HUD staff could not be as candid as they would have liked because the regulatory revisions to RESPA were still under consideration by HUD. ALTA® representatives were able to discuss at length ALTA®'s positions on controlled business, core title agent services, and state-controlled business law preemption.
On July 21, 1994, HUD published the long-awaited proposed RESPA regulations. The regulations provided for additional restrictions on employer-employee referrals and computerized loan originations systems (CLOS). Minor revisions were made in the controlled business disclosure form. One of the most controversial aspects of the regulations was the ability of employers to pay employees for the referral of business to affiliates. The proposed rules allowed the payment of bonuses and compensation to managers of controlled business for referrals to affiliates as long as the compensation was not tied directly to the number and value of referrals and the employees did not routinely deal with the public. Although this was an improvement over the existing rule, it did not take into account the ability of managers to exercise more subtle coercion over their employees to make referrals to affiliates. Particularly disappointing to ALTA® was HUD's refusal to amend the rule on preemption of state-controlled business laws. HUD refused to acknowledge ALTA®'s position that the HUD Secretary did not have the authority under the RESPA statue to preempt conflicting state-controlled business laws unless he determined that they provided less protection to consumers and competition. In 1995 a House bill, H.R.1362, the "Financial Institutions Regulatory Relief Act" would transfer RESPA regulatory authority to the Federal Reserve Board and enforcement authority to the Federal Trade Commission.On May 23, 1995, Parker S. Kennedy, ALTA® immediate past-president, and president, First American Financial Corporation, Santa Ana, CA, told the House Financial Institutions and Consumer Credit Subcommittee that ALTA® had serious reservations concerning these proposals.
At the direction of the Board of Governors at its October 1996 meeting, ALTA® President Dan R. Wentzel appointed a task force to submit recommendations to the Board for a revised ALTA® position on RESPA Section 8. The task force met in December and presented its recommendations to the Board in January 1997. The task force called for radical change in ALTA®'s long-standing RESPA Section 8 position: acceptance of controlled business as a market reality, provided services were actually rendered by the entity; repeal of Section 8 with its replacement by some alternative regulatory approach to be determined though coalition efforts; and certain interim measures to erase the negative effects of existing enforcement problems.
Mr. Wentzel reported that the prevailing view from HUD and Capitol Hill was that repeal of Section 8 was not feasible. On July 9, 1997, Joseph M. Parker, Jr., chairman of the ALTA® Abstracters and Title Insurance Agents Section, president, Parker Title Insurance Agency Inc., Winston-Salem, NC, testified before the Senate Subcommittee on Financial Institutions and Regulatory Relief concerning RESPA. He recommended changes to RESPA Section 8:
to provide express recognition that compensation arrangements between insurers and their bona fide title agents can include compensation for the solicitation of business; and
that RESPA criminal penalty provisions be eliminated.
At the March 1998 meeting of the Board of Governors, the Board adopted the recommendation of the Government Affairs Committee that ALTA®, within the context of modifications to RESPA Section 8, oppose packaging or bundled pricing of goods and services, recognizing that the consumer had a separate benefit or interest in the selection of the product or service and the pricing of each component of the package. This policy clarified the past ALTA® policy that "ALTA® supports packaged pricing of goods and services which are for the lender protection only and in which the consumer has no separate benefit or interest in the selection of the product or service."
ALTA®'s Strategic Plan
At its meeting on March 18, 1996, the Board of Governors approved the initial step in the association's Strategic Plan, which included Vision 2002, a Mission Statement, Program Goals and Management Goals. Vision 2002 provided that by the year 2002, ALTA® would be:
Other Firsts This Decade
The Land Title Institute released 10 educational training videos from 1989-1995, and held one regional seminar annually from 1989-1998.
In 1991 ALTA® developed a set of guidelines to encourage uniform claims coding.
In May 1993 ALTA® held its first Federal Conference.
In late 1993, the ALTA® Land Title Systems Committee completed a three-year effort to develop EDI (Electronic Data Interchange) Standards for the title industry. The project included a cooperative effort with other real estate and mortgage finance participants at both the MBA EDI Workgroup Meetings and DISA (Data Interchange Standards Association), the secretariat for data interchange standards. The result was publication of approved standards for Title Insurance Services Order and Response, Title Evidence, and Real Estate Settlement Information.In 1996 ALTA® held its first annual Legal Symposium for underwriter, agent and associate member counsel.
In 1998 the first annual vendor survey to identify products specifically targeted to the title industry was distributed by the Technology Committee in cooperation with the Committee on Internal Auditing.
The Next Decade: 1999-2007
Look for the final article in ALTA®'s 100-year history series on the next issue of Title News. If you missed any issues this year, you can find all of the articles 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 email@example.com.|