From the ALTA® viewpoint, convening of the 105th Congress this January is characterized by a midstream atmosphere. Although there were legislative victories in 1997, numerous pending federal issues on this year's agenda reflect action during the previous year.
In the 1997 ALTA® victory column are:
Turning to the 1998 Congress, the remaining challenges are formidable. There is need to persuade the Treasury Department to implement the law and remove the administrative burden of 1099-S reporting from title companies. Banking reform is likely to be on the table in the House this spring. And, RESPA reform is under active consideration in both House and Senate.
Following is a summary of the major actions, along with a perspective on the scenarios for 1998.
Bank Powers 1997 Legislative Action ALTA® has been actively pursuing a federal legislative and regulatory effort to moderate bank entry into the title insurance industry. In February of 1997, ALTA® modified its policy on national bank entry to provide that ALTA® would 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 both. Consistent with that policy, ALTA® sought and achieved adoption of amendments in the House Banking and Commerce Committees when they considered HR 10, the Financial Services Competition Act of 1997. The legislation significantly broadens authorization for national banks to engage in non-banking activities, such as sale of securities, through holding company structures. It also authorizes national bank entry into the insurance industry.
In order to preserve an entity that could be regulated under state law, ALTA® sought to ensure that national bank entry into the title industry, unlike other forms of insurance, would be restricted to affiliation. ALTA® consequently sought and obtained several amendments to the bill. The House of Representatives failed to pass the bill before Congress recessed, so this legislation remains pending. Consequently, hope remains that ALTA® will be able to affect a positive outcome on some of the outstanding issues. A synopsis of the major insurance provisions of the relevant bills is provided below. HR 10: Financial Services Modernization (Reported by the Committee on Banking and Financial Services) The Banking Committee version pre-empts state laws which "prevent or restrict" (the standard established in the United States Supreme Court Barnett decision) insured depository institutions from affiliation with insurance entities. The bill would provide that national banks cannot directly underwrite insurance. But, through affiliation in a holding company regulated by the Federal Reserve Board, banks may underwrite all forms of insurance, including title insurance.
In general, national banks would be able to sell insurance directly from the bank. Thanks to Rep. Rick Hill (R-MT), ALTA® was able to obtain adoption of an amendment clarifying that neither national banks nor their subsidiaries would be permitted to underwrite title insurance from the bank. The bill thus includes a new prohibition barring both national banks and their subsidiaries from engaging in title insurance sales activities - - which overturns opinions from the Office of the Comptroller of the Currency(the regulator of national banks) allowing these activities.
A grandfather provision is included in the Banking Committee version of the legislation that permits those national banks or their subsidiaries that were engaged in title insurance sales activities prior to January 1, 1997, to continue in those activities. Beyond those grandfathered entities, the amendment extinguishes the rights of national banks to sell title insurance under 12 U.S.C. Sec. 92, and prohibits banks from selling or underwriting title insurance under the incidental powers clause of 12 U.S.C. 24(7). However, consistent with ALTA® policy, national banks could engage in title insurance sales activity through affiliation.
The bill also contains some general consumer protection provisions applicable to insurance sales, and establishes a national council on financial services which could determine whether an activity constituted insurance or banking.
HR 10, Financial Services Modernization (Reported by the House Commerce Committee) This version of the bill also revises the bank holding company act to allow bank holding companies regulated by the Federal Reserve Board to engage in insurance activities. Like the House Banking Committee bill, the Commerce version pre-empts state laws which "prevent or restrict" an insured depository institution from being affiliated with an insurance entity. That standard would not pre- empt other state laws, i.e., controlled business statutes. Consequently, only those state laws which prevent a national bank from "engaging," i.e., those with a direct prohibition, or "significantly interfering with the ability to engage" directly or indirectly in an authorized activity, would be pre- empted. This language would present a problem in those states which have a direct prohibition against bank involvement (e.g., New Jersey) in title insurance activities. However, as it is also the Barnett Supreme Court test, it would in all likelihood be upheld in litigation.
The Commerce Committee version of the bill extolls McCarran-Ferguson, requires that insurance entities comply with state insurance licensing laws, and requires that sales of insurance be functionally regulated. It requires that insurance underwriting be done through an affiliate. Unlike the banking bill, the Commerce version includes a definition of insurance. It also divides products developed after January 1, 1997 into insurance and banking products. In order to avoid development of a TOP-like banking product, ALTA® sought and obtained an amendment including title insurance in the list of insurance products.
The bill requires that national banks and subsidiaries enter insurance sales for a two-year period only by acquisition of existing licensed agencies.
The bill retains the language offered by Montana Representative Hill, prohibiting direct bank involvement, but includes a "parity" exception. The "parity" provision broadens national bank authority by (1) allowing state-chartered banks authority to sell insurance in towns under 5,000, because national banks now have authority to sell insurance in towns under 5,000, and (2) giving national banks back the authority to sell statewide, in the same manner and extent as provided under state law.
The bill authorizes banking regulators to promulgate consumer protection regulations for insurance products offered by the bank. 1997 Regulatory Action The Office of the Comptroller of the Currency(OCC) issued several opinions in 1997 granting national banks significantly broader authority to engage in insurance and security sales and underwriting. Namely, the OCC proposed to pre-empt state law in Rhode Island which provides consumer protection requirements for banks selling insurance. ALTA® joined the insurance agent community in submitting comments of February, 1997, and additional comments in May, 1997.
In the late fall and winter, OCC issued several opinions to allow national banks to engage in underwriting, namely, to allow national banks to set up captives to provide mortgage reinsurance, and to underwrite municipal revenue bonds. Banks have been acting on the opinion issued to First Union Corporation in 1996, broadening the scope of the current exemption of national banks to sell insurance from small towns.
RESPA 1997 Legislation Moratorium on Class Action Lawsuits Rep. Bob Ehrlich (R-MD) introduced legislation, H.R. 1283, the "Real Estate Settlement Procedures Class Action Relief Act of 1997," to attempt to place a moratorium on lawsuits which mortgage brokers are subject to under the yield spread premium. No hearings were held in 1997, but the legislation remains pending in 1998.
HUD Rule Action has centered on a rule proposed by HUD in the early fall that would provide for up front disclosure of:
All fees the mortgage broker would receive for obtaining a mortgage for the homebuyer, and
Whether the mortgage broker commits to getting the borrower the best loan available from the lenders doing business with the broker.
The proposed rule includes a new one-page disclosure form - - the honest lending contract - - written in "plain English" to be signed by a mortgage broker before a borrower applies for a loan. Under the draft rule, brokers will be required to check one of three boxes, which would include a line item stating:
"I represent you, but may get a fee from a lender. A broker who uses the disclosure agreement would be safe harbored from enforcement action as long as their fees fall inside parameters established when the rule becomes final."
ALTA® filed a comment with HUD objecting to HUD's request for comments about pricing in the rule, expressing concern that the Department has structured the proposed safe harbor as a presumption that can be rebutted by a determination that the compensation is not actually reasonable, based on elements such as compensation of other providers in the marketplace. This approach runs dangerously close to rate regulation, a function which is appropriately conducted in the title industry at the state level. ALTA® expressed concern that the avenue taken was beyond the legitimate scope of RESPA regulation. With respect to operational issues, it appears that, if the disclosure is provided when the consumer contracts with the mortgage broker or when the consumer expresses serious interest in obtaining a loan from the broker and prior to application, it would be provided prior to the selection of the title provider and closing agent. If the disclosure is to be provided only before receipt of any payment, and payment is made out of closing funds, ALTA® commented that the mortgage broker should remain responsible for preparation of the disclosure.
Affinity Programs RESPA is addressed in legislation introduced in the Senate shortly before Congress recessed for 1997. Section 206 of S 1405, the Financial Regulatory Relief and Economic Efficiency Act of 1997, would clarify that affinity group marketing is not covered by RESPA. This language is similar to language that was included in regulatory relief legislation proposed in the last Congress.
This clarification is intended to accommodate marketing of home equity loans to credit card customers by MBNA and Household International. It may also accommodate existing company arrangements with HFS. ALTA® is exploring the implications for the title industry.
Mortgage Reform Working Group In response to concerns by the lender community stemming from class action lawsuits on the mortgage broker yield spread premium, Congress directed the real estate industry and the consumer group community to meet to develop alternatives to RESPA. Consequently, ALTA® has participated in a Mortgage Reform Working Group, which has been attempting to develop a consensus on RESPA reform. A number of groups have developed reform proposals, which do tend to include lender's title insurance in a package. At this writing, the group has decided to reach a determination of "what is consensus." ALTA® also participated in a forum with the Federal Reserve Board on December 15, 1997, to discuss this matter.
ALTA® policy currently states that ALTA® supports packaged pricing of goods and services that are for lender protection only and in which the consumer has no separate benefit or interest in the selection of the product or service.
Bankruptcy With the help of Joe Bonita of Chicago Title, who testified before the House Judiciary Subcommittee last year, and the assistance of the First American Title Insurance Company, ALTA® has achieved inclusion of amendments to overturn McConville in HR 764, Bankruptcy Amendments of 1997, which passed the House on November 12, 1997. The amendments are also included in Title IV "Technical Corrections" of S 1301, the Consumer Bankruptcy Reform Act of 1997, which has been introduced in the Senate. In McConville, the Ninth Circuit denied protection for a lender's lien under section 549(c) of the Bankruptcy Code to disallow perfection of a lender's lien after the borrower filed an undisclosed bankruptcy. The court limited the application of section 549(c) to transfers of fee interests only. The amendments overturn the Ninth Circuit decision, and clarify (1)that post petition transfers are valid, (2) are exempt from automatic stay, and (3)may be transfers of security interests in real property.
As the language is identical in both bills, it appears likely that the provisions will go forward.
PMI Legislation Legislation introduced in the Senate, S 318, established new requirements for disclosure and mandatory cancellation of private mortgage insurance. One version of the legislation included a statutory requirement for preparation and delivery of the disclosure on the closing agent. Although this provision was dropped in the Senate-passed version, it may reappear. The House-passed legislation does not address this issue. Tax Reporting The "Taxpayers Relief Act of 1997" signed by the President on August 5, 1997, modifies both capital gains treatment for sales of principal residences and Form 1099-S reporting requirements.
Capital Gains for Home Sales Under prior law, taxpayers can generally roll over the gain on the sale of a personal residence into the cost of a replacement residence without paying any capital gains tax. Taxpayers over age 55 are also provided with a one-time opportunity to exclude up to $125,000 of gain on the sale of a personal residence. Under prior law, taxpayers track their gain and file Form 2119 to report the transaction with their annual tax returns.
Under the new law (Sec. 312 of the "Taxpayer Relief Act of 1997"), taxpayers are generally able to exclude up to $250,000 of gain ($500,000 if married filing jointly) from the sale or exchange of a principal residence. The provision is generally effective for sales after May 6, 1997, although a taxpayer may elect to take prior capital gains treatment if there is a valid contract in effect on August 5. The exclusion can be used only once every two years, and there are many limitations in qualifying for the capital gains exclusion, such as a requirement that the property should have been used as a principal residence for two of the last five years, denial of the exclusion to expatriates, and a requirement for depreciation recapture for home offices and rentals. Real Estate Reporting, Form 1099-S Under prior law (Sec. 6045(e) of the I.R.C.), real estate reporting persons file for most real property transactions, information on gross proceeds, and state real property tax proration amounts associated with a sale, on Form 1099-S. The new law provides that real estate reporting persons generally need not file information reports (Form 1099-S) for sales or exchanges of principal residences with a sale price at or below $250,000 for a single individual (or at or below $500,000 if the seller is married), as long as the reporting person obtains a certification from the seller in a form acceptable to the Secretary [of the Treasury] that the property (1) is the principal residence and (2) the full amount of the gain on such sale or exchange can be excluded. Consequently, closers should continue to collect information necessary to file Form 1099-S until Treasury issues an "acceptable" certification form. We expect the 1099-S filing requirement will still be applicable in the District of Columbia to track the first-time homebuyers credit of $5,000.
Illustration A single individual bought property for $100,000 in 1992, has used it as a principal residence for at least two years, and sells it for $300,000 in December, 1997. The individual would not have to pay capital gains taxes, as they only have $200,000 worth of gain, and there is an exclusion of $250,000 from capital gains taxes on sales of principal residences. Nevertheless, a Form 1099-S should be filed as the property sale price is over $250,000. Implementation of elimination of tax reporting requirements for properties below either $250,000 in sale price or $500,000 is currently awaiting a certification notice from the Treasury Department.
Like-Kind Exchange The Administration's like-kind exchange proposal, which was included in their tax simplification plan early last spring, would have raise $1.8 billion by narrowing the legal test from like-kind to similar- in-use, and allowing consumers to roll over funds from a like-kind exchange on their own, thereby eliminating the use of title entities as intermediaries.
ALTA® actively participated in coalition efforts to oppose the changes, and arranged meetings for Chicago Title Deferred Exchange Corporation with several members of Congress to line up support on the matter.
Acting in conjunction with the real estate industry, ALTA® was successful in preventing adoption of these provisions.
Payments to Attorneys The Administration proposed reporting of payments to attorneys in connection with legal services in their tax simplification proposals last spring. Payments made to attorneys are reportable on Form 1099-MISC as of December 31, 1997. ALTA® successfully battled the requirement to include this provision on Form 1099-S. Reporting is required on Form 1099-MISC.
Bankruptcy Code Lien Issues Senator Charles Grassley (R-IA) has introduced legislation, S 1149, the "Investment in Education Act of 1997," to amend Section 505 of the Bankruptcy Code to permit a bankruptcy court to reverse a property valuation decision only when a bankruptcy debtor has the right to challenge a decision under state law. In addition, the bill would amend Bankruptcy Code Sec. 724(b) to provide that property taxes protected by liens are paid ahead of other expenses. It would prevent out of state bankruptcy judges from determining the fair market value of property located in another state.
The bill is supported by local governments and school districts, but appears to be opposed by the American Bar Association and the National Bankruptcy Conference.
HR 1534: Private Property Rights Implementation Act of 1997 Legislation clarifying the definition of "final agency action" and expanding the jurisdiction of federal claims courts passed the House late in the session and is moving in the Senate this year. A floor amendment added on the House floor requires federal agencies to give notice to the owners of affected properties explaining their rights under the bill's amendments, and the procedures for obtaining compensation. ALTA® members may be interested in the form and content of the notice requirements.
New Issues in 1998 Congress begins its 1998 work at the end of January. The new agenda was not established at the time of this writing. Republican priorities will include fighting crime, improving education, reforming Social Security, and cutting taxes. Democratic priorities will be balancing the budget and targeted tax cuts. Consequently, title issues are likely not to be a high priority. But, it can be expected that there will be concerns with both inadvertent actions of federal legislators and regulators unfamiliar with the title product, and actions by competitors, attempting to shift liability and responsibility to title professionals.