Preoccupied with the impeachment proceedings in the early part of the year, Congress has now begun to make up for lost time and turned its attention to legislative business. As Title News goes to press, both the House and the Senate have begun action on legislation affecting the title insurance industry.
To date, Congress has begun action on Financial Services Modernization and Regulatory Burden Relief legislation. In the Banking Committees, which have jurisdiction over most of the statutes regulating the financial services industry, consideration of two bills is already underway. Now scheduled for quick action are the Financial Regulatory Relief and Economic Efficiency Act of 1999, and Financial Services Modernization legislation.
Affinity Group Exception to RESPA Proposed
The Regulatory Burden Relief bill has already been ordered reported in the Senate. This bill is actually fairly narrow in scope and has dropped most controversial provisions, such as loosening of the anti-tying provisions of bank holding companies.
However, questions have been raised concerning one RESPA provision, which permits payments by settlement service providers (other than lenders making loans to be used to purchase residential real estate) to "affinity groups" for the endorsement of their products or services to the members of the group. This new RESPA exception is seen by some as a provision which would potentially allow affinity groups to exert pressure on settlement service providers to pay referral fees for access to affinity group members, such as union members. On the other hand, some real estate industry groups see it as an opportunity to obtain an endorsement of affinity groups, similar to the preferred provider endorsements that now exist. The companion House legislation to the Senate bill, Chairman Marge Roukema’s(R-NJ) Regulatory Relief bill, was passed by the House late in the last Congress. This year, Chairwoman Roukema has indicated that she will reintroduce the bill and hold a hearing on this legislation in her Subcommittee later this spring. Such action will not occur until after Financial Services Modernization legislation is reported from the Committee.
Congress Proposes Expansions of National Bank Powers
At this time, both the House and Senate Banking Committees are scheduled to consider legislation broadening the powers of national banks. ALTA® is evaluating a variety of options to support the value of the industry’s product.
Historically, ALTA® and the industry have devoted significant resources and energy to the Government Affairs effort in opposing bank involvement in title insurance. However, during the past several years the Office of the Comptroller of the Currency (OCC), the regulator of national banks, has issued a series of opinions expanding the insurance sales and underwriting powers of national banks. These opinions, which were challenged by the insurance industry but approved by the courts, have changed the legal landscape, and therefore changed the willingness of banking representatives to negotiate changes in legislation. Politicians are also reluctant to turn back the clock and take authority away from an entity that already has it.
In recognition of these legal changes, ALTA® revised its policy and legislative strategy on banks in insurance at the beginning of the last Congress. Much of the debate in the legislation centers on the choice of regulator. In general, the financial serivces modernization proposals would grant new authority to bank holding companies, which are regulated by the Board of Governors of the Federal Reserve System, to engage in insurance underwriting activities thorugh a separate affilate. Regulation through a holding company structure would facilitate maintenance of a separate entity and "functional"? in this case "state"? regulation of insurance. Some of the proposals would permit national banks and their subsidiaries to engage in sales and underwriting, thus giving the OCC authority over bank insurance sales and underwriting.
Current policy provides that ALTA® would not oppose financial services affiliation legislation, provided that 1) state regulation of insurance is preserved through absolute "functional regulation," and 2) adequate consumer safeguards are adopted, either at the federal or state level, or at both levels. Thus, in the last Congress, ALTA® sought separation of banking and title insurance agency activities through affiliation with the Federal Reserve as the regulator in order to facilitate state regulation of insurance.
As reported in the press, Secretary Robert E. Rubin of the Treasury Department, and Alan Greenspan, Chairman of the Federal Reserve Board, have been engaged in a dispute over jurisdiction. Secretary Rubin has jurisdiction over the OCC while Alan Greenspan, as head of the Federal Reserve System, has jurisdiction over bank holding companies. As noted above, ALTA® has sought to have title insurance sold through a non-banking affiliate of the holding company for several reasons. First, the OCC has historically granted the banks’ every request. Consequently, ALTA® has sought to minimize OCC authority over bank activity in the title insurance industry. The easiest way to do this has been to seek transfer of authority to another Federal regulator who has regulatory authority for the financial services industry. The Federal Reserve System, which regulates bank holding companies, has historically allowed bank securities affiliates to be regulated by the Securities and Exchange Commission. Further, the Federal Reserve has had a somewhat more consumer-oriented approach to sale of insurance. Consequently, ALTA® has attempted to ensure that the Federal Reserve would have jurisdiction over title insurance activities by entities affiliated with the bank holding company.
In recent years, the OCC has been particularly generous in granting authority to national banks, while the Federal Reserve has been, relatively speaking, more reasoned. In addition, it was believed that maintenance of a separate entity within the holding company structure would facilitate so called "functional regulation" of an insurance entity. ALTA® will continue this fight to preserve the regulation of insurance at the state level.
Cases and Opinions Broaden Bank Powers
The OCC, the regulator of national banks, issued an opinion to Citibank in 1987 allowing banks to underwrite their own mortgage loans as long as the underwriting was 100 percent reinsured. This opinion was issued under the statutory authority that underwriting title insurance was "incidental" to banking. We are unaware of any national banks that are presently underwriting title insurance and consequently have not had grounds to challenge the opinion. At this writing, Senator Phil Gramm(R-TX) has begun circulating legislation proposing that national banks be given authority to underwrite title insurance through an operating subsidiary, regulated by the OCC.
Through a series of interpretive letters (the legal mechanism through which the OCC approves a bank’s authority to engage in new activities) the OCC has concluded that national banks have the authority to own minority interests in other business enterprises. In addition, through another, more heavily litigated series of opinions, the OCC has broadened the insurance powers sales of national banks.
Of most relevance to the title insurance industry is a preemption case, Barnett Bank of Marion County, N.A. v. Gallagher 116 S. Ct. 1103. In this case, the Supreme Court held in favor of the bank and the OCC. It stated that a Florida statute prohibiting a bank, an affiliate, or subsidiary of a bank from engaging in insurance agency activities, was preempted by ?92 of the National Bank Act. The case effectively allows a national bank to sell insurance from a town with a population of less than 5,000. The Court held that the Florida statute "significantly interfered" with the bank’s ability to sell insurance, under ?92.
The OCC has subsequently issued a series of opinions broadening the scope of that small town provision to the point where sales of insurance can effectively be conducted through places of 5,000 under a U.S. Census Bureau designation (First Union National Bank, November, 1996), (Division of Legal Services, Florida Department of Insurance, February 27, 1998).
With respect to title insurance specifically, last year, the OCC issued a series of opinions (National Penn Bank, Letter #275, May, 1998; Mellon Bank, Letter Appro. #276, June 1998; Interp. Letter #842, November, 1998). These opinions do not break new legal ground, as they all allow the sale of title insurance through small towns. However, they are significant to the extent that they are in effect a roadmap for banks to enter the title insurance industry. The letters essentially approve joint venturing with banks on title insurance sales and other real estate closing services.
In addition to federal and state legislation, the banks are seeking expansion of their insurance powers through litigation. In Association of Banks v. Duryee, Huntington National Bank and two banking associations brought an action in the U.S. District for the Eastern District of Ohio, contending that two Ohio statutes "significantly interfere" with national banks’ federal rights to sell insurance in Ohio under ?92 of the National Bank Act (small towns exception), which should result in their preemption under the Barnett standard. One such statute specifically prohibits banks (and other controllers of business) from selling title insurance. This statute would be subject to the Barnett "significant interference" test, and in all likelihood would be pre-empted under that case. The other statute prohibits insurance agent licensing of any entity if the "principal purpose" of the licensing is to place insurance on the applicant’s own property. In addition, the "principal purpose" test applies to situations where the entity or an affiliate is, among other things, a payee.
Thus, the banks have taken a multi- pronged approach to increasing their involvement in our industry. As we continue the fight in Congress, what do we expect to see in the marketplace? Historically, many lenders, such as federal savings and loans, credit unions, mortgage banking companies, and state chartered banks, have had legal authority to engage in title insurance sales, and have, in many instances, actually engaged in title insurance sales. In many states, these lender-affiliated entities have operated under specific state statutes that, in some instances, have recognized the need for independence through requirements such as controlled business statutes.The marketplace question is one that you will have to determine independently, for your specific market area. Those states which have controlled business statutes may see less activity than those where bank entry is easier. Further, the RESPA joint venture requirements are still in place and will be followed. They may well remain the primary federal regulations affecting bank involvement in the industry.