Despite overwhelming odds, the American Land Title Association® (ALTA®) and its membership chalked up significant victories during the course of debate on the Financial Services Modernization Act. Several industry-initiated amendments successfully limit bank entry into the title industry and ensure that, to the maximum extent possible, banks entering the business must comply with the law applicable to the rest of the title insurance industry.
At the last moment of negotiations, the title insurance industry was unfortunately swept into a broadly negotiated deal between the Chairmen, the Federal Reserve Board, and the Treasury Department on operating subsidiaries. In addition, heavy lobbying and misinformation put out by the American Bankers Association hindered the ability of Reps. Spencer Bachus (R-AL) and Bill McCollum (R-FL) to restore ALTA®’s proactive efforts to specifically preserve our many distinct state laws over national bank operating subsidiaries; however, many protections do remain.
As Title News goes to press, language on the compromise is still being drafted. However, our industry has had significant victories, some of which are outlined below, improving protection of the title insurance product beyond its current interpretation under Federal law established by the banking regulator and the courts. In addition to making sure that the title insurance product is subject to state regulation, the bill requires compliance with state licensing laws, preserved our ability to litigate other state laws in Federal courts, and gained ground in limiting the Office of the Comptroller of the Currency (OCC).
Sales: At present, national banks can effectively sell insurance, including title insurance, nationwide under the legal authority of "Section 92." That 1916 federal statute, upheld by the Supreme Court in 1996 in the Barnett case, allows national banks located in places with populations not exceeding 5,000 to sell all forms of insurance, including title insurance from these small places. The OCC has interpreted this provision broadly, expanding it to allow sales from "census places" within large communities"such as heavily populated but separate "cities, boroughs, towns and villages" in metropolitan areas such as Sarasota, Florida. Since 1996, the OCC has continually expanded the scope of these national bank insurance sales powers through a series of opinions, and Federal courts have consistently upheld OCC interpretations. The insurance industry has actually seen the national banking regulator pre-empt not only state law prohibiting national banks from affiliating with insurance entities but also important licensing laws. Further, national banks can use current authorizations to own minority interests in corporations to invest in title agency activities.
Underwriting: The OCC granted a national bank authority to underwrite title insurance in 1987.
Financial Services Bill
The bill, which will soon be on its way to the President, contains several title insurance specific provisions which foster preservation of the title insurance product. ALTA® sought and obtained an amendment including title insurance within the definition of insurance products subject to state insurance regulation, thus limiting the OCC’s ability to approve "knock-off" products under development by the banks. ALTA® was also successful in overturning the 1987 OCC opinion that granted underwriting powers to a national bank. Due to ALTA®’s efforts the bill now requires that title insurance underwriting be performed only through an affiliate within a holding company structure, thus removing regulatory authority from the OCC. Regulation of the holding company is subject to the Federal Reserve Board. State insurance regulators will continue to serve as the "functional regulator" of companies engaged in insurance activities regulated under state law. In fact, the Conference report on the bill requires that the new statutory provisions supercede and replace liberal rules which were already proposed by the OCC.
ALTA® was successful in ensuring that the bill require that national banks’ selling title insurance comply with the state laws applicable to state chartered banks , so called "parity." It also provides that insurance sold by national banks shall be "functionally" regulated on the state level. Further, the bill preserves the insurance industry’s ability to litigate against bank’s claims that specific state laws fall under the Barnett standard, that they "significantly restrict" the bank’s ability to sell insurance.
ALTA® was also successful in having included in the legislation this year an improvement over last year’s bill which prohibits national banks from using general state law provisions linked to general national bank law as authority to sell title insurance. For example, Wyoming has a "wild card provision" in their state statute which allows each state chartered bank to "engage in any activity in which a federally chartered insured depository institution operating within the state is authorized to engage..."
Unfortunately, as mentioned above, these specific statutory "parity" restrictions on the national bank were not placed specifically on the bank operating subsidiaries in last minute negotiations. Nevertheless, the bill explicitly preserves state licensing laws. A specific exemption for title agents from the national licensing scheme provided for insurance agents was also obtained by ALTA®. The bill does "grandfather" national banks and subsidiaries selling or underwriting title insurance as of date of enactment of the Act; grants state insurance commissioners "equal deference" with the OCC in insurance disputes; and provides that the OCC and the Federal Reserve will cooperate on controversies arising from the new "insurance-securities-banking" conglomerates.
Few, if any of these changes are likely to happen overnight. The dates on which provisions in the bill become effective vary. For example, while in general Title III of the bill, State Regulation of Insurance becomes effective upon enactment of the legislation, many institutions are likely to delay acquisitions or refrain from entering new areas until the Federal Reserve Board issues implementing regulations.
Many national banks have already relied on the OCC opinions and court decisions to enter the title insurance industry. Further, the bill does contain significant constraints on the OCC, which are more restrictive than current interpretations. Nevertheless, the legal certainty provided by an enacted bill may serve to encourage many more banks to consider entering the industry in one form or another. State law hurdles and RESPA remain significant compliance burdens that will moderate and affect bank entry. The only real business certainty is that the title industry will continue to face customer interest in entering the title business.