[Federal Register Volume 61, Number 183 (Thursday, September 19, 1996)]
[Rules and Regulations]
[Pages 49398-49400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24069]



[[Page 49397]]


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Part IV





Department of Housing and Urban Development





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24 CFR Part 3500



Real Estate Statement Procedures Act; Statement of Enforcement 
Standards: Title Insurance Practices in Florida; Final Rule

  Federal Register / Vol. 61, No. 183 / Thursday, September 19, 1996 / 
Rules and Regulations  

[[Page 49398]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 3500

[Docket No. FR-4114-N-01]


Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner; Real Estate Settlement Procedures Act; Statement of 
Enforcement Standards: Title Insurance Practices in Florida; RESPA 
Statement of Policy 1996-4

AGENCY: Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner, HUD.

ACTION: Statement of policy.

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SUMMARY: This Statement advises the public of the enforcement standards 
HUD applies to determine whether certain practices involving title 
insurance companies and title insurance agents comply with the Real 
Estate Settlement Procedures Act (RESPA). Although this Statement 
specifically addresses issues and practices that HUD reviewed in the 
State of Florida, its general principles may apply by analogy to other 
geographic and settlement service areas.
    This Statement discusses HUD's interpretation of two exceptions: 
Section 8(c)(1)(B) involving ``payments of a fee by a title company to 
its duly appointed agent for services actually performed in the 
issuance of a policy of title insurance;'' and Section 8(c)(2) 
involving the ``payment to any person of a bona fide salary or 
compensation or other payment for goods or facilities actually 
furnished or for services actually performed.'' HUD is publishing this 
Statement to inform the public of its interpretation of the law.

EFFECTIVE DATE: September 19, 1996.

FOR FURTHER INFORMATION CONTACT: David R. Williamson, Director, Office 
of Consumer and Regulatory Affairs, Room 5241, telephone: (202) 708-
4560. For legal enforcement questions, contact Peter S. Race, Assistant 
General Counsel, Program Compliance Division, Room 9253, telephone: 
(202) 708-4184. (These are not toll free numbers.) For hearing and 
speech-impaired persons, this number may be accessed via TTY (text 
telephone) by calling the Federal Information Relay Service at 1-800-
877-8339. (This number is toll free.) The address for the above listed 
persons is: Department of Housing and Urban Development, 451 Seventh 
Street, SW, Washington, DC 20410.

SUPPLEMENTARY INFORMATION:

General Background

    Section 8(a) of the Real Estate Settlement Procedures Act (RESPA) 
prohibits any person from giving or accepting any fee, kickback, or 
thing of value for the referral of settlement service business 
involving a federally related mortgage loan. (See 12 U.S.C. 2607(a).) 
Section 8(b) of RESPA prohibits any person from giving or accepting any 
portion, split or percentage of any charge made or received for the 
rendering of a settlement service other than for services actually 
performed. (See 12 U.S.C. 2607(b).) Two exemptions to section 8's 
prohibitions against compensated referrals in RESPA covered 
transactions involve payments for title insurance services actually 
performed. Section 8(c)(1)(B) specifically exempts payments of a fee 
``by a title company to its duly appointed agent for services actually 
performed in the issuance of a policy of title insurance.'' A more 
general provision, section 8(c)(2), exempts the ``payment to any person 
of a bona fide salary or compensation or other payment for goods or 
facilities actually furnished or for services actually performed.'' 
(See also 24 CFR 3500.14(g)(1).)
    In enacting RESPA, Congress stated its intent that section 8 of 
RESPA did not prohibit payments by title insurance companies for 
``goods furnished or services actually rendered, so long as the payment 
bears a reasonable relationship to the value of the goods or services 
received by the person or company making the payment.'' (H. Rep. No. 
1177, 93d Cong., 2nd Sess. 1974 at 7-8 (hereafter ``the Report'').) The 
Report stated that ``to the extent the payment is in excess of the 
reasonable value of the goods provided or services performed, the 
excess may be considered a kickback or referral fee proscribed by 
Section [8].'' The legislative history of section 8(c)(1)(B) also noted 
that the ``value of the referral itself is not to be taken into account 
in determining whether the payment is reasonable.'' (Report at 8.) The 
Report specifically elaborated on the exemption for payments made by 
title insurance companies to duly appointed agents for services 
actually performed in the issuance of a policy of title insurance and 
stated:

    Such agents, who in many areas of the country may also be 
attorneys, typically perform substantial services for and on behalf 
of a title insurance company. These services may include a title 
search, an evaluation of the title search to determine the 
insurability of the title (title examination), the actual issuance 
of the policy on behalf of the title insurance company, and the 
maintenance of records relating to the policy and policy-holder. In 
essence, the agent does all of the work that a branch office of the 
title insurance company would otherwise have to perform.

Report at 8.
    On November 2, 1992, HUD issued regulations that, among other 
things, gave guidance concerning title agent services under RESPA. 
These regulations relied in part on the legislative history. Section 
3500.14(g)(3)\1\ of the regulations provides an example of the type of 
substantial or ``core'' title insurance agent services necessary for an 
attorney to receive multiple fees in a RESPA covered transaction. It 
states:

    \1\ All citations in this Statement of Policy refer to recently 
streamlined regulations published on March 26, 1996 (61 FR 13,232), 
in the Federal Register (to be codified at 24 C.F.R. 3500 et seq.).
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    For example, for an attorney of the buyer or seller to receive 
compensation as a title agent, the attorney must perform core title 
agent services (for which liability arises) separate from attorney 
services, including the evaluation of the title search to determine 
the insurability of the title, the clearance of underwriting 
objections, the actual issuance of the policy or policies on behalf 
of the title insurance company, and, where customary, the issuance 
of the title commitment, and the conducting of the title search and 
closing.

    Appendix B to the regulations provides additional guidance on the 
meaning and coverage of RESPA. Illustration 4 provides a factual 
situation in which an attorney represented a client as an attorney and 
as a title insurance agent and received fees for each role in a 
residential real estate transaction. In its comments on Illustration 4, 
HUD stated that the attorney was double billing his clients because the 
work he performed as a ``title agent'' was work he was already 
performing for his clients as an attorney. The title insurance company 
was actually performing the title agent work and providing the attorney 
with an opportunity to collect a fee as a title agent in exchange for 
referrals of title insurance business. HUD also stated that for the 
attorney to receive a separate payment as a title insurance agent, the 
attorney must ``perform necessary core title work and may not contract 
out the work.''
    To qualify for a section 8(c)(1)(B) exemption, the attorney title 
insurance agent must ``provide his client with core title agent 
services for which he assumes liability, and which includes, at a 
minimum, the evaluation of the title search to determine insurability 
of the title, and the issuance of a title

[[Page 49399]]

commitment where customary, the clearance of underwriting objections, 
and the actual issuance of the policy or policies on behalf of the 
title company.'' (See 24 CFR part 3500, Appendix B, Illustration 4.)
    In another example, Illustration 10 of Appendix B, a real estate 
broker refers title insurance business to its own affiliate title 
company. This company, in turn, refers or contracts out all of its 
business to another title company that performs all the title work and 
splits its fees with the affiliate. HUD stated that because the 
affiliate title company provided no substantive services for its 
portion of the fee, the arrangement between the two title companies 
would be in violation of section 8 of RESPA. This illustration showed 
that the controlled business arrangement exemption did not extend to 
``shell'' entities that did not perform substantive services for the 
fees it collected from the transaction. (See 24 CFR part 3500, Appendix 
B, Illustration 10.)
    Section 19(a) of RESPA authorizes the Secretary to interpret RESPA 
to achieve the purposes of the Act. Section 19(c) of RESPA authorizes 
HUD to investigate possible violations of RESPA. During the course of 
its RESPA investigations, HUD applies the facts revealed by the 
investigation to the statute and regulations in determining whether a 
violation exists.
    After receiving complaints of possible RESPA violations, HUD, in 
1993, initiated an investigation of practices by some title insurance 
companies and some title insurance agents in the State of Florida. On 
September 21, 1995, HUD sent a letter and document entitled ``Findings 
of HUD's Investigation of Florida Title Insurance Companies and 
Statement of Enforcement Standards'' to certain title insurance 
companies in Florida. In November 1995, HUD met with Florida title 
insurance companies and received input from them on the enforcement 
standards. On June 19, 1996, HUD sent additional guidance to the 
particular companies that received the September 21, 1995 letter.

Statement of Policy--1996-4

    To give guidance to interested members of the public on the 
application of RESPA and its implementing regulations to these issues, 
the Secretary, pursuant to section 19(a) of RESPA and 24 CFR 
3500.4(a)(1)(ii), hereby issues the following Statement of Policy.\2\ 
In issuing this Statement, HUD is not dictating particular practices 
for title insurance companies and their agents but is setting forth 
HUD's enforcement position for qualification in Florida for exemptions 
from section 8 violations.
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    \2\ This Statement provides additional guidance to the 1995 
standards issued to the particular companies and, to the extent 
there are any inconsistencies, supersedes those standards.
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    Generally, it is beneficial for title insurance companies and their 
agents to qualify under the section 8(c)(1)(B) exemption since HUD does 
not normally scrutinize the payments as long as they are ``for services 
actually performed in the issuance of a policy of title insurance.'' 
(HUD will, however, continue to examine payments to agents that are 
merely for the referral of business such as gifts or trips based on the 
volume of business referred.) If the practices of a title insurance 
company or its agent do not qualify under the section 8(c)(1)(B) 
exemption, the company and the agent may still qualify under section 
8(c)(2). Under a section 8(c)(2) standard, HUD will examine the amount 
of the payments to or retentions by the title insurance agent to see if 
they are reasonably related to services actually performed by the 
agent.

A. Definitions

    For purposes of this statement, the terms listed below are defined 
as follows:
    1. ``Title Insurance Agent'' means a person who has entered into an 
agreement with a title insurance company to act as an agent in 
connection with the issuance of title insurance policies, and includes 
title agents, title agencies, attorneys, and law firms.
    2. ``Core title services'' are those basic services that a title 
insurance agent must actually perform for the payments from or 
retention of the title insurance premium to qualify for RESPA's section 
8(c)(1)(B) exemption for ``payments by a title company to its duly 
appointed agent for services actually performed in the issuance of a 
policy of title insurance.''
    In performing core title services, the title insurance agent must 
be liable to his/her title insurance company for any negligence in 
performing the services. In considering liability, HUD will examine the 
following type of indicia: the provisions of the agency contract, 
whether the agent has errors and omissions insurance or malpractice 
insurance, whether a contract provision regarding an agent's liability 
for a loss is ever enforced, whether an agent is financially viable to 
pay a claim, and other factors the Secretary may consider relevant.
    ``Core title services'' mean the following in Florida:
    a. The examination and evaluation, based on relevant law and title 
insurance underwriting principles and guidelines, of the title evidence 
(as defined below) to determine the insurability of the title being 
examined, and what items to include and/or exclude in any title 
commitment and policy to be issued.
    b. The preparation and issuance of the title commitment, or other 
document, that discloses the status of the title as it is proposed to 
be insured, identifies the conditions that must be met before the 
policy will be issued, and obligates the insurer to issue a policy of 
title insurance if such conditions are met.
    c. The clearance of underwriting objections and the taking of those 
steps that are needed to satisfy any conditions to the issuance of the 
policies.
    d. The preparation and issuance of the policy or policies of title 
insurance.
    e. The handling of the closing or settlement, when it is customary 
for title insurance agents to provide such services and when the 
agent's compensation for such services is customarily part of the 
payment or retention from the insurer.
    3. A ``pro forma commitment'' is a document that contains a 
determination of the insurability of the title upon which a title 
insurance commitment or policy may be based and that contains 
essentially the information stated in Schedule A and B of a title 
insurance commitment (and may legally constitute a commitment when 
countersigned by an authorized representative). A pro forma commitment 
is a document that contains determinations or conclusions that are the 
product of legal or underwriting judgment regarding the operation or 
effect of the various documents or instruments or how they affect the 
title, or what matters constitute defects in title, or how the defects 
can be removed, or instructions concerning what items to include and/or 
to exclude in any title commitment or policy to be issued on behalf of 
the underwriter.
    4. ``Title evidence'' means a written or computer generated 
document that identifies and either describes or compiles those 
documents, records, judgments, liens, and other information from the 
public records relevant to the history and current condition of the 
title to be insured. Title evidence does not, however, include a pro 
forma commitment.

B. Qualification Under Section 8(c)(1)(B)

    To qualify for an exemption as an agent in Florida under section 
8(c)(1)(B), the payments to (or retentions by) a title insurance agent 
must be ``for services actually performed in the issuance of a

[[Page 49400]]

policy of title insurance.'' HUD interprets this language as requiring 
a title insurance agent to perform core title services, as defined 
above, in order for title insurance company payments to the title 
insurance agent to qualify for this exemption. These ``core title 
services'' describe the type of services that Congress stated would 
come within this exemption, that is, the type of work that a branch 
office of the title insurance company would otherwise have to perform 
in the issuance of a title insurance policy. Thus, as applied to 
practices in Florida, for a title insurance agent to be able to retain 
the maximum agency portion of the risk premium payment allowed under 
Florida law, the title insurance agent must actually perform ``core 
title services,'' and generally may not contract out those services.
    HUD recognizes, however, that there may be a legitimate temporary 
need (such as surges in business) for the title insurance agent to 
contract out some part of the core title services to an independent 
third party, not affiliated with the title insurance company. In such 
cases, payments to these agents still qualify under section 8(c)(1)(B). 
However, there is no qualification for the exemption if such 
contracting out of core title services is done on a regular basis.
    HUD also will not consider a title insurance agent to be an agent 
for purposes of section 8(c)(1)(B) and to have actually performed (or 
incurred liability for) core title services when the service is 
undertaken in whole or in part by the agent's insurance company (or an 
affiliate of the insurance company). For example, if the title 
insurance company provides its title insurance agent with a pro forma 
commitment, typing, or other document preparation services, the title 
insurance agent is not ``actually performing'' these services. As such, 
the title insurance agent would not be providing ``core title 
services'' for the payments to come within the section 8(c)(1)(B) 
exemption. HUD acknowledges, however, that title insurance companies 
often provide their own title insurance agents with general advice and 
assistance on a particular unusual question or concern on an individual 
case by case basis, and this type of assistance would not affect the 
scrutiny of the payments to the title insurance agent under this 
exemption.
    Within the section 8(c)(1)(B) context, moreover, title insurance 
companies may provide their title insurance agents with title evidence, 
as defined above. HUD acknowledges that title insurance companies have 
invested in title plants and may sell title evidence to their title 
insurance agents. In doing so, however, title insurance companies 
should not charge fees that reflect a payment for the referral of the 
title insurance order. (See 24 CFR 3500.14(b).) By this, HUD interprets 
the section 8 requirements to mean that the title insurance company 
must charge its title insurance agents a fee for title evidence that is 
not a disguised referral fee given in exchange for the referral of 
title business. It is evidence of a thing of value given for referrals 
if the title insurance company is not charging fees for title evidence 
that cover its costs of producing the title evidence or if the title 
insurance company charges less for title evidence to be used for a 
commitment or policy issued on behalf of the title insurance company 
than on another company's behalf.
    In performing core title services, a title insurance agent is 
likely to use employees. If a title insurance company supplies 
employees or has control over or directs the work of employees of the 
title insurance agent, then the title insurance agent is not actually 
performing the core title services. In such a case, HUD will review the 
services provided by the insurance company to the agent for sufficiency 
under section 8(c)(2).

C. Qualification Under Section 8(c)(2)

    If a title insurance agent does not perform ``core title services'' 
to qualify for the exemption under section 8(c)(1)(B) of RESPA, that 
agent may receive payment for services actually performed pursuant to 
section 8(c)(2), so long as the payment is reasonably commensurate with 
the reduced level of responsibilities assumed by the agent.
    With respect to practices under Florida's title insurance statute, 
it is HUD's enforcement position that it is difficult to justify the 
payment (or retention) of a significant portion of the title insurance 
risk premium to a title insurance agent who fails to perform and assume 
responsibility for the title examination function. Likewise, if the 
title insurance company provides other services, or carries out the 
title insurance agent functions, or provides or controls ``part time 
examiners,'' HUD may scrutinize the net level of retention realized by 
the agent to determine whether the agent's compensation from the 
insurer reflects a meaningful reduction from the compensation generally 
paid to agents in the area who perform all core title services. The 
level of such reduction in compensation must be reasonably commensurate 
with the reduced level of responsibilities assumed by such person for 
the services provided and the underwriting risks taken. The value of a 
referral, however, is not to be taken into account in determining 
whether the payment bears a reasonable relationship to the services 
rendered. (See 24 CFR 3500.14(g)(2).)

D. Unearned Fees

    Under the RESPA regulations, when a person in a position to refer 
title insurance business, such as an attorney, real estate broker or 
agent, mortgage lender, or developer or builder, receives a payment for 
providing title insurance agent services, such payment must be for 
services that are actual, necessary, and distinct from the primary 
services provided by such person. (See 24 CFR 3500.14(g)(3).) Thus, if 
an attorney is representing a consumer in a home purchase and also 
acting as a title insurance agent, he or she may not receive duplicate 
fees for the same work.
    If a title insurance agent obtains third party services, such as 
the provision of title evidence, and does not add any additional value 
to the service provided by the third party, but increases the charge to 
the consumer for that service and retains the difference, then HUD 
views the amount that the person retains as an unearned fee in 
violation of section 8(b) of RESPA. (See 24 CFR 3500.14(c).)

    Dated: September 6, 1996.
Nicolas P. Retsinas,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 96-24069 Filed 9-18-96; 8:45 am]
BILLING CODE 4210-27-P