No More Free Lunch: Insurance Division Limits Handouts of Title Companies' Products and Services
Author(s): Lindsay L. McKae
Published: 06/16/2010
On May 1, 2010, the recent revisions to Colorado Division of Insurance (the "Division") Regulation 3-5-1 became effective, changing historically common practices in the real estate industry. Most prominently, the industry-wide practices of title companies providing to customers free Ownership and Encumbrance Reports ("O&E Reports") and To Be Determined Title Commitments ("TBD Commitments") are now gone. Under the revised regulation, title companies must charge for these products, and title companies may only offer free educational seminars if the subject matter relates to the business of title insurance, among other new rules.
The revised regulation will alter title company practices, services, and products and likely affect most real estate professionals, including brokers, lenders, buyers, and sellers. The following outlines some of the revised regulation and its consequences.
O&E Reports and TBD Title Commitments
Historically, title insurance companies have provided O&E Reports and TBD Commitments free of charge. The foremost change most real estate professionals will immediately notice is that title companies will now be required to charge a fee that "bears a reasonable relation to the cost of production" for each of these products. Any amounts paid for an O&E Report or a TBD Commitment may be credited to final premiums if a transaction closes with the title company. If they have not already done so, title companies will have to develop new internal processes to track O&E Report and TBD Commitment charges and credits. Additionally, the revised regulation mandates that title companies report their O&E Report fees to the Division as of June 1, 2010, just as they now file reports with the Division regarding insurance premium fees. A consumer may check with the Division to assure that a title company's fees have been reported to the Division.
Vesting Deeds
The revised regulation does leave title companies the option to continue to offer a few products without charge. If a title company decides not to impose a fee, it may provide one copy of the last recorded vesting deed for a property. Also, in connection with the issuance of a title commitment, the title company may provide free of charge copies of all of the documents of public record including, but not limited to, deeds, deeds of trust, mortgages, judgments, liens, contracts, maps, plats, declarations, conditions, restrictions, and any other documents affecting a property.
Classes for Real Estate Brokers
Consistent with the old rule, title companies may continue to provide educational seminars on any topic they wish. The revised regulation, however, stipulates which educational seminars may be provided free of charge. Title companies now may hold educational seminars on topics related to the business of title insurance without charge to attendees. If, however, the educational seminars do not relate to the "business of title insurance," for example, a class on marketing or property inspections, the title companies cannot foot the bill. The Division is currently discussing clarifying what is meant by the "business of title insurance." Questions related to whether a topic is related to the "business of title insurance" should be directed to the Division of Insurance, not the Division of Real Estate.
Title Insurance Company Sponsorships
The revised regulation alters the rules for title company sponsorships of events. Title companies may not sponsor broker or settlement producer events in exchange for the benefit of advertising if such sponsorship results in substantial subsidization of the cost of the event. They may, however, participate in events if they keep a physical presence throughout the event. A title company may have a table at an event with marketing and advertising material, but it must have an employee at the table. Additionally, title companies may participate in, or provide sponsorship for, trade or industry association events (e.g., golf tournaments) if the value derived from the sponsorship reasonably relates to the expenditure, and the event is a "bona fide trade or industry association" event.
Consumer Protections of Escrow Monies
In an effort to protect consumers, the revised regulation also imposes fiduciary duties on title insurance companies. Monies relating to a closing must be deposited into a trust, fiduciary, or escrow account so such funds are not comingled with the title company's business or any employee's personal funds. Title companies may earn interest on the trust or escrow accounts if disclosure has been provided to all parties that such interest is or will be earned. If a title company receives earnest money without written instructions, under the revised regulation, it must deposit the money into an escrow, trust, or fiduciary account and hold the money pending instructions. If the deal fails to close, the title company must release the money as directed by instructions executed by all parties. If the funds are uncontested, title companies must hold them for 180 days and then return them to the original payor. If the funds, however, are contested, the title company may 1) wait until completion of any proceeding; 2) interplead all parties to the court and let the court distribute the funds; or 3) deliver written notice to all parties that the funds will be returned to the original payor after 120 days if there are suits filed for the funds. There are various other changes to title company practices mandated by the revised regulation, including new rules on the internal operations of title entities such as regulations on reasonable searches and certain disclosure requirements on title commitments. Additionally, the Colorado Division of Real Estate is currently studying its regulations to assure they are consistent with the provisions of the revised regulation. If you have any questions about the impact of the revised regulation on your business, please feel free to contact members of our firm's Real Estate Practice Group.
Lindsay McKae is an associate in the Denver office at RJ&L. Ms. McKae represents lenders and borrowers with issues related to foreclosures and loan workouts, including deeds-in-lieu of foreclosure, forbearances, and credit restructurings, and she represents purchasers and sellers of distressed assets. She also focuses on financing real estate transactions and represents buyers and sellers in the acquisition and disposition of real property. Ms McKae can be reached at 303-628-9511 or by email at lmckae@rothgerber.com.