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On March 29, the Utah governor signed SB 121, which modifies certain title insurance definitions and provisions and adopts, with certain exceptions, Section 8 of RESPA for the purposes of state law governing affiliated business arrangements involving title entities. SB 121 “repeals existing provisions governing controlled business relationships in the title industry,” and permits an “affiliated business arrangement” as defined under 12 U.S. Code § 2602, with the exception that the “services that are the subject of the arrangement do not need to involve a federally related mortgage loan.”
Specifically, title entities with affiliated-business arrangements will be regulated by the state’s Division of Real Estate (Division), which has enforcement authority over the bill’s provisions, including over certain RESPA provisions against real estate licensees such as “failing to timely disclose to a buyer or seller an affiliated business relationship.” Title companies are also required to file annual reports to the Division related to affiliated business arrangements as well as capitalization for the previous calendar year. SB 121 further provides a specific list of RESPA violations pertaining to affiliated business arrangements. The amendments take effect 60 days after adjournment of the legislature.
On January 31, NYDFS issued Supplement No. 2 to Insurance Circular Letter No. 1 (2003), which provides guidance to the title insurance industry following a January 15 unanimous decision by the Appellate Division of the New York State Supreme Court to uphold Insurance Regulation 208. The Appellate Division’s decision vacated the majority of a trial court order annulling Regulation 208, which limits title insurers’ ability to offer inducements to obtain business. (See previous InfoBytes coverage here.)
The NYDFS supplement highlighted three critical holdings from the Appellate Division’s decision. First, the court upheld Regulation 208’s ban on inducements for future title insurance business, recognizing that NYDFS had found that lavish gifts were routinely offered to intermediaries such as lawyers in anticipation of receiving business. Second, the appellate court held that Insurance Law § 6409(d), which prohibits a commission, rebate, fee, or “other consideration or valuable thing,” is not limited to a prohibition on quid pro quo exchanges for specific business. Third, the court annulled Regulation 208’s ban on certain closer fees and fees for ancillary searches.
On July 5, the Supreme Court of the State of New York ordered the annulment of Insurance Regulation 208, which was promulgated by the New York State Department of Financial Services (NYDFS) in October 2017. The decision results from an Article 78 petition by several title insurance companies challenging the state regulation, which prohibits title insurance entities from providing benefits such as meals, tickets to events, gifts, cash, access to parties, trips and other incentives to referral sources. The regulation clarifies that certain “reasonable and customary” advertising and marketing expenses are permitted under New York’s insurance law, provided they are “without regard to insured status or conditioned directly or indirectly on the referral of title business.” The title insurance companies argue that Regulation 208’s restrictions are inconsistent with New York’s insurance law because the law only prohibits “quid pro quo inducements given in exchange for title insurance business” and the law permits marketing and entertainment payments so long as they are not being exchanged for “a specific identified piece of business.”
The court agreed and found that the insurance law—which prohibits a “commission,” “rebate,” “fee,” or “other consideration or valuable thing”—could not be construed to include marketing and entertainment expenses because “it is common sense that marketing is an inducement for business” and it would be “an absurd proposition” that the New York Legislature intended to prohibit companies from marketing themselves. Additionally, construing the insurance law to include marketing and entertainment expenses as prohibited expenditures but also including a provision which delineates certain types of marketing and entertainment expenses as permissible is “irreconcilable and irrational.” The court ultimately concluded that Regulation 208 must fail because it contravenes the will of the Legislature under the insurance law.
In response to the decision, NYDFS Superintendent, Maria T. Vullo, issued a statement that the state intends to appeal as they “remain certain of [their] legal opinion and are confident [they] will prevail on appeal.” On July 6, NYDFS filed a notice of appeal with the court.
On October 17, the New York Department of Financial Services (NYDFS) adopted two final regulations designed to stop “unscrupulous practices” in the title insurance industry. The final regulations—which are the culmination of a NYDFS’ investigation into the practices of title insurers—supersede “emergency” versions of both regulations that went into effect earlier this year. (See previously InfoBytes coverage here.) Specifically, the first rule clarifies that certain “reasonable and customary” advertising and marketing expenses will be permitted provided “they are without regard to insured status or conditioned directly or indirectly on the referral of title business.” Meals, entertainment, and other forms of inducements are prohibited. According to a NYDFS press release, the state’s “anti-inducement statute is not limited to situations in which there is a direct quid pro quo for business.” The second rule requires, among other things, that title insurance companies or agents function independently from any affiliates through which they generate a portion of their business and make “good faith” efforts to accept business from non-affiliate sources.
FinCEN Renews GTOs for Title Insurance Companies in Six Major Metropolitan Areas Upon Finding that GTOs Provide ‘Valuable Data’
On February 23, the Financial Crimes Enforcement Network (FinCEN) announced the renewal of its existing GTOs Geographic Targeting Orders (GTOs), each of which temporarily require U.S. title insurance companies to identify the natural persons behind shell companies used to pay “all cash” for high-end residential real estate in six major metropolitan areas. Generally, the GTOs require all title insurance companies in the targeted cities to file a FinCEN Form 8300 within 30 days of closing a covered transaction, identifying the buyer, any beneficial owner of the buyer, and the individual primarily responsible for representing the buyer in an “all-cash” purchase of high-end residential real estate. Covered businesses must also retain their records for at least five years after the GTO expires.
Notably, the decision to continue the GTO program for another 180 days—beginning on February 24, 2017—was based largely on FinCEN’s finding that the first GTOs issued back in July are producing “valuable data” that is assisting both law enforcement and FinCEN’s efforts to address money laundering through real estate transactions. Nearly one-third of the targeted transactions covered by the July GTOs ended up involving a beneficial owner or representative who is already the subject of a previous suspicious activity report. The results appear to validate the concerns underlying FinCEN’s rationale for issuing GTOs in the first place, namely the use of shell companies to buy luxury real estate in all-cash transactions.
The targeted geographic areas and corresponding closing price thresholds include: (i) Manhattan ($3 million) and all other boroughs of New York City ($1.5 million); (ii) Miami-Dade, Broward, and Palm Beach counties ($1 million); (iii) Los Angeles County ($2 million); (iv) San Francisco, San Mateo, and Santa Clara counties ($2 million); (v) San Diego County ($2 million); and (vi) Bexar County, Texas, which includes San Antonio ($500,000). In targeting the above-listed metropolitan areas, FinCEN clarified that “GTOs do not imply any derogatory finding by FinCEN with respect to the covered companies.” Rather, as explained by FinCEN Acting Director Jamal El-Hindi, “Money laundering and illicit financial flows involving the real estate sector is something that we have been taking on in steps to ensure that we continue to build an efficient and effective regulatory approach.”
For additional information concerning GTO compliance, FAQs released by FinCEN in August 2016 are available here.
Foreclosure Law Firms and Title Companies to Pay $1.8 for Violations of Colorado Consumer Protection Laws
On August 3, Colorado AG Cynthia H. Coffman announced that certain Colorado foreclosure law firms and title insurance companies must pay, pursuant to a court order, $1.8 million in penalties to resolve allegations that they participated in a scheme to defraud consumers. According to AG Coffman’s announcement, between 2008 and 2013, the law firms and title companies violated the Colorado Consumer Protection Act (CPA) and the Colorado Fair Debt Collection Practices Act (CFDCPA) by charging “false and misleading costs for title insurance policies” on more than 2,000 foreclosures. The court originally imposed penalties of $2,291,000 for violations of the CPA and $1,374,600 for violations of the CFDCPA, but the penalties were reduced to a combined $1.8 million because of a statutory maximum penalty cap.
On July 27, FinCEN issued temporary Geographical Targeting Orders (GTO) requiring certain U.S. title insurance companies to identify and report the natural persons behind shell companies used to conduct “all-cash” purchases of high-end real estate in six major metropolitan areas. The GTOs cover the following areas: (i) all boroughs of New York City; (ii) Miami-Date, Broward and Palm Beach Counties in South Florida; (iii) Los Angeles County; (iv) San Francisco, San Mateo, and Santa Clara counties; (v) San Diego Country; and (vi) Bexar County, Texas, which includes San Antonio. FinCEN simultaneously released a table outlining the monetary thresholds that trigger the identification and reporting requirements in each jurisdiction. Upon taking effect, the GTOs will remain effective for 180 days absent an extension. As previously covered in InfoBytes, FinCEN remains concerned that all-cash purchases conducted through LLCs or other “opaque structures,” may be conducted by natural persons trying to hide their assets and identity. According to FinCEN’s Acting Director Jamal El-Hindi, “[b]y expanding the GTOs to other major cities, we will learn even more about the money laundering risks in the national real estate markets, helping us determine our future regulatory course.”
U.S. FinCEN Issues Geographical Targeting Orders Requiring Reporting of High-End Cash Purchases and Buyers of Residential Real Estate in Manhattan and Miami
On January 13, FinCEN issued two Geographical Targeting Orders (GTO) requiring certain U.S. title insurance companies to provide identification for certain “all-cash” buyers of high end real estate, and to report such transactions. One GTO focuses on the Borough of Manhattan in New York City, New York and the other focuses on Miami-Dade County, Florida.
According to FinCEN, natural persons may be purchasing real estate without bank financing and through LLCs or “other opaque structures” in an attempt to hide their assets and identity. FinCEN commented: “Having prioritized anti-money laundering protections on real estate transactions involving lending, FinCEN’s remaining concern is with money laundering vulnerabilities associated with all-cash real estate transactions.” The two GTOS will be effective from March 1, 2016 through August 27, 2016, and will require certain title insurance companies to “record and report to FinCEN the beneficial ownership information of legal entities purchasing certain high-value residential real estate without external financing.”
The GTOs are identical with the exception of the purchase price value applicable to the different locations. For purchases exceeding $3 million in the Borough of Manhattan, or $1 million in Miami-Dad County, that are made by a legal entity (as defined in the GTO), “without a bank loan or other similar form of external financing,” where “the purchase is made, at least in part, using currency or a cashier’s check, a certified check, a traveler’s check, or a money order in any form,” a title insurance company, and any of its subsidiaries and agents, is required to file a Form 8300 within 30 days of closing.
Among other information, the Form 8300 must:
- Contain information about the identity of the individual primarily responsible for representing the Purchaser, including a copy of this individual’s driver’s license, passport, or other similar identifying documentation.
- Contain information about the identity of the Purchaser.
- Contain information about the identity of the Beneficial Owner(s) of the Purchaser. The Covered Business must obtain and record a copy of the Beneficial Owner’s driver’s license, passport, or other similar identifying documentation. A “Beneficial Owner” means each individual who, directly or indirectly, owns 25% or more of the equity interests of the Purchaser.
- If the purchaser involved in the Covered Transaction is a limited liability company, then the Covered Business must provide the name, address, and taxpayer identification number of all its member
This development is consistent with FinCEN’s long-term trend of pushing for greater transparency, exemplified by its pending proposed rule that would mandate enhanced customer due diligence related to beneficial ownership. See prior InfoBytes Alert and our description of the proposed rule.
On May 12, the NYDFS announced newly approved title insurance industry rates for mortgage refinancing transactions, which is just one of the steps the NYDFS is planning to take to reform and lower title insurance rates. The new rates vary depending on the term, size, and duration of the loan, and they are anticipated to provide significant savings to New York homeowners.
On April 29, New York Governor Andrew Cuomo unveiled new title insurance regulations aimed at reducing title insurance closing costs of up to 20 percent for new homebuyers by eliminating kickbacks and other improper expenditures within the title insurance industry. The new regulations follow an NYDFS investigation which revealed that title insurance companies and their agents routinely spent excessive amounts on meals and entertainment for attorneys, real estate professionals and others in exchange for referrals on new business, passing along the costs to consumers’ insurance premium. In addition, the regulations also impose a cap on fees charged for searches and other services associated with the issuance of a title insurance policy, and requires title companies to submit filings, once every three years, affirming that the title insurance rates are not excessive or discriminatory.
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