The road less traveled: there are many hurdles to overcome for lenders contemplating owning an affiliated title agency. But it can be done, with a little planning and due diligence.
Obviously, increased revenue is the primary reason to consider owning a title agency. In this current market, where increasing reserves and working capital are paramount to both regulators and investors, increasing your revenue may prove essential to your survival.
A close second to increased revenue is the benefit of greater control. Actual collaboration between the lender and its title agency results in customized services that are unique to the lender's way of doing business. The resulting consistency and reliability not only make for less operational headaches, but also make reacting to the changing demands of the industry faster and more controlled.
A case in point is the Real Estate Settlement Procedure Act's (RESPA's) 2010 reform when the Department of Housing and Urban Development (HUD) mandated a new Good Faith Estimate (GFE) and new HUD-1 effective Jan. 1, 2010. Today the final documents at closing place the numbers from the GFE side-by-side with the final numbers on the HUD-1.
If the numbers do not match or they stray outside the variances allowed by law, the lender is liable for the difference and must cure any incongruity within 30 days. New levels of coordination and communication between the lender and the title agency have become an ongoing necessity.
This interplay is simplified, and the risk of liability to the lender greatly minimized in the affiliated relationship. There is an incentive for the lender and its title subsidiary to pre-determine their fees in relation to each other, creating greater accuracy at every stage of the transaction, as well as the foresight to compare their total fees with those of the competition.
Now, add technology to the scenario. Technology affords simple upfront programming and automatic connection between the lender's loan origination system (LOS) and the title production system. The ability to push data, such as pre-determined fees, between the two systems allows for accuracy at the time the GFE is disclosed and when the final HUD-1 is prepared, resulting in a seamless sharing among the lender, its title agency and, ultimately, the satisfied and well-informed borrower.
Throughout your assessment process, it is important to sit down with your outside counsel or staff attorneys to obtain legal advice regarding federal and state regulations, such as anti-kickback statutes, RESPA regulations and the new Dodd-Frank Wall Street Reform and Consumer Protection Act.
I am sure many of us in the industry have heard stories about lenders that owned title agencies that were fabulously successful. But for every success story, I assure you, there were failures. I have personally experienced both the success and failure of affiliation, so my advice comes from the joy and pain of both perspectives.
It is wise not to jump into ownership before you have at least answered the following questions and anticipated how each answer will play out.
1. Does the mortgage product you sell enable you to actively control where the title business is placed?
You must be able to exert control over and direct the title services associated with your mortgage product to your title agency. The most powerful variable embedded in this question concerns the type of mortgages you sell. I am not referring to the distinction between conventional or government loans, nor fixed-rate versus adjustable-rate. The only distinction you need to pay attention to at this point is the distinction between purchase-money mortgages and the other non-purchase forms of mortgage lending, such as refinance, reverse mortgages and loan modifications.
The purchase-money mortgage is extremely difficult for a mortgage lender to direct. There are several other professionals involved in the process. Traditionally, real estate agents have the greatest hold on where the title work is placed, and builders dominate in the new-construction arena. If a large majority of your business is purchase-money mortgages, dig deep and analyze the source of your past business. Then determine if attempting to direct business to your title company will damage important referral relationships. Whose toes will you step on and what will be the ramifications?
The other products, such as refinance or reverse mortgages, fall more easily under the lender's control simply because fewer professionals are involved in the transaction. The lender or mortgage broker is usually the first professional the borrower seeks out. Assuming you have complied with RESPA Section 8 and provided the "affiliated business arrangement disclosure," borrowers are usually agreeable to placing title and settlement with your affiliated title agency.
But the analysis doesn't stop here. Management must be equally committed to the formation and the success of the affiliated title agency. Analyze the culture of your establishment. Historically, have you allowed your loan officers to seek out their own relationships with title agencies? If so, prepare for great dissatisfaction when the new affiliated title agency is introduced. Beware of straddling the fence. Allowing loan officers to exclude the affiliated agency when presenting title choices to their borrower clients may prove a fatal mistake. It leads to lower and unpredictable capture rates and a business flow that is very difficult to scale.
Ironically, just as fatal is expecting the affiliated title agency to handle all the business from day one. Systematically phasing it in while communicating the ultimate capture goal is vitally important as the title agency gears up. Be prepared to be title's biggest advocate, particularly in its rough first days of operation. Will you and management have the resolve to actively promote the business through good times and bad? Make sure you know the answer to this question before you invest in an affiliated title agency.
2. Are you closing enough volume every month to warrant investment in a title agency?
This analysis should be short and sweet, provided you are confident in the stability of your unit volume. Determine the average number of loans you closed every month over the last year and estimate what percentage of that unit volume potentially could go to your title company. If your final figure is less than 60 controllable transactions per month, in my humble opinion, you are not in a position to own an affiliated title company. Ownership will not yield positive financial results. If you arrive at a figure of 60 or more, it is time to consider the interplay between your volume and the title fee structures in the states where you lend.
3. Is the majority of your controllable volume in fee-friendly states?
Before we dig into how different state title insurance rates impact title fees, it is important to briefly review the title services performed by title agencies. The term "title services" generally includes the title search; title examination and evaluation; preparation and issuance of the commitment; clearance of underwriting objections; preparation and issuance of policies; and the service of conducting the settlement, including the disbursement of loan funds and recordation of the mortgage.
Of course, there are myriad processing and administrative services required to perform these functions (e.g., document delivery, preparation and copying, wiring, endorsements and notary).
The business of title services is regulated on a state-by-state basis by each state's bureau of insurance. No two states are the same. Fee regulation in the title industry runs the gamut from absent to granular.
Take, for example, the state of New Jersey. The New Jersey Land Title Insurance Rating Bureau not only dictates title insurance premium rates but sets mandatory charges for virtually every other function included in title services, from the title examination down to photocopies through a plethora of settlement scenarios such as "in office," "out of office," "outside regular business hours," "greater than normal length," "without disbursements," and the list goes on.
A multi-state title agency will have to coordinate a maze of different state fee structures--as rates differ across the country. In this article, I am providing the 10,000-foot view of fee regulation; but even this broad brush will convey how important it is to know your states' rate structures and their impact on your agency's bottom line.
The majority of states fall into one of two categories: 1) the "all-inclusive" rate plan and 2) the risk-premium-only plan (or "non-all-inclusive" rate plan).
In states that follow the all-inclusive rate plan, the title insurance premium is an all-inclusive fee composed of the risk premium, searching charge, examination charge and, often, other charges related to the issuance of the title insurance policy. The agency cannot charge over and above the premium for the cost of the search or determining insurability.
And as you can imagine, there are different degrees of all-inclusive. In New York's most populous counties, the premium includes the search, while in Nebraska the premium includes the search and examination charges and "every other charge related to the issuance of the title insurance policy"--but excludes the closing. Pennsylvania takes all-inclusive a step further and throws the closing back in.
In the non-all-inclusive states, the rates quoted are for the title insurance risk premium only and do not include charges for title searches or examinations, abstracts, attorney fees, escrow or closing services. Obviously, this rate structure gives the agency greater discretion to set its fee structure and allows the agency to directly charge for services it subcontracted to a third party. Contrast that with the all-inclusive state, where, for example, the cost of a third-party abstractor who performed the title search must be paid from the agency's portion of the title insurance premium--i.e., from your own pocket.
So you would think that the all-inclusive rate would be relatively higher than the rates of its counterpart. But that is not the rule.
A title agency doing business in more than one state must analyze each state's fee structure in isolation, taking into account that state's percentage of total unit volume, before combining the rates of the states to estimate the gross revenue against the costs/expenses of doing business. This is the point where a pro forma becomes necessary to prove out if the business you control equates to a profitable business model.
You have gotten through your first wave of due diligence. You are in control and the numbers are encouraging. I refer to it as "the first wave" of due diligence because it is only the start. As you proceed, there are certainly more issues to be resolved. But before you continue the climb, let's address the obstacles you will need to overcome to get off the ground.
1. State licensing, regulation and anti-affiliation statutes
The vast majority of states have laws requiring title insurance agencies to be licensed, although not all states are uniform in what their requirements are. Most states require a candidate to pass a test and answer a series of questions, including financial inquiries into past bankruptcies and judgments. More and more states require background checks, fingerprint samples, surety bonds and continuing education. Fortunately, many states have reciprocity agreements that provide a simplified procedure for license holders in a reciprocal state to qualify for a license in another.
Most states east of Colorado employ a uniform application process and reciprocate. But there are always exceptions--take, for example, Texas. Texas vigorously regulates title insurance agencies, making it difficult for companies outside its borders to sell title insurance. Agencies must have a distinct physical location in at least one county of the state and must own or lease a title plant in that county. The agency must employ at least one "qualified" escrow officer that is a Texas resident (or resident of an adjoining state) and submit an annual escrow audit. There are minimum capitalization requirements based on the population of the county in which the agency is licensed, and mandatory reporting of quarterly Internal Revenue Service (IRS) tax withholding.
As you head west from Colorado on the U.S. map, you will confront a higher-than-usual number of obstacles to licensure, including title plant subscription prerequisites, brick-and-mortar requirements, separate escrow licensing and audit reporting, and capital and/or bond requirements.
In addition, there are several states that layer prohibitive unauthorized practice of law (UPL) laws over their licensing requirements. These states demand that certain functions inherent in the title insurance and settlement process be conducted only by an attorney. Examples include deed and document preparation, search and examination of title, and/or conducting the actual closing.
Finally, several states have different restrictions on affiliated business arrangements that complicate a lender's ownership of a title agency. For example, Ohio prohibits a lender from owning a majority interest in a title agency. Other states, such as Tennessee, employ a hard-cap statutory scheme that limits the percentage of revenue derived from affiliated business.
2. Appointment by an underwriter
Getting a title insurance license is not enough--in order to actually sell title insurance, a title agency must be appointed by an underwriter. Title insurance companies such as Fidelity National Title Insurance Co., Old Republic National Title Insurance Co., First American Title and Stewart Title Guaranty Co., to name a few, are the underwriters behind the title insurance policy. They are the insurance company the insured looks to in the event of a title claim.
Title insurance claims have increased markedly over the last several years, due in part to the swell of mortgage foreclosures. Title insurance companies are on the front line, but they will exercise their right of indemnification against the agency if the agency was negligent in issuing the title insurance policy.
Gone are the days when an agency simply needed a title insurance license and a couple of experienced employees to obtain an appointment. The pendulum has swung in the other direction, and affiliated multi-state title agencies fall under the greatest of scrutiny. That said, don't lose faith--underwriters continue to look for good-quality, sound business.
Just as you will select an underwriter(s) with sound financials, underwriters will analyze your financial health. Despite the decline in the housing market, the appointment checklist has not changed; but it is applied more thoroughly, in a more aggressive manner. There are no shades of gray. Underwriters will demand credit reports and criminal background checks on all owners and key employees. They will expect key employees to have years of experience in the title industry and be licensed title insurance agents themselves.
Underwriters will review your business plan and fee structures for compliance with state and federal statutes; demand proof of controlled volume; and set requisite volume levels in each state. They will analyze your procedures with regard to internal underwriting guidelines and escrow account controls, including the conduction of a pre-escrow audit. They will expect financial projections and proof of error and omissions (E&O) insurance, fidelity and surety bonds.
Don't be surprised if they ask for personal guarantees. The appointment process is within the title insurance company's discretion, and rumor has it that appointments of multi-state agencies that are affiliated with lenders are scrutinized the most and appointed the least. So be prepared to wow them by meeting their requirements head-on.
3. RESPA Section 8
No article about affiliated title agencies would be complete without paying homage to RESPA Section 8. RESPA specifically addresses affiliated business arrangements and the conditions they must satisfy in order to claim exemption from Section 8's prohibitions against referral and unearned fees.
Your agency must perform valuable and substantial services, primarily through its own employees, and be subject to real risk. Determine if you are willing to invest fair and adequate startup capital into the title agency. Are you prepared to employ actual employees and management dedicated to title and to lease a separate office for which the title agency pays fair rent? Are you willing to accept dividends or equity distributions related solely to your ownership interest?
If so, you are meeting many of the criteria outlined by HUD to provide exemption or a safe harbor from Section 8. Your next step is to retain the services of an attorney well versed in RESPA to ensure your compliance with this federal law as you form and operate your title agency.
The journey to a successful affiliated title agency requires thoughtful analysis to overcome obstacles. By taking the road less traveled and addressing each challenge, you will set the stage for a thriving title agency that will increase your revenue and control--all while enhancing your lending operation's longevity and profitability in the ever-demanding mortgage industry.
Mary Jo Broussard-Speier is an attorney with the Speier Law Firm, based in Rockville, Maryland. Broussard-Speier has returned to private practice after 12 years dedicated to forming and operating affiliated and multi-state title agencies. She provides legal and consulting services to mortgage lenders and title insurance agencies interested in forming multi-state or affiliated business relationships. She can be reached at firstname.lastname@example.org.
|Printer friendly Cite/link Email Feedback|
|Title Annotation:||Title Insurance|
|Comment:||The road less traveled: there are many hurdles to overcome for lenders contemplating owning an affiliated title agency.|
|Author:||Broussard-Speier, Mary Jo|
|Date:||Nov 1, 2010|
|Previous Article:||One of a kind: Burton Wood--MBA's longtime legislative counsel--was truly one of a kind.|
|Next Article:||MORTECH 2010: lenders chafing under 'federalization'.|