Interesting new law about Title Insurance (long) - Posted by Bassman

import · February 29, 2000, 8:11am

Posted by Glenn OH on February 29, 2000 at 10:21:26:

I wonder if Bronchick could comment on the implications of these changes for all of us.

import · February 29, 2000, 8:11am

Posted by Bassman on February 29, 2000 at 09:11:14:

Here is an article in the Lawyers weekly that I found interesting about how Title Insurance will be handled in the future. Sorry its so long, but the web address is long and you have to subscrbie to get into the archives.
Hope you find this interesting also.

USA Newspaper Subscribers Only

USA Archives
(all years)

December 13, 1999 Cite this Page: 99 LWUSA 1103

News Story:

Real Estate Lawyers Threatened by New Banking Reform Law
By James L. Dam

Real estate attorneys may lose the bulk of their title insurance work to banks and bank-affiliated companies as a result of the banking reform law enacted last month, attorneys tell Lawyers Weekly USA.

If that happens, most of the residential real estate work that attorneys are left with will no longer be profitable, attorneys say.

The new law allows national banks to sell insurance, including title insurance, through affiliated companies, and in some instances directly. It affects state-chartered banks as well, because many states have laws giving them whatever powers national banks have.

Ever since 1933, banks have generally been unable to sell insurance, although some have been able to do so through a number of loopholes.

Attorneys expect that banks will take advantage of their new powers by creating or acquiring title insurance agencies and then “steering” borrowers to these agencies.

Currently, in many parts of the country, both residential and commercial real estate attorneys often act as the title insurance agent in the conveyances they handle, for which they receive a portion of the insurance premium.

In residential work, attorneys say this is generally the only way they are able to make a profit, as they must charge a very low fee to clients in order to compete with settlement companies that are affiliated with, and get referrals from, real estate agencies.

“The only way to compete on fees is to make some money on title insurance,” says Howard Birmiel of Burke, Va.

“It’s the most profitable part of doing a residential closing,” says Joel Stein of Braintree, Mass.

Now, attorneys fear that this source of profit will be lost to banks, or to title insurance agencies that are affiliated with and get referrals from a bank.

“The banks can take that business away from attorneys, because they have control of the deal,” says Cara Detring of Farmington, Mo., who is president-elect of the American Land Title Association.

They “can intimidate consumers with the fear of not being approved for the loan,” says Birmiel.

“The consumer is sitting there in front of the loan officer and making the application for a loan and will take the easiest way out,” says Detring.

In some cases, if the client goes to the bank’s title agency, they may not go to an attorney at all. By taking away the profit or the client, “One way or another, banks will push the lawyers out of it,” says Birmiel.

Commercial real estate work will probably not be as affected as residential work, because commercial borrowers are generally more sophisticated and not as easily influenced by a bank’s “steering,” say attorneys.

Also, commercial borrowers are likely to retain an attorney no matter what the bank tells them, and the attorneys generally don’t depend on a share of the insurance premium to make the work profitable, says Sheldon Rubin of Beverly Hills, Calif., who is the chair of the title insurance committee of the American College of Real Estate Lawyers.

Ultimately, some real estate attorneys may want to work for a bank-affiliated title agency, attorneys say.

Lawyers who already own an agency might bring a bank in as a co-owner, says John Pottridge of Alexandria, Va., who is a mergers and acquisitions consultant to banks, with a specialty in insurance. Banks may be more interested in that than in starting a new agency, he says.

But no matter what the arrangement, attorneys would lose their independence and probably wouldn’t make as much money, lawyers agree.

“Banks will be reaping the profits,” says Birmiel.

In any event, there may not be many such opportunities, since banks, like settlement companies, will probably try to keep costs down by involving as few lawyers as possible, say attorneys.

A bank’s agency may have 90 lay people and one lawyer, says Louis Preveza, the manager of Land America’s title insurance companies in Boston.

Also, banks will not want to co-own an agency with lawyers who aren’t doing a large volume of closings, says Peter Norden, a vice president of First American Title Insurance Company in Boston. “The little guys will be squeezed out.”

The New Law
The new law repeals provisions of the 1933 Glass-Steagall Act that prohibited banks from being involved in the underwriting or selling of insurance or securities.

It allows all national banks to sell insurance through bank subsidiaries. It also allows them to sell it directly in states that allow state banks do so, which includes the majority of states, according to Stein.

In addition, it allows banks to both sell and underwrite insurance through affiliates in bank holding companies, as long as they meet certain requirements regarding capitalization and management.

It leaves states the power to regulate the insurance activities, but generally preempts state laws and regulations that “prevent or significantly interfere with” a national bank’s ability to sell insurance.

The provisions allowing banks to sell through subsidiaries do not take effect until the Comptroller of the Currency issues regulations, which it is required to do by Aug. 10, 2000. However, direct selling in states allowing it can begin immediately.

Underwriting through holding companies can also begin immediately. (Technically, it must wait until March 11, 2000. But as a practical matter, banks are allowed a year to divest themselves of ownership in an insurance company where their investment violates the law, so even if a bank begins underwriting before March 11, it wouldn’t be punished.)

Prior to the new law, loopholes through which some national banks were already selling insurance included a law that allowed them to sell it if they were in a town with fewer than 5,000 people. This law has existed since 1916, but was seldom used until the Comptroller of the Currency ruled in 1996 that a national bank with a single branch in a town with fewer than 5,000 people could sell insurance anywhere to anyone.

‘One-Stop Shopping’?
Experts are generally confident that banks will get into selling title insurance to some extent.

It is “virtually certain,” says Peter Birnbaum, president of Attorneys’ Title Guaranty Fund in Chicago.

The extent of the involvement, however, is very unclear.

“Nobody knows, including the banks themselves,” says Perry Hamilton, president of Condell & Company in Hilton Head Island, S.C., a publishing and consulting firm focusing on the title and settlement industry.

Some lawyers doubt the involvement will be very great, at least at first.

For example, Los Angeles attorney John Hosack, author of California Title Insurance Practice, notes that banks have had some ability to sell title insurance for many years, but not very many have done so. He says, “It’s not a realistic problem on a broad basis.”

Banks will probably view life and casualty insurance as much more profitable, and be more interested in them, says Title Management Today editor Lewis Laska of Nashville, Tenn.

But many attorneys fear the worst, and view the banks’ new powers as likely to lead to much more of the “one-stop shopping” that has already begun with real estate agencies’ affiliation with settlement companies.

Now that banks, title agencies, title insurers, real estate agencies and everyone else can all be affiliated, there can be a “packaging” of everything related to a real estate transaction, says Birmiel. A single entity or group of affiliated entities will have just one price for the entire package, which would include originating the loan and taking the transaction through closing, including the title insurance. “This takes the lawyer out altogether.”

“The whole business is changing. This is one more step in what’s been evolving since 1992,” says Birmiel.

In 1992, regulations under the Real Estate Settlement Procedures Act (RESPA) were revised to allow real estate agencies to pay their own employees commissions for steering title business to their affiliated settlement companies.

This is bad not only for lawyers, but also for consumers, because there will be less competition, says Birmiel.

Also, banks may put pressure on title agents and insurers to insure a property even though there may be problems with the title, because the bank wants to make the loan, says Denise Ward, an attorney in Port Chester, N.Y.

Some Restrictions on Banks
Banks’ ability to steer borrowers to their title agencies may be restricted somewhat by RESPA. For example, RESPA would prevent the agency from sharing profits with the bank based on the number of customers the bank refers to it, says Bushnell Nielsen of Brookfield, Wis., editor of The Title Insurance Newsletter.

However, lawyers don’t expect these restrictions to be a significant factor.

“The enforcement of them in recent years has been non-existent,” says Birnbaum.

Banks might also be restricted, however, by consumer protection regulations that the new law requires be issued, including ones that prohibit any practice that would lead a customer to believe an extension of credit is conditional upon the purchase of insurance from the bank or an affiliate.

State consumer protection laws may also apply. For example, an Illinois law prohibits a lender from insisting on the use of a particular title insurance company, says Birnbaum.

Such laws may be preempted. However, the new law lists 13 “safe harbors” from preemption, which include state laws that prohibit banks from conditioning an extension of credit on the purchase of insurance from an affiliate and laws that prohibit them from rejecting an insurance policy on the basis that it was purchased from an unaffiliated agent.

Under a Connecticut law, only lawyers are permitted to sell title insurance, which could be preempted, says Richard Patterson, president of Connecticut Attorneys Title Insurance Company in Rocky Hill, Conn.

The new law is the “Gramm-Leach-Bliley Act,” Public Law 106-102, enacted on Nov. 12, 1999.

You can read, print or download the full text in the “Important Documents” section of Lawyers Weekly’s Internet site:

http//www.lawyersweekly.com

Lawyers Can Go to Jail for False Statements
Investigators Are Putting Collection, Divorce, P.I. Lawyers at Risk
Attorneys who ask an investigator to find out about someone’s account at a bank or other financial institution can go to jail if they know that the investigator will obtain the information by false pretenses, under provisions of the new banking reform law.

This applies to collection attorneys, as well as any other attorney using an investigator to obtain personal financial information, including divorce and personal injury lawyers.

It appears that many investigators - including “asset locators,” “skip tracers” and “information brokers” - frequently use false pretenses, or “pretext calling,” to obtain such information.

For example, to find out if there is enough money in a debtor’s bank account to justify an attachment, an investigator might call the debtor’s bank and pretend to be the debtor, or pretend to be a merchant wondering if a check written by the debtor for a certain amount will clear.

Attorneys say that even in the past they generally would not knowingly allow an investigator to use such tactics, out of concern they might violate ethical rules, the Fair Debt Collection Practices Act, or other laws.

Now, with the threat of criminal penalties, it’s even more important to be careful about this, attorneys say.

“What they’ve done is criminalize what was previously civil,” says Charles Natkins of Cleveland, a vice president of the National Association of Retail Collection Attorneys (NARCA).

Under the new law, both the investigator and the attorney could be fined up to $250,000 or serve up to five years in prison. These penalties could be doubled in certain aggravated cases.

The law applies not just to bank account information, but to any “customer information” of a “financial institution,” which is defined to include any broker or dealer, investment adviser or investment company, insurance company, loan or finance company, credit card company or consumer reporting agency.

It does not apply, however, to the collection of child support.

New Weapon for Debtors
Although the new law does not provide for civil damages, attorneys might still want to raise an issue about it if they spot a potential violation by another party or an investigator or attorney, lawyers say.

In a collection case, the issue might be raised along with a claim for damages under the Fair Debt Collection Practices Act, which prohibits debt collectors, including collection attorneys, from using “any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer.” (15 U.S.C. Sect. 1692e(10).).

If conduct potentially violates the new law, that may strengthen this claim and help in settling the debt dispute.

There might also be a claim under a state consumer protection statute.

Of course, in many cases, someone whose bank account has been discovered won’t know how the discovery was made. But they may know if the pretext calling included calls to them, as it apparently often does.

Also, the new law is worded so broadly that violations of it may include any statement made to a debtor that is (1) an attempt to obtain account information, and (2) “false, fictitious, or fraudulent.”

For example, it may be a violation to say to a debtor, “We know where you bank,” or, “We can find out where you bank,” if those statements are not true, says New York private investigator Lee Wind, who headed a lobbying organization dedicated to fighting against the passage of the new law.

Avoiding Liability

To avoid liability for a Fair Debt claim or a violation of the new law, attorneys may want to request investigators to sign a certification that no pretext will be used, says Michael Martin, president of an asset location company, Advanced Research, in Stroudsburg, Pa.

They also may want an indemnification agreement, suggests Wind.

In the past, most attorneys have applied a “don’t ask, don’t tell” rule, says William Fason, a private investigator in Houston. “They’ve said, ‘We don’t want to know.’”

Now, because the risk is greater, attorneys may be better off asking, says Martin.

Debt Collection May Be Harder
To the extent that investigators hired by attorneys have been using pretext calling but will now stop, debt collection may be more difficult and expensive.

“Pretext calling has been the easiest way to get financial information in a relatively low-cost way,” says Martin.

Other ways of getting the information - such as asking the debtor, reviewing credit reports, sending subpoenas to banks and asking other people, such as an ex-spouse of the debtor - are generally either more expensive or not as thorough or reliable, says Fason.

“Getting that information is a difficult thing,” says Chicago attorney Ira Leibsker, who is the secretary of NARCA. “It’s not readily available.”

Thorough and reliable information is especially important in places where the court costs for attachments are high, says Fason. For example, in Texas, it costs $225 to serve a writ of garnishment, plus the attorney’s time. If it turns out the account you believed the debtor had at a bank isn’t there, “that’s a tremendous waste of time and resources, when just a few phone calls could have sorted it out ahead of time,” he says.

In Ohio, on the other hand, the cost is only $15 to $25, so it’s worthwhile to file attachments based on a “a guessing game,” says Natkins.

Fason gives an example of how a few calls can quickly lead to bank account information: Suppose the investigator knows from a credit report that a debtor pays $317 per month to a mortgage company. He calls the mortgage company and pretends to be the debtor, and finds out when the monthly payment is due. This allows him to call the debtor and pretend he is the mortgage company complaining about an overdue payment, in response to which, in order to verify that the payment was made, the debtor reveals where his checking account is and the account number. Fason then calls the bank pretending to be a merchant wondering if a check from the debtor will clear, and thus he finds out whether there is enough in the account to justify an attachment.

Each of those calls would be illegal under the new law, he says.

To the extent that investigators hired by attorneys do not stop pretext calling, debt collection may also be more expensive, because the investigators may charge more to offset the additional risk they are taking, says Fason.

Collection Attorneys May Be Helped
The potential impact of the new law on collection attorneys, however, is not all bad.

It’s possible that, by forcing creditors to use court-ordered discovery rather than pretext investigation to find out about bank accounts, it will force creditors to use attorneys, says Richard Golden, a collection attorney in Fairfax, Va.

This means there should be more work for collection lawyers generally.

In addition, by criminalizing what previously may have just been unethical, the law may allow lawyers who did not use pretext investigation because of the ethical issues to now compete on a more equal footing with lawyers who did use it.

The new provisions are Sects. 521-527 of the “Gramm-Leach-Bliley Act,” Public Law 106-102, enacted on Nov. 12, 1999.

You can read, print or download the full text in the “Important Documents” section of Lawyers Weekly’s Internet site:

http//www.lawyersweekly.com/subscriber/treas.htm