By Patrick K. Yu
The New York State Department of Financial Services (“DFS”) published Insurance Regulation 208 (11 NYCRR 228) in the October 18th State Register. Regulation 208 took effect partially on December 18, 2017 and the remainder on February 1, 2018.
Regulation 208 prohibits inducements for title business such as meals, entertainment, gifts, vacations and free classes to select targeted individuals. It also caps certain ancillary charges by title companies and payments to closers, including an outright prohibition on gratuities to title closers. The purported goal of Regulation 208, according to DFS, is to prevent inducements for title business that results in higher premiums and costs to the consumer.
Section 228.2(a) of Regulation 208 broadens Insurance Law Section 6409(d) to prohibiting inducements regardless of whether provided as a quid pro quo for specific business (emphasis added). Section 228.2(b) specifically lists nine types of compensation/expenses that are prohibited, including:
1) Meals and beverages (unless permitted in Section 228.2(c);
2) Entertainment, including tickets to sporting events, concerts, shows or artistic performances);
3) Gifts, including gift cards or certificates;
4) “Outings,” including vacations; golf, ski, fishing, gambling, shopping trips, or “trips to recreational areas” and country clubs;
5) Parties, including cocktail and holiday parties, or open houses;
6) Providing “assistance with business expenses” of another person, including rent, salaries, advertising, and furniture;
7) Use of premises (unless a fair rental fee at market rates is charged);
8) Paying the fees or charges of any professional representing an insured, including attorneys, engineers or surveyors;
9) “Providing or offering to provide non-title services without a charge that is commensurate with the actual cost”.
Ancillary Fees Capped
Section 228.1(b) defines “ancillary fee” as “any fee for services related to a real estate transaction that is not included in the rate of premium approved by the superintendent [of the DFS], and that is not necessary for issuance of a title insurance policy, such as Patriot, bankruptcy, and municipal or departmental searches, or recording fees or charges.” Ancillary fee does not include the actual recording fee or other charge imposed by a governmental entity. Section 228.5(a) caps the fees that a title insurance corporation or agent (collectively, “Title Company”) can charge an applicant in a residential transaction for bankruptcy, patriot, and municipal searches to 200% (or double) the actual out-of-pocket cost for the search. The applicant would be the buyer or borrower according to the definition of “application” under Section 228.1(c)(1) of Regulation 208. If the search is conducted in-house, the Title Company is restricted to charging double the fair market value that a non-affiliated third party would charge the Title Company.
Municipal search fees are limited to 100% of the fair market value of the search if the search was completed by a non-affiliated third party in the same county plus the charge by the municipality.
Recording fees are capped at $25.00 per document above the out-of-pocket cost charged by the municipality.
Survey inspection fees are limited to $75.00 above the out-of-pocket costs charged by the surveyor.
Escrow service fees are limited to $50.00 per escrow.
Overnight mailings are limited to actual out-of-pocket costs of the Title Company.
Section 228.5(d)(1) of Regulation 208 prohibits closers from accepting gratuities or any form of payment from the “applicant” or on behalf of the applicant. Additionally, Section 228.5(d)(1) makes the closer’s compensation the sole responsibility of the title insurance agent or title insurance corporation.
Payoff Fees Prohibited to In-House Closers
Section 228.5(d)(2) prohibits closers who are direct employees of a Title Company from charging a fee for remitting a payoff to a lender (“Payoff”). However, without offering any explanation for treating independent closers differently, this section permits independent closers to charge for a Payoff so long as these three conditions are met (i) notice is provided to the seller of the fee to be charged for the Payoff at least three days prior to the scheduled closing date, (b) the Payoff fee is reasonable, and (c) the same fees are charged for the same service.
While it is not an exhaustive discussion of all the provisions of Regulation 208, the above discussion highlights those provisions which severely restrict Title Companies from marketing their services, Title Companies and in-house closers from making a living and all closers from receiving gratuities which are often the largest source of their compensation. Closers are similar to waiters in that they both perform a service that depends on gratuities for most of their compensations. The caps on the ancillaries charges are antithetical on the free market system and will likely put many title insurance agents out of business. On February 21, 2018, the New York State Land Title Association, a title industry trade organization, along with the Great American Title Agency and Venture Title Agency, have filed, through their attorneys Gibson, Dunn & Crutcher, a New York Civil Practice Law and Rules Article 78 proceeding against the DFS on the grounds the current regulations will “wreak havoc” on the title companies by forcing company closures, layoffs and reduced services and “unconstitutionally vague” with regard to advertising, among other things, under Regulation 208.