BILL ANALYSIS                                                                                                                                                                                                    






                        SENATE COMMITTEE ON BANKING, FINANCE,
                                    AND INSURANCE
                          Senator Michael J. Machado, Chair


          SB 133  (Aanestad)                 Hearing Date:  August 18,  
          2008  

          As Amended August 8, 2008
          Fiscal:             Yes
          Urgency:       No
          

          SUMMARY    Would establish procedures for obtaining and renewing  
          a certificate of registration as a title marketing  
          representative, as specified; prohibit a person from marketing,  
          offering, soliciting, negotiating, or selling title insurance in  
          California without a valid certificate of registration as a  
          title marketing representative; and place limits on the value of  
          items that title marketing representatives are allowed to  
          provide to those in a position to refer business to the title  
          insurers they represent.  
           
          DIGEST
            
          Existing law
            
           1.  Requires title insurers, controlled escrow companies, and  
              underwritten title companies to obtain a certificate of  
              authority or a license, as specified, before doing business  
              in this state, but exempts full-time, salaried employees of  
              these entities from the requirement to obtain a certificate  
              of authority or a license (Insurance Code Sections 1621 and  
              1634);

           2.  Makes it unlawful for any title insurer, underwritten title  
              company, or controlled escrow company to directly or  
              indirectly pay any commission, compensation, or other  
              consideration to any person as an inducement for the  
              placement or referral of title business (Insurance Code  
              Section 12404(a)); 

           3.  Includes a list of activities that are deemed inducements  
              for the placement or referral of title insurance and are  
              considered unlawful (Insurance Code Section 12404(c)).   
              These activities will be referred to in the remainder of  




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              this analysis as illegal rebate activities, and include:  

               a.     Paying or offering to pay, furnishing or offering to  
                 furnish, or providing or offering to provide assistance  
                 with the business expenses of any person, including but  
                 not limited to rent, employee salaries, furniture,  
                 copiers, fax machines, automobiles, telephone services,  
                 or computers;

               b.     Providing or offering to provide any form of  
                 consideration intended for the benefit of any person,  
                 including cash, below market rate loans, automobile  
                 charges, merchandise, or merchandise credits;

               c.     Placing or offering to place compensating balances  
                 on behalf of any person.  A compensating balance is a  
                 balance maintained in a lending institution by a title  
                 insurer, underwritten title company, or controlled escrow  
                 company for the express or implied purpose of influencing  
                 the extension of credit to a third party or the provision  
                 of goods, services, or benefits to a third party;

               d.     Advancing, paying, or offering to advance or pay  
                 money on behalf of any person into an escrow to  
                 facilitate the closing of that escrow, except under  
                 certain narrow exceptions stated in law;

               e.     Disbursing or offering to disburse escrow funds held  
                 by a title insurer, underwritten title company, or  
                 controlled escrow company before the conditions of the  
                 escrow have been met;

               f.     Furnishing or offering to furnish all or any part of  
                 the time or productive effort of any employee of the  
                 title insurer, underwritten title company, or controlled  
                 escrow company for any service unrelated to the title  
                 business;

           4.  Provides that "reasonable expenditures" for food,  
              beverages, entertainment, educational programs, and  
              promotional items constituting ordinary business expenses do  
              not constitute an illegal inducement for the placement or  
              referral of title business, as long as they are correctly  
              reported and properly substantiated as ordinary and  
              necessary business expenses under provisions of the Internal  
              Revenue Code, and as long as the expenditures do not violate  




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              any other section of law (Insurance Code Section 12404(d));

           5.  States the intent of the Legislature that the rules  
              regarding illegal rebate activity be liberally construed for  
              the purpose of protecting consumers of title business  
              (Insurance Code Section 12404(g));

           6.  Provides that every title insurer, controlled escrow  
              company, and underwritten title company that pays any  
              unlawful commission or makes any unlawful rebate is liable  
              for five times the amount of that commission or rebate,  
              recoverable by the Insurance Commissioner (IC), and  
              additionally authorizes the IC to restrict or suspend the  
              certificate of authority of any title insurer or controlled  
              escrow company or the license of any underwritten title  
              company for such violations (Insurance Code Section 12409);

           7.  Provides that notwithstanding any other provision of law,  
              the Commissioner of Real Estate may suspend or revoke the  
              license of a real estate licensee who claims, demands, or  
              receives a commission, fee, or other consideration, as  
              compensation or inducement, for referral of customers to any  
              escrow agent, controlled escrow company, title insurer,  
              underwritten title company, structural pest control firm, or  
              home protection company (Business and Professions Code  
              Section 10177.4).
           
          This bill

            1.  Would delete the provision of law that allows those who  
              solicit title insurance business to make reasonable  
              expenditures for food, beverages, entertainment, educational  
              programs, and promotional items, as specified, and would  
              instead do the following, with respect to those who solicit  
              title insurance business:

               a.     Prohibit advertising or paying for the advertising  
                 in any newspaper, newsletter, magazine, or publication  
                 that is produced by, or on behalf of a person, or that  
                 results in a direct or indirect subsidy to a person;

               b.     Prohibit expenditures for food, beverages, and  
                 entertainment for a person;

               c.     Allow expenditures for promotional items with a  
                 permanently affixed company logo of the underwritten  




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                 title company, title insurer, or controlled escrow  
                 company, and with a value of not more than $10 each, but  
                 provide that promotional items do not include gift  
                 certificates, gift cards, or other items with a specific  
                 monetary value on their face or items that may be  
                 exchanged for other items having a specific monetary  
                 value;

               d.     Allow the furnishing of education or educational  
                 materials exclusively related to the business of title  
                 insurance for a person, if continuing education credits  
                 are not provided;

               e.     Allow other expenditures for a person, as permitted  
                 by DOI, by regulation;

           2.  Would define a title marketing representative as a natural  
              person employed by a title insurer, underwritten title  
              company, or controlled escrow company, whose primary duty is  
              to market, offer, solicit, negotiate, or sell title  
              insurance, and would provide that a title marketing  
              representative does not include a person whose primary  
              duties directly involve the creation, production, or  
              issuance of the title policy or the performance of escrow  
              services;

           3.  Would prohibit any person from being employed as a title  
              marketing representative in California, unless the person  
              holds a valid certificate of registration as a title  
              marketing representative, issued by the IC, and would  
              authorize the IC to issue a cease and desist order, if he or  
              she becomes aware of any person who knowingly markets title  
              insurance without having applied for or obtained a  
              certificate of registration;

           4.  Would specify the items that must be included on an  
              application for a certificate of registration as a title  
              marketing representative; document the process that must be  
              followed, and specify the authority granted to the IC, when  
              he or she reviews an application; authorize the IC to impose  
              a filing fee, not to exceed $200 per application; and  
              establish procedures for denying, restricting, suspending,  
              or revoking a certificate of registration, and appealing any  
              such action by the IC; 

           5.  Would provide that each certificate of registration is  




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              valid for a three-year period and specify a procedure for  
              registration renewal;

           6.  Would allow an applicant for a certificate of registration  
              to solicit, sell, or market title insurance on a provisional  
              basis while his or her application is pending with the IC,  
              but would require these provisional title marketing  
              representatives to adhere to the same compliance  
              requirements as those who hold certificates of registration,  
              and would prohibit any applicant who previously had a  
              certificate of registration revoked, suspended, or otherwise  
              limited from receiving provisional status;

           7.  Would require title companies to notify DOI within 30 days  
              of the hiring and/or termination of a title marketing  
              representative;

           8.  Would require businesses that employ title marketing  
              representatives to provide the representatives with training  
              regarding Article 6 (relating to rebates and commissions)  
              within 60 days of their hiring; 

           9.  Would provide that, in addition to, or in lieu of, any  
              other penalty that may be imposed under existing law by the  
              IC against a title marketing representative, the IC may  
              bring an administrative action against a title marketing  
              representative for any violation of Article 6 (relating to  
              rebates and commissions), and would provide that if the  
              title marketing representative is determined by the IC to  
              have committed a violation of Article 6, the IC may require  
              the surrender of, or may temporarily or permanently suspend  
              or revoke the representative's certificate of registration  
              and impose a monetary penalty;

           10. Would provide that if a monetary penalty is imposed as  
              described in Number 9 above, the payment of such penalty  
              must be made from the title marketing representative's  
              personal funds, and not by his or her employer, either  
              directly or indirectly, through the title marketing  
              representative;

           11. Would prohibit a title marketing representative who has had  
              his or her certificate of registration revoked by DOI from  
              reapplying for another certificate of registration for five  
              years from the date of revocation;





                                              SB 133 (Aanestad), Page 6




           12. Would prohibit a title marketing representative who is  
              issued a certificate of registration from engaging in any  
              activity that is otherwise prohibited through a separate  
              entity controlled by the title marketing representative or  
              by the company or entity that employs him or her.


           COMMENTS

           1.  Purpose of the bill   To eliminate the payment of illegal  
              rebates by title marketing representatives to persons who  
              are in a position to refer business to the title insurers  
              for which the marketing representatives work.  

            2.  Background   This bill is the result of several years of  
              discussion and negotiation between the title insurance  
              industry and DOI regarding the most effective and  
              appropriate ways in which to stop illegal rebates by title  
              marketing representatives.  

           Title marketing representatives (also known as title  
              solicitors) are salespeople employed by title insurance  
              companies to market the title insurers' services.  Title  
              marketing representatives typically market their title  
              insurance companies to real estate agents and brokers, with  
              the expectation that the real estate licensees will  
              recommend the title insurance companies to their clients.   
              Individuals may select any title insurance company that  
              operates in the county in which they are purchasing or  
              refinancing their home, and can therefore stand to benefit  
              by shopping around to find the best rate on title insurance  
              services.  However, most individuals select the title  
              company recommended to them by their real estate agent or  
              broker.  For this reason, the provision of special perks by  
              title marketing representatives to real estate agents and  
              brokers, and the resulting referral of business by these  
              real estate licensees to the title company represented by  
              the title marketing representative, can limit competition in  
              the marketplace, and can result in consumers paying a higher  
              price for a service than they might otherwise have obtained  
              if they had shopped around.  

           According to DOI, the problem of illegal rebates by title  
              marketing representatives has grown over the past several  
              years.  The DOI has documented direct cash payments offered  
              by title marketing representatives to real estate agents and  




                                              SB 133 (Aanestad), Page 7




              brokers, the establishment of shell companies to launder  
              money that makes its way to real estate agents and brokers,  
              and the hiring of ghost employees by title companies and  
              subsequent payment by the ghost employee of his or her  
              salary to a real estate agent or broker.  DOI has also found  
              evidence that title marketing representatives paid rent and  
              purchased computers, copiers, and fax machines for real  
              estate agents and brokers, and provided free printing  
              services to agents and brokers.  

           Although all of the examples cited immediately above are  
              currently illegal, existing law is insufficient to  
              significantly deter illegal rebate activity for at least two  
              reasons.  First, existing law provides no mechanism for  
              tracking, registering, licensing, or disciplining title  
              marketing representatives.  Instead, title companies are  
              left to police their own employees, something they have  
              traditionally done poorly.  Furthermore, although existing  
              law allows DOI to punish title insurers, these punishments  
              have little, if any, impact on the activities of the title  
              insurers' employees.  

           Second, although many types of inducements for the placement or  
              referral of title insurance are illegal, existing law allows  
              title marketing representative to pay "reasonable  
              expenditures" for food, beverages, entertainment,  
              educational programs, and promotional items constituting  
              ordinary business expenses.  The debate over what  
              constitutes a "reasonable" expenditure is longstanding, and  
              has caused at least one piece of legislation (SB 728,  
              Escutia, from the 2005-06 Legislative Session) to fail  
              passage.  

           This bill would resolve the longstanding dispute between the  
              California Land Title Association and DOI over how best to  
              prevent illegal rebate activities.  The provisions of this  
              bill address both enforcement challenges noted immediately  
              above.  First, the bill would establish a process for  
              registering title marketing representatives, training them  
              in the statutes regarding illegal rebate activities, and  
              disciplining those who fail to follow the law.  Second, it  
              would more clearly identify what represents an allowable  
              (and an illegal) payment for food, beverages, entertainment,  
              educational programs, and promotional items.

            3.  Pending DOI Regulations   On June 17, 2008, DOI issued  




                                              SB 133 (Aanestad), Page 8




              proposed regulations governing title insurance rebates and  
              commissions.  These regulations proposed to clarify the  
              meaning of "reasonable expenditures" for food, beverages  
              entertainment, educational programs, and promotional items;  
              define a "title marketing and/or sales representative;"  
              require title insurers, underwritten title companies, and  
              controlled escrow companies to notify DOI upon hiring,  
              contracting with, or terminating a title marketing or sales  
              representative; require submission to DOI by title insurers,  
              underwritten title companies, and controlled escrow  
              companies of documentation the identities of title marketing  
              or sales representatives and of expenditures made by these  
              persons that fall within the definitions in Insurance Code  
              Section 12404; and provide for recordkeeping requirements in  
              connection with these submissions.  The proposed regulations  
              differ in several regards from the provisions of SB 133.   
              Generally speaking, the provisions of SB 133 are more  
              restrictive regarding the activities of title marketing  
              representatives, and give DOI more power, than the proposed  
              regulations. 

           In the process of analyzing SB 133, Committee staff contacted  
              DOI regarding the Department's position on SB 133 and its  
              plans regarding the proposed regulations, if SB 133 were to  
              become law.  According to DOI staff, DOI does not have a  
              formal position on the bill.  However, because SB 133 gives  
              DOI more authority to regulate title insurance marketing  
              representatives than the proposed regulations, DOI staff  
              expects to reconfigure the regulations to conform to the  
              bill, if the bill is enacted.  DOI staff note that these  
              reconfigured regulations would fit into a broader package of  
              proposed regulations to reform the title insurance industry  
              in California.

            4.  Support  .  The California Land Title Association (CLTA)  
              characterizes SB 133 as a pro-consumer bill that will create  
              a registration/licensing program for title marketing  
              representatives employed by title companies.  CLTA believes  
              that the bill will significantly reform how title insurance  
              may be marketed by clarifying what is and is not an  
              allowable marketing practice for the title industry, and  
              will increase competition in the title insurance  
              marketplace.  

           The California Escrow Association (CEA) observes the  
              longstanding nature of the debate over illegal rebates, and  




                                              SB 133 (Aanestad), Page 9




              states, "Questions concerning unlawful rebates in the title  
              industry have existed literally for decades.  SB 133 is an  
              important step to resolving these questions and creating a  
              structure for addressing the issues in the future."  CEA  
              believes that the bill resolves longstanding ambiguities  
              relating to marketing expenses by title companies and  
              establishes a responsible approach to regulating the  
              activities of sales representatives. 

           First American Corporation supports the measure, as part of its  
              cooperative working relationship with DOI to explore  
              industry reforms that would improve transparency in the  
              title insurance marketplace. 

            5.  Opposition    None on file.

            6.  Prior Legislation   

                  a.        SB 728 (Escutia), 2005-06 Legislative Session:  
                     Would have established application requirements and  
                    procedures for obtaining and renewing a certificate of  
                    registration as a title solicitor, prohibited a person  
                    from marketing, offering, soliciting, negotiating, or  
                    selling title insurance in California unless that  
                    person held a valid certificate of registration as a  
                    title solicitor, and authorized the IC to adopt rules  
                    and regulations as necessary to administer the title  
                    solicitor registration program.  Died on the Senate  
                    Inactive File.  

          
          POSITIONS
          
          Support
           
          California Land Title Association
          California Escrow Association
          First American Corporation
           
          Oppose
               
          None received

          Consultant:  Eileen Newhall  (916) 651-4102