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
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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
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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