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 SB 133 (Aanestad), Page 2 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 SB 133 (Aanestad), Page 3 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 SB 133 (Aanestad), Page 4 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 SB 133 (Aanestad), Page 5 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