Title Division

1. Title Division Jonathan Handsborough Director Indiana Department of Insurance jhandsborough@idoi.in.gov 317-234-5156

2. Title Insurance and Real Estate Professionals (RESPA/ IDOI) FAQ Inducements IDOI (Bulletin 158) and (Bulletin 177) CFPB (Bulletin 2015-05)

3. ***Note the information included does not constitute legal advice and it is recommended that you consult with an attorney if you have questions about how to comply with RESPA***

4. 1. Question: A real estate agent is sponsoring an open house for other agents. A local title agency reimburses the real estate agent for the cost of a luncheon and the title agency does not market its title services at the open house. Is this a violation of Section 8 of RESPA? A: Yes, this is a violation of RESPA. By reimbursing the real estate agent for the cost of the luncheon, the title agency has given the real estate agent a thing of value in consideration for the referral of business. Both the title agency and the real estate agent could be held responsible for the RESPA violation.

5. 2. Question: A real estate broker and a title agency agree to jointly place a full-page advertisement in a local newspaper. Each company gets exactly one-half of the page to advertise its services. Each company pays one-half of the cost of the advertisement. Is this a violation of Section 8 of RESPA? A: No, this appears to comply with RESPA. Section 1024.14 (d) explains the term “thing of value.” In relationship to joint advertising between service providers, it can become difficult to account for every “thing of value.” Equal space and equal payment is one way to accomplish this.

6. 3. Question: The owner of a title agency meets the owner of a real estate brokerage firm for dinner at a local restaurant. The purpose of the dinner is for the two individuals to discuss future marketing opportunities. After the discussion has ended, the owner of the title agency pays for the real estate broker’s dinner. Is this a violation of Section 8 of RESPA? A: No, this appears to comply with RESPA. The owner of the title agency can pay for dinner and not violate RESPA because the purpose of the dinner was business related and was not a payment for the referral of business.

7. 4. Question: A title agency devises a contest among local real estate agents where the real estate agent who refers the most customers to the title agency will receive a vacation cruise to Alaska. Is this a violation of Section 8 of RESPA? A: Yes, this is a violation of RESPA. One purpose of RESPA is to regulate the referral of business between service providers involved in real estate transactions. RESPA prohibits any settlement service provider from giving or receiving anything of value for the referral of business. Section 1024.14(g)(1) A company may not pay any other company or the employees of any other company for the referral of settlements service business.

8. 5. Question: A title agent conducts real estate closings in the conference room of the real estate broker. The title agent pays fair market value to rent the conference room for each closing. Is this a violation of Section 8 of RESPA? A: No, this appears to comply with RESPA. Section 1024.14 (d) explains the term “thing of value.” In relationship to renting office space or equipment, it can become difficult to account for every “thing of value.” Paying fair market value for purchased/ rented equipment or rental space are ways to accomplish this.

9. 6. Question: A title agency gives a real estate broker marketing materials, such as desk calendars, pens, and notepads, all of which promote the title agency’s name. Is this a violation of Section 8 of RESPA? A: No, this appears to comply with RESPA. See RESPA Section 1024.14 (d) “thing of value.”

10. 7. Question: RESPA prohibits referral fees. Does this apply to all settlement service providers? A: Yes, RESPA applies equally to all settlement service providers and does not distinguish among different types of settlement providers. A settlement service is any service provided in connection with a real estate settlement, including title searches, title examinations, title commitments, title insurance, services rendered by an attorney, the preparation of documents, surveys, credit reports or appraisals, pest and fungus inspections, home warranty companies, services rendered by a real estate professional, the origination of a federally related mortgage loan, and the handling of the closing or settlement. This list is broad, but is not all-inclusive.

11. 8. Question: Can a title company sponsor a luncheon for real estate professionals and offer free education? A: Maybe—this would need to be evaluated on a case-by-case basis. A title company can sponsor an educational event as long as they are promoting their services/ advertising, and the costs associated with the event do not defray expenses that the real estate agent would otherwise encounter and are not conditioned on the referral of business. This does NOT include offering free CLE or CE credits in Indiana.

12. 9. Question: Can a title agency offer free CLE, CE, or PE for real estate professionals? A: No, the agency must be compensated for providing this service in Indiana. See Indiana Bulletin 158 Prohibition on the Use of Goods and Services as Gifts to Induce Title Insurance Business.

13. 10. Question: Is there a way to structure a marketing services agreement (“MSA”) that complies with RESPA? A: RESPA allows the marketing of one settlement services provider by another settlement service provider so long as the payments made for these services represents the fair value for the services provided. A lawful MSA will need to contain the following elements: the real estate professional can perform services for other companies in the same field of business (i.e., the agreement is not exclusive); the compensation is not based on the volume of business, but rather on the value of the services provided by the real estate professional; there is a written contract between the parties which documents the services to be provided pursuant to the agreement; and a written disclosure is provided to the consumer describing the real estate professional’s role in selling the third-party service. That said, CFPB has been very active with enforcement actions in this area and appears to take the view that these agreements are going to almost always include improper referral fees. Any one Title Agency entering into a MSA in Indiana will need to be exercise extreme caution.

14. 11. Question: “A” is a real estate broker who refers business to its affiliate title company “B.” “A” provides its customers with an affiliated business disclosure that lists the range of charges that “B” will charge for title services, states that “A” has a financial interest in “B,” and notifies the customer that he or she is not required to use “B” for title services. Does this violate Section 8 of RESPA? A: No, this complies with RESPA. RESPA has particular provisions and regulations relating to affiliated business arrangements between real estate brokerage firms and affiliated mortgage companies or other settlement service providers, where there is a 1% or more common ownership between the companies. A settlement service provider may refer to affiliates (who are settlement service providers) if all of the following three requirements are satisfied: 1. Disclosure/notice is given to the consumer at or before the time each referral is made (or, if the referral is made by a lender to a borrower, by the time the Loan Estimate is provided). 2. The consumer is not required to use any particular provider of settlement services (that is, the consumer is not steered towards or required to use an affiliated entity providing mortgage or other settlement services); and 3. The only thing of value that is received from the arrangement (other than reasonable payments for goods, facilities or services actually furnished) is a return on the ownership interest (such as corporate dividends or LLC distributions, as applicable, in accordance with the owners’ percentage ownership interests).

15. 12. Question: Can a Realtor association solicit sponsorships from affiliate title agencies who provide settlement services for association functions that are not education-related, such as awards and recognition ceremonies and association fundraisers? A: Maybe—this will need to be examined on a case-by-case basis. While the association is not a settlement service provider, the subsidizing of the costs of the event for real estate professionals could be seen as conferring a benefit upon the members in return for referrals, as the members may not have to pay the costs normally associated with such an event. In order for the event to not violate RESPA, the affiliate would need to obtain the advertising exception in Section 8(c). The affiliate member MUST advertise its services during the event and there would need to be a reasonable relationship between the costs of sponsorship and the advertising.

16. 13. Question: A prospective buyer’s real estate professional has told her that in order to qualify for a special package of services, she must use a certain title insurance company. Does RESPA allow this? A: No, this is a violation of RESPA. Section 9 of RESPA states: “No seller of property that will be purchased with the assistance of a federally regulated mortgage loan shall require, directly or indirectly, as a condition to selling the property that title insurance covering the property be purchased by the buyer from any particular title company. Any seller who violates the provisions of subsection (a) shall be liable to the buyer in an amount equal to three times all charges made for such title insurance”. Simply stated, Section 9 prohibits a seller from forcing a buyer to purchase title insurance from a particular title insurance company as a condition of sale. However, Section 9 must be read carefully, as there are several important components and nuances to the seemingly straightforward language. This hinges primarily on whether or not the buyer is actually required to pay for the title insurance (owner and/or lender’s policy). Therefore, a seller may, in most situations, condition the sale of property on the use of a particular title insurance company if the seller purchases and pays for the entire cost of title insurance (owner’s and lender’s policies).

17. 14. Question: A seller has stated that in order for an offer to be accepted, a buyer must agree to pay for a title company selected by the seller. Doesn’t that violate RESPA? What if the seller required the buyer to pay for a third-party short sale negotiator? What if the seller was bank-owned REO? A: Yes, this violates RESPA. Section 9 of RESPA prohibits a seller from requiring the use of a particular title insurance company when the buyer will pay for the title insurance. This applies to any seller, whether a private individual, a home builder, or a lender with REO properties. This also applies only when the buyer will pay for the cost of title insurance. If a seller were to pay the full cost of title insurance on the buyer’s behalf, the seller could require that the title insurance be issued by a particular company. Finally, this only applies to title insurance. For instance, it does not prohibit a seller from requiring a buyer to pay for a particular third-party short sale negotiator, as long as that negotiator is not also the company issuing title insurance or the seller’s affiliate company. It also does not prohibit a seller from requiring a buyer to use a particular settlement or escrow company, as long as the settlement agent does not control the issuance of title insurance and is not the seller’s affiliate company.

18. 15. Question: What are the consequences for violations relating to inducements in Indiana for Insurance Agencies and Insurance Underwriters? A: See Indiana Bulletin 158. Title Companies and those doing business with Title Companies are responsible for knowing all applicable laws and complying with them. Consequences for violations of this bulletin include loss or suspension of one’s license, restitution, and/or fines of up to $50,000 per act.

19. Common Title Industry Inducement Violations 1. Co-advertising – In this scenario, the title company pays for an advertisement in a publication, on a billboard or some other media. Most typically, this involves a real estate magazine that advertises homes for sale. The problem, however, is that the amount the title company pays is far in excess of the amount of space allotted to the title company’s advertisement. 2. Broker opens – These events are open houses intended to help familiarize real estate agents with specific properties that are being listed for sale. The listing real estate agent hosts the event, which includes food and drinks, but the costs are paid by the title company which receives nothing of value in return from the arrangement other than the prospect of future title insurance customers. 3. Food and drinks – Title companies provide food at breakfast, lunch, and dinner meetings with their associated middlemen, usually in the associate’s offices. This incentive can range from a simple bag of donuts for a morning meeting to an expensive catered meal. Costs are paid by the title company which receives nothing of value in return from the arrangement other than the prospect of future title insurance customers.

20. 4. Educational classes – Real estate agents are required to take continuing education classes to maintain their licensing. Title companies will offer these classes and pay for the speaker, facility, food, and drinks. Some title companies will charge participants for the class (although the fees rarely reflect the full cost), while others will provide the class at no charge. 5. Gifts – Title companies provide a wide range of gifts to real estate professionals and banking professionals (those in a position to steer title insurance customers to them). These gifts range from nominal $5 coffee gift cards to more expensive gifts and gift cards. Costs are paid by the title company which receives nothing of value in return from the arrangement other than the prospect of future title insurance customers. 6. Golf – Rounds of golf were a commonly used incentive paid for by title companies. These ranged from inexpensive courses to more expensive, exclusive clubs. Costs are paid by the title company which receives nothing of value in return from the arrangement other than the prospect of future title insurance customers. 7. Sponsorships – Title companies provide sponsorships held for the real estate professionals and banking professionals (those in a position to steer title insurance customers to them). These sponsorships include gifts, prizes and supplies that cover a broad range in expense. Costs are paid by the title company which receives nothing of value in return from the arrangement other than the prospect of future title insurance customers.

21. 8. Party hosts – Title companies routinely host and pay for parties of all descriptions, at their own offices, real estate offices, or at restaurants and other facilities. Costs are paid by the title company which receives nothing of value in return from the arrangement other than the prospect of future title insurance customers. 9. Sporting events –Title companies provide complimentary tickets for other service providers to attend major sporting events in the area. These tickets can range from bleacher seats to the more exclusive luxury boxes. 10. Meals – Title companies picking up the tab for breakfasts, lunches, and dinners, also known as “wining and dining,” is by far the most often used incentive and inducement. These inducements range from inexpensive lunches costing just a few dollars per individual to expensive dining experiences costing thousands of dollars. Costs are paid by the title company which receives nothing of value in return from the arrangement other than the prospect of future title insurance customers. 11. Professional organizations – Title companies pay for other service providers’ Association Meetings. Costs are paid by the title company which receives nothing of value in return from the arrangement other than the prospect of future title insurance customers.

22. 12. Donations – Title companies often contribute food, gifts, money, and auction items to the charity events of other service providers. The title company receives nothing of value in return from the arrangement other than the prospect of future title insurance customers.