Dept. of Insurance Adopts new ABA rule !!!

Dept. of Insurance Adopts new ABA rule


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by Lorie Garland
Asst. Vice president
Legal Services


A new Department of Insurance rule, OAC 3901-7-04 became effective on Jan. 1. The rule establishes ownership and licensing standards for title insurance agents and agencies in accordance with ORC Section 3953.21, which prohibits certain persons from acting as an agent for a title insurance company. For years, the Department of Insurance has interpreted the insurance regulation to prohibit a real estate licensee from holding a fifty percent or greater ownership interest in a title company. The new rule codifies the ownership limitation and also prohibits a real estate licensee from serving as an officer of a title insurance company. Real estate licensees who have ownership interests or are officers of a title company may be affected by this new rule.

The rule provides that no business entity may be licensed as a title insurance agency where one of more prohibited persons control the business entity. A “prohibited person” is defined as a bank, trust company, lending institution, mortgage service, brokerage, mortgage guaranty company, escrow company, real estate company, builder, developer or any subsidiaries thereof or any individuals so engaged. As real estate licensees are prohibited persons they cannot act as an agent for a title insurance company or control a title insurance company.

“Control” is defined as possession of the power to direct the management and policies of the title insurance company. Control is presumed to exist if any person, directly or indirectly, owns or controls fifty percent or more of the voting interests. Control is also presumed to exist between a natural person and an immediate family member. “Immediate family member” includes a person’s father, mother, stepfather, stepmother, brother, sister, stepbrother, stepsister, son, daughter, stepson, stepdaughter, grandparent, grandson, granddaughter, father-in-law, mother-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law, the spouse of any of the foregoing, and the person’s spouse. This means that a real estate licensee and a family member cannot own a combined amount totaling 50 percent or more of a title company. These presumptions may be rebutted by showing that control does not actually exist.

However the prohibition of prohibited persons controlling a title company only applies to anyone applying for a title insurance license after Jan. 1, and to title insurance companies licensed before Jan. 1 that have a change of ownership after Jan. 1. Therefore, title companies licensed before Jan. 1 are “grandfathered” in until there is a change in ownership.

The rule also provides that a prohibited person may not serve as a partner, officer, director, or managing member of a title insurance company or be involved in the day-to-day operations of the title company. This provision applies to all title companies, even those licensed prior to Jan. 1, as there is no “grandfathering” for this section of the new rule. Therefore, any real estate licensee who is currently an officer, director, partner or managing member of a title agency will need to resign from that position.

Ohio’s title insurance regulations, as well as federal law under the Real Estate Settlement Procedures Act (“RESPA”), prohibit “sham” affiliated business arrangements. An affiliated business arrangement occurs when a real estate licensee has an ownership interest of more than 1 percent in a settlement service provider that the agent refers business to, i.e. a title company. The real estate licensee can receive a return on his ownership interest in the title company but cannot receive a referral fee for referring consumers to the affiliated title company. A “sham” arrangement is found if the affiliated business arrangement is set up solely to circumvent the prohibition of referral fees.

The new insurance rule provides that a title company may not become licensed or remain licensed where the company is merely a “sham” arrangement. The Superintendent of the Department of Insurance will consider factors similar to those used to determine whether an affiliated business arrangement is a “sham” arrangement under RESPA. The factors include the following:

Does the new entity have sufficient initial capital and net worth, typical of the industry, to conduct the title insurance business for which it was created or is it undercapitalized to do the work it purports to provide?
Is the new entity staffed with its own employees to perform the services it provides or does the new entity have “loaned” employees of one of the parents?
Does the new entity manage its own business affairs or is the new entity being run by one of the parents?
Does the new entity have an office for business which is separate from any of the parents? If the new entity is located at the same business address as one of the parents, does the new entity pay fair market value rent for the facilities actually furnished?
Is the new entity providing substantial services, i.e. the essential functions of the real estate settlement service, for which it receives a fee?
Does the new entity perform all of the substantial services itself or does it contract out part of the work? If so, how much work is contracted out?
If the new entity contracts out some of its essential functions does it contract services from any independent third party or from a parent or affiliate of a parent? If the new entity contracts out work to a parent or to an affiliate of a parent, does the new entity provide any functions that are of value to the settlement process?
If the new entity contracts out work to another party, is the party performing any contracted services receiving a payment for the services or facilities that bears a reasonable relationship to the value of the goods or services received?
Is the new entity actively competing in the marketplace for business or does it provide services solely for one or more of the parents?
The rule provides that if an affiliated business arrangement exists the only thing of value an owner can receive is a return on his ownership interest. A return on an ownership interest may not include any payment which is based on the amount of actual, estimated or anticipated referrals or a payment based on an ownership share which has been adjusted based on number of referrals. In determining whether a payment is a return on an ownership interest or an impermissible referral payment, the Superintendent of the Department of Insurance will consider factors used to determine whether the payment is permissible under RESPA.