Bulletin: FL000100

Exhibit A

FLORIDA DEPARTMENT OF INSIIRANCE

POSITION STATEMENT

LEGAL ANALYSIS

It has come to the attention of the Florida Department of Insurance that there exists a widespread practice among title insurance underwriters, agents and agencies in which these entities provide inducements to persons and entities in a position to refer title insurance business on a continuing basis. This Statement issued by the Florida Department of Insurance shall clarif~i that the Florida Department of Insurance intends to investigate these practices and to issue appropriate sanctions that include fmes and sanctions against the licenses of the offending parties.

It has been the position of the Florida Department of Insurance that the offer or acceptance of an inducement, or a "thing of value" as described in the Real Estate Settlement Procedures Act (RESPA), in return of the referral of insurance business is a violation of State and Federal law.

In particular, Florida Statute 626.9541(l)(h) 3.a. states as follows:

No title insurer, or any member, employee, attorney, agent, agency or solicitor thereof, shall pay, allow, or give or offer to pay, allow, or give, directly or indirectly, as an inducement to title insurance, or after such insurance has been affected, any rebate or abatement of the agent's, agency's or title insurer's share of the premium or any charge for related title services below the cost for
o providing such services, or provide any special favor or advantage, or any monetary consideration or inducement whatever. Nothing herein shall preclude an abatement in an attorney's fee charged for legal services.

In addition, Florida Statute 626.9541(l)(h) 3.c. states the following:

No insured named in a policy, or any other person directly or indirectly connected
o with the transaction involving the issuance of such policy, including, but not limited to, any mortgage broker, real estate broker, builder, or attorney, and any employee, agent, agency, representative, or solicitor thereof, or any other person whatsoever, shall knowingly receive or accept, directly or indirectly, any rebate or abatement of said charge, or any monetary consideration or inducement, other than as set forth in sub-paragraph (b).

The Florida title insurance rule, Rule 4-186, is consistent with provisions of the Unfair Insurance Trade Practices Act set forth above. In particular, rule 4-186.003(ll)(c) states as follows:

Any ongoing or standing offer of gifts, compensation or special services to the same person or customer on a continuing basis as an inducement to referring title insurance transactions is prohibited.

In addition, the Florida Department of Insurance is empowered to enforce Section 8 of RESPA pursuant to the following provision contained in Section 8 (12 USC 2607(d)(4)):

The Secretary, the Attorney General of any State, or the insurance commissioner of any State may bring an action to enjoin violations of this section.

In particular, the portions of Section 8 that the Department of Insurance would seek to enforce are 12 UCC 2607(a) and 12 USC 2607(b).

Subsection 8(a) of RESPA provides:

No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

12 U.S.C. § 2607(a). This statutory language is incorporated in HUD's Regulation X, 24 C.F.R. § 3500.14(b) (1998). Subsection 8(b) of RESPA provides:

No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.

12 U.S.C. § 2607(b). This statutory language is also incorporated in HUD's Regulation X, 24 C.F.R. § 3500.14(c) (1998).

Based upon the above, it is abundantly clear that the payment or acceptance of a thing of value in return for the referral of business is a violation of both State and Federal law. The offending parties are not only the persons or entities giving the inducement, but those receiving the inducement as well.

It should be noted that the Department of Housing and Urban Development (HUD) has enhanced its enforcement position. Under RESPA, the criminal penalties for a Section 8 violation are a fine up to $10,000 per violation and up to one year in prison. Under State law, the penalty for a violation of the Unfair Insurance Trade Practices Act is a fine of up to $2,500.00 for each non-willful violation and up to $20,000.00 for each willful violation, with each separate transaction being considered a separate violation. These fines are in addition to any action that will be taken by the Florida Department of Insurance with respect to the revocation or suspension of the license of the offending underwriter, agent or agency, any action that may be taken by the Florida Real Estate Commission against the license of a real estate broker or agent and any action taken by the Florida Department of Banking and Finance against a mortgage broker's license. The Florida Department of Insurance will seek the cooperation of these agencies in the prosecution of offending parties.

PROHIBITED PRACTICES

The Florida Department of Insurance has detected the widespread utilization of the practices set out below. This list of prohibited practices is not all inclusive and any practice in which an inducement or thing of value is given in return for the referral of insurance business will be the subject of prosecution by the Florida Department of Insurance. The following practices, however, have been noted as widespread practices and the Florida Department of Insurance hereby notifies the title insurance industry that these practices are illegal and that sanctions will result from the continued practices set forth below.

I. Payments to Brokers for the Completion of Order Forms.

It has come to the attention of the Florida Department of Insurance that title insurance underwriters, agents and agencies are paying substantial fees to real estate brokers, real estate agents and mortgage brokers for the completion of an order form by the broker or agent setting forth information relating to the order. This practice has been abused in that the payments that are normally given to real estate brokers, real estate agents, and mortgage brokers are far in excess of the value of the service to the receiving party. In addition, the order forms that are submitted provide no further information than the information that is traditionally supplied by a real estate broker, real estate agent or mortgage broker to a title insurance underwriter, agent or agency prior to the implementation of the referral/payment program. This being the case, it is the position of the Florida Department of Insurance that the compensation for these services is included in the commission paid to the brokers and agents and is not a new service that is being provided to the title insurance underwriter, agent or agency for which a separate fee should be paid. Any such payment is therefore considered by the Florida Department of Insurance to be an inducement and is hereby confirmed to be an illegal practice. Title insurance underwriters, agents and agencies are hereby notified that they should cease and desist paying a fee to real estate brokers, real estate agents and mortgage brokers in return for the completion of an order form.

The Department of Insurance has also recognized the process in which parties that receive the referral of insurance business attempt to circumvent the law by creating a fictitious employer/employee relationship between the broker or agent and the title insurance underwriter, agent or agency. The Florida Department of Insurance hereby confirms that it will scrutinize these relationships to determine whether the broker is truly an employee entitled to a commission for generating business.

II. Providing Bulletins, Flyers and Other Inducements Directly to Real Estate Agents.

The Florida Department of Insurance has recognized the widespread practice of title insurance underwriters, agents and agencies providing bulletins and flyers advertising realtor listings to real estate brokers and agents. In some circumstances, a fee is charged to the real estate broker or real estate agent for providing these bulletins and flyers. It is the position of the Florida Department of Insurance that the provision of bulletins and flyers advertising listings, as well as providing other benefits in the form of pamphlets and brochures under the disguise that these pamphlets and brochures are advertising for the title insurance underwriter, agent or agency are not legitimate and constitute a violation of State and Federal law. The position of the Department of Insurance is that providing these items is an inducement for insurance, even if the cost is reimbursed to the title insurer, agent or agency. (If supplying these items were not an inducement, then the brokers would be ordering these materials on their own.) The Florida Department of Insurance hereby informs title insurance underwriters, agents and agencies that the practice of supplying bulletins, flyers and similar items to real estate brokers and agents is illegal. The Florida Department of Insurance will seek sanctions against those who engage in these practices.

In addition to the provision of brochures and similar items, it has come to the attention of the Florida Department of Insurance that title insurance underwriters, agents and agencies are providing "virtual tours" at little or no cost for real estate brokers to advertise their listings. The provision of this service, as is the case with the brochures and pamphlets described above, is a thing of value in return for the referral of business and is also declared to be illegal.

III. Sham Business Organizations.

It has come to the attention of the Florida Department of Insurance that numerous title insurance underwriters and agencies are engaging in the practice of allowing real estate brokers, real estate agents, mortgage brokers and others in a position to refer business to own sham title insurance agencies. The Department of Housing and Urban Development has set forth the standards in its affiliated business arrangements section of RESPA relating to how these affiliated business arrangements can be structured. Please refer to HUD's Statement of Policy 1996-2, 61 Fed. Reg. 29,258 (June 7, 1996) to determine the criteria for bona fide affiliated business arrangements.1

The Florida Department of Insurance has identified certain relationships in which there is little or no risk to the broker, agent or other referrer of business for establishing these agencies. In these situations, there is little risk or no risk of loss associated with the creation and ownership of the title insurance agency and the payment of dividends to brokers or agents is a certainty. The Florida Department of Insurance, both under the Unfair Insurance Trade Practices Act, and by virtue of its authority under RESPA to enforce RESPA, hereby clarifies that affiliated business arrangements that are created as a subterfuge to pay inducements to real estate brokers, real estate agents, mortgage brokers and others in a position to refer insurance business for the referral of said business will be scrutinized by the Florida Department of Insurance. Title insurance underwriters, title insurance agents, title insurance agencies, real estate brokers, real estate agents, mortgage brokers and others that participate in sham title insurance agency entities that do not qualify under HUD's guidelines are hereby notified that the Florida Department of Insurance will seek sanctions against them.

CONCLUSION

In summary, the practices listed above are identified as existing and widespread within the State of Florida. The Florida Department of Insurance hereby puts the title insurance industry on notice that it intends to enforce the Unfair Insurance Trade Practices Act and RESPA and will be seeking appropriate sanctions against those who commit violations of these Acts. The ultimate objective of the Florida Department of Insurance is to enforce these laws and to preserve insurer solvency through this enforcement. Anyone with questions regarding the position of the Florida Department of Insurance on the issues addressed in this Statement or who wishes to make the Department aware of violations is urged to contact [FILL IN NAME].

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1 In order to determine whether a particular affilated entity is a "bona fide" provider of settlement services rather than a sham, the statement of policy explains that "HUD balnaces a number of factors in determining whether a violation exists and whether an enforcement action under section 8 is appropriate." The statement of policy identifies then such factors that HUD will "balance".

EXIHIBIT B

THE TREASURER OF THE STATE OF FLORIDA
DEPARTMENT OF INSURANCE

TOM GALLAGHER

July 11, 2002

Mr. John.LaJoie
Chairman, Insurer Section, FLTA
Vice President and Regional Counsel
First A.merican Title Insurance Company
2075 Centre Point Boulevard
Tallahassee, Florida 32308

Re: Inducements, Special Favors, Advantages

Dear John:

Thank you for the excellent position paper restating the Department position regarding violations by the title insurance industry.

Since our last meeting and discussion with various members of title insurers and agents, and after reflecting on these problems, I have concluded that our efforts in the past to alert the industry to these probiems has met with little success. It is undoubtedly time to seek administrative remedies that are available to the Department. Continuous warnings only serve to enhance the image that is already o~it there; i.e., the Department is only a ~'papertiger'~! We will riot place ourselves in a position of compiling a list of give-a-ways th~at are acceptable, and conversely, those that are riot. Title insurance people know the law, or should at the very least, have knowledge of the law.

We have looked at vaiious violations of state law as well as Reg X including the kick-back to realtors for filling out an orderforrn in return for $1004150. We have stated in the past that we cannot dictate whom an agent or insurer employs, but certainly every realtor who walks in with a contract and the completed order form is not an "employee". The fact that a 1099 to IRS is completed does not change the relationship. We have always maintained that a legitimate employer/employee relationship must exist. This position has obviously been misconstrued.

Providing bulletins, flyers, postage, o~ce equipment and other inducements (and would you believe a masseuse!) to realto~ will continue to be monitored as well as "sham business" arrangements in an effort to refer business. We are quite familiar with many affiliated business arrangements throughout the state, with the RESPA rule in structuring these businesses and have worked to get many into compliance. We intend to enforce the RESPA rule.

The Florida Real Estate Commission, Department of Banking and Finance and RESPA Enforcement are also looking into these issues.

We have done a considerable amount of work in these areas and it will continue with the resources available to us. In the future, any questions regarding this position or making the Department aware of violations should be reported to the Title Section of the Department.

I think the industry has the ability to clean up their act voluntarily. I would suggest strongly that they do so.

Sincerely,

W. M. Senter

TREASUER - INSURANCE COMMISSIONER - FIRE MARSHAL

W. M. SENTER, TITLE INSURANCE COORDINATOR BUREAU OF SPECIALTY INSURERS
200 EAST GAINES STREET, TALLAHASSEE, FLORIDA 32399-0331, PHONE (850) 413-2554, TELECOPIER (850) 488-0313
Email: senterw@do1.state.fl.us Website: www.do1.state.fl.us

Exhibit C

1. Does the new entity have sufficient initial capital and net worth, typical in the industry, to conduct the settlement service business for which it was created? Or is it undercapitalized to do the work it purports to provide?

2. 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 its parent providers?

3. Does the new entity manage its own business affairs? Or is an entity that helped create the new entity running the new entity for the parent provider making the referrals?

4. Does the new entity have an office for business which is separate from one of the parent providers? If the new entity is located at the same business address as one of the parent providers, does the new entity pay a general market value rent for the facilities actually furnished?

5. Is the new entity providing substantial services, i.e., the essential functions of the real estate settlement service, for which the entity receives a fee? Does it incur the risks and receive the rewards of any comparable enterprise operating in the market place?

6. Does the new entity perform all of the substantial services itself? Or does it contract out part of the work? If so, how much of the work is contracted out?

7. If the new entity contracts out some of its essential functions, does it contract services from an independent third party? Or are the services contracted from a parent, affiliated provider or an entity that helped create the affiliated entity? If the new entity contracts out work to a parent, affiliate provider or an entity that helped create it, does the new entity provide any functions that are of value to the settlement process?

8. If the new entity contracts out work to another party, is the party performing any contracted services receiving a payment for services or facilities provided that bears a reasonable relationship to the value of the services or goods received? Or is the contractor providing services or goods at a charge such that the new entity is receiving a "thing of value" for referring settlement service business to the party performing the service?

9. Is the new entity actively competing in the market place for business? Does the new entity receive or attempt to obtain business from settlement service providers other than one of the settlement service providers that created the new entity?

10. Is the new entity sending business exclusively to one of the settlement service providers that created it (such as the title application for a title policy to a title insurance underwriter or a loan package to a lender)? Or does the new entity send business to a number of entities, which may include one of the providers that created it?