Bulletin: TX2014001

Dear Associates: 

On October 11, 2013, Insurance Commissioner Julia Rathgeber issued Commissioner's Order 2806. This bulletin covers the rules related to agent solvency matters that will take effect July 3, 2014. We are distributing this bulletin to provide you time to prepare your business to comply with the changes.

As background, Stewart Title Guaranty Company, the Texas Land Title Association, the Texas Title Guaranty Association and the staff of the Title Insurance Department drafted many of the provisions of HB 4338 in 2009 after considering a report from a study committee appointed by the Commissioner in light of the impact on title agents of the severe economic downturn that began in 2008. The Commissioner’s Order adopts administrative rules related to Minimum Capitalization Standards for Title Agents.

Agenda Items 2012-21 Adopt Administrative Rule S.1, Minimum Capitalization Standards for Title Agents Pursuant to §2651.012 and Certification and Procedure to Determine Value of Assets Pursuant to §2651.158, to include the timetables and capitalization amounts in Insurance Code §2651.012.

What you should know:

A title agent must maintain unencumbered assets with a market value in excess of liabilities, exclusive of abstract plants, as specified in Section 2651.012(c).

TDI describes these unencumbered assets as essentially considered reserves for contingencies for agent insolvency and to mitigate poor winding down practices.

Depending on the length of time an agent has been licensed and the size of the largest county in which the agent maintains a principal office, there are five different levels of capitalization that range from $0(Exempt) to $150,000 (see chart below). An agent that maintains a principal office in more than one county must meet the asset standards for the largest county for which the agent maintains a principal office.

TDI will be posting a list of the populations of counties on their website for your ease of reference, per TDI Manager of Title Examinations, Robert York. 

Principal Office is defined as: a principal office of the business organization, unincorporated association, sole proprietorship, or partnership in this state in which the decision makers for the organization conduct the daily affairs of the organization. The presence of an agency or representative does not establish a principal office.

Administrative Rule S-1 provides a list of different options for a title agency to meet the unencumbered assets rule:

• cash or cash equivalents;
• liquid assets;
• real estate, in excess of any encumbrances;
• investments, such as mutual funds, certificates of deposit, stocks and bonds;
• a surety bond, which complies with Administrative Rule S.7;
• a deposit made in accordance with Section 2651.102;
• a letter of credit that meets the requirements of Section 493.104(b)(2)(C);
• a solvency account that meets the requirements of Section 2651.0121

Under Administrative Rule S.1, a schedule for compliance with the minimum capitalization standards is set forth and ranges from immediate (7/3/2014) compliance for new agents to up to 9 years (11/1/22) based on the number of years the agent has held a license in the State of Texas. The following table assists with determining the deadline for full compliance. 

Agenda Item 2012-22 Adopts Form T-S1, Title Agent’s Unencumbered Assets Certification Form. The form specifies the title agent’s method of meeting the required minimum capitalization under Insurance Code §2651.158.

What you should know:

Agents that are exempt are not required to file T-S1 as there is no box on the form to check that they are exempt. Agents that are NOT exempt must submit form T-S1 each time they submit their annual escrow audit report. T-S1 designates how the agency has complied with the unencumbered asset requirement. T-S1 does not require proof to be submitted with the form; however, TDI may follow up with the agent with requests for additional information regarding the integrity of the assets being pledged. It could be expected that this information would be requested during the regular TDI audit. T-S1 can be found on the TDI website at www.tdi.texas.gov.

All agents, both exempt and non-exempt must still comply with filing the new quarterly reports as further detailed below in Administrative Rule S.5.

The initial T-S1 certification must be submitted to TDI with the agent’s annual audit of escrow accounts between September 1, 2014 and August 31, 2015. The subsequent annual T-S1 certification must be submitted annually between September 1 and September 30 of each year to TDI for the preceding calendar year beginning in 2015. We suggest marking your calendar to make this report as late reports will subject you to TDI fines.

The start date of the time that a title agent has been licensed is the date on which the title agent was first assigned a Title Agent Company Identification Number by TDI in connection with the issuance of the title agent’s initial license. Administrative Rule S.1 details the start date for instances of changes in ownership, acquiring an agency through inheritance, merger, and consolidation.

What you should do: 

Determine your minimum capitalization requirement and schedule for compliance as well as the method you will use to meet the minimum capitalization requirement. For determining years licensed, remember to use the effective date of September 1, 2013.

A title agent that applies for its first license on or after the effective date of this rule and does not elect to create a Solvency Account shall be required to (1) hold unencumbered assets or (2) make a deposit in the amount of 100% of the required capitalization specified under the Rule or (3) provide a bond in the form created in S-7 as a condition precedent to the issuance of a new license.

Form T-S1 will normally accompany the annual audit of escrow accounts submitted to TDI unless the agent makes a deposit under Insurance Code §2651.012(f). Create internal systems and procedures to comply with the rule.

Agenda Item 2012-23 Adopts Administrative Rule S.2, Solvency Capitalization Standards, to meet the requirements of Insurance Code §2651.012.

What you should know:

A Solvency Account can be set up by using Form T-S2 to meet the requirements of Administrative Rule S.1. If creating a Solvency Account, the agency must deposit into the account a portion of the agent's portion of the premium (the greater of 1% or $5) from each transaction. Deposits must be made to the Solvency Account quarterly (within 31 days of the end of each calendar quarter). There is no set deadline for reaching the required level of funds (required by Sec. 2651.012).

Agenda Item 2012-24 Adopts Form T-S2, Tripartite Agreement, to enable a title agent to establish a solvency account to comply with capitalization requirements. Note: This form must be executed by the agent, the agent's bank and TDI.

Agenda Item 2012-25 Adopts Administrative Rule S-3, Title Agent Requirements, Procedures and Forms for Obtaining Release of Assets in Accordance with Insurance Code §2651.012(b) or §2651.0121, to provide procedures for an agent to request and obtain the release of assets, including funds held in a solvency account.

What you should know:

No funds can be returned to an agent that has ceased operations unless the Commissioner agrees to release the funds. Use Form T-S3 for requests to release funds; however funds will only be released at the discretion of the Commissioner.

Agenda Item 2012-26 Adopts Form T-S3, Solvency Account Release Request. The form provides a checklist for the actions required to request a release.

Agenda Items 2012-27 and 2012-28 Adopts Administrative Rule S.7, Surety Bond for Title Agents to Comply with Minimum Capitalization Standards and adopts Texas Title Insurance Agent's Minimum Capitalization Bond form.

Agenda Item 2012-29 Adopts Administrative Rule S.4 and provides that title insurers and TDI may exchange information concerning agent solvency issues in a confidential manner. Information provided to TDI is privileged and may not be disclosed to the public. This rule is effective January 3, 2014.

Agenda Item 2012-32 Adopts Administrative Rule S-5, Filing of Title Agent's Quarterly Withholding Tax Report.

What you should know:

This rule is effective January 3, 2014 and creates a new quarterly filing requirement for the filing of Quarterly Tax Reports. This requirement starts the first quarter of 2014. At the end of each quarter, every title agent and direct operator must submit a copy of their own quarterly payroll tax report (941) to TDI, along with evidence that the taxes were paid (example: cancelled check or receipt of payment). The remittance form must indicate whether or not the agent has employees. The information must be submitted within 45 days of the end of each quarter. TDI will be creating a separate email address so that the information can be submitted electronically and information regarding submitting the information electronically can be found on TDI’s website.

What you should do:  Create internal systems and procedures to comply with the rule.

Comments and Additional Instructions:

This rule hearing and accompanying order is very detailed and makes many changes. It will be necessary to carefully read each rule each time an issue comes up to make sure you are complying with the many changes. 

If you have any questions relating to this or other bulletins, please contact a Stewart Title Guaranty Company underwriter. 

For on-line viewing of this and other bulletins, please log onto www.vuwriter.com.

T-S1 Title Agent's Unencumbered Assets Certification
T-S2 Tripartite Agreement
T-S3 Solvency Account Release Request
T-S4 Annual  Report of Title Company's Officers Authorized to Provide Information on Agent Financial Matters