On October 17, 2017, in response to an investigation concluding that title insurance companies and agents were spending millions of dollars a year in “marketing costs” provided to attorneys, real estate professionals, and mortgage lenders in the form of meals, gifts, entertainment, free classes, and vacations that ultimately were passed on to consumers through heightened title insurance rates, the New York Department of Financial Services (“DFS”) issued Insurance Regulation 208, in which it identified a non-exhaustive list of prohibited inducements and permissible marketing expenses. The new rule went into effect on February 1 of 2018. Five months later, on July 5th, 2018, the New York State Supreme Court (the state’s trial-level court) annulled the part of the DFS regulation addressing marketing practices, holding that any such rule must be issued by the state legislature, not a regulating agency.
DFS Insurance Regulation 208 distinguished between those practices the DFS deemed to constitute illegal inducements for title insurance business in violation of Section 6409(d) of the New York Insurance Law, which prohibits the exchange of a rebate, fee, or other consideration or valuable thing as an inducement for business, and those practices the DFS found appropriate. Section 228.2 of the insurance regulation prohibited a title insurance company or agency from providing to any person or entity acting as an agent, representative, attorney, or employee of the owner or mortgagee of real property any payment, expense, compensation, or benefit associated with: meals and beverages; entertainment, including tickets to sporting events, concerts, shows, or artistic performances; gifts, including cash, gift cards, or gift certificates; outings, including vacations, holidays, golf, ski, fishing and other sport outings, gambling trips, shopping trips, or trips to recreational areas, including country clubs; parties and open houses; assistance with business expenses (e.g., rent, employee salaries, advertising, furniture, office supplies, telephones, telecommunications, computers, business equipment, or automobiles); use of premises, unless a fair rental fee is charged; paying fees or charges for professional representation, or providing non-title services for free. The regulation deemed any such consideration to be an inducement to purchase title insurance, even in the absence of a quid pro quo for prospective business. On the other hand, the regulation expressly provided that certain marketing opportunities remained permissible as long as the expenses were reasonable and customary, not lavish or excessive, paid without regard to insured status, not conditioned on referrals, and offered with no expectation that the recipient would purchase insurance. Such allowable opportunities included: advertising or marketing in any publication or media at market rates; advertising and promotional items of a de minimis value that include a permanently affixed logo of a title company or agent; promotional or marketing events, including complementary food and beverages, that are open to and attended by the general public; continuing legal education events, including complementary food and beverages, that are open to any attorney; complementary attendance at an event hosted by a title company or agent, including food and beverages, as long as title insurance business is discussed, such events do not occur regularly, and at least 25 diverse individuals from unaffiliated, different organizations were invited to attend; charitable contributions made by check to the organization in the name of the title agency or company; and political contributions.
In its press release announcing the new regulation, the DFS stated its intent to address questionable title industry practices and clarify the rules. After certain lawmakers asked the DFS to delay implementation of the rule until May, the DFS agreed to delay implementation until February. Members of the State Senate then passed a bill to roll back the regulation before it took effect, although the bill still has not moved in the State Assembly. Media also reported that the title industry’s response to DFS Insurance Regulation 208 was one of outrage, with one source quoting a title executive as stating that “Everyone in the industry is completely tied up in furious knots over this.”
Shortly after the regulation took effect in February, the New York State Land Title Association, Inc., along with the Great American Title Agency, Inc. and Venture Title Agency, filed a court petition to annul the regulation. On July 5, 2018, Justice Eileen Rakower reversed the part of the regulation prohibiting “marketing costs,” calling it “irrational,” and stating that the issues would be better addressed by the state legislature. She noted that Section 6409(d) of the New York Insurance Law prohibits rebates and commissions, not ordinary marketing and entertainment expenses, and that the legislature did not intend to restrict marketing practices. She stated that it is an “absurd proposition” to suggest that the legislature intended to prohibit title insurance corporations from marketing themselves for business. Justice Rakower further stated that even if marketing could be deemed prohibited under the statute, the DFS would not have the authority to delineate what types of marketing are permissible. She emphasized that the legislature “is in the best position to balance any social and economic ramifications purportedly created by certain practices in the Title Insurance Industry, not DFS.”
While Justice Rakower’s decision would appear to leave title companies and agents free to return to their former marketing and entertainment activities, the DFS already has filed a notice of appeal with the court, which may or may not issue a stay of the decision. If the court issues a stay, then DFS Insurance Regulation 208 will remain in effect pending the outcome of the appeal. Without a stay, the prohibitions on “marketing costs” will be lifted unless and until the DFS wins on appeal. The question for title insurance companies and agents now is whether to revert to their prior business practices or to continue abiding by Insurance Regulation 208 and wait for the outcome of the appeal before revising their business practices once again. New York Financial Services Superintendant Maria Vullo has emphasized the DFS’ position that the regulation “is a necessary supervisory tool to ensure appropriate market conduct and to protect New York consumers” and its belief that that the DFS will prevail on appeal. Before New York title agents get too excited, RESPA still prohibits providing things of value for the referral of settlement service business.