solvency and licensing update - stewart
TRANSCRIPT
Solvency and
Licensing Update
Charlie Craig Senior Vice President
Associate General Counsel
SW States Regional Counsel
Why Solvency?
1. Title companies licensed in Texas have the public’s trust;
handle more than a billion dollars of other people’s money
every year and provide title insurance needed for people to
buy, sell and loan money on Texas real estate.
2. The size and growth of the Texas real estate market and the
regulated environment encouraged more and more agents to
establish companies in Texas.
3. The automation of title plants and use of subscriptions rather
than plant ownership aided more agents to get into the title
business in Texas.
4. Then the 2008-09 economic downturn hit…
• Despite audits by TDI and underwriters, some agents
(and one underwriter) failed for a variety of reasons:
- Fraud, theft, poor business practices and in some cases the
downturn(s) in the economy
- Incompetency
• To maintain the public’s (including the legislature and the
TDI’s) trust, minimum solvency standards for agents
were needed.
Why Solvency?
• United Title was a subsidiary of a Colorado agent. It grew rapidly
in Texas and was solvent on its own.
• However, the parent company ran into financial trouble and its
bank froze its funding, causing the parent to eventually file
bankruptcy.
• Even though United Title was solvent, its parent shut down United
Title on one Friday and fired all of its employees on the spot.
• Since United Title itself was NOT insolvent and its escrow
accounts were still in tact, Texas Title Insurance Guaranty
Association (TTIGA) had no authority at that time to get
involved. Greater authority for TTIGA was needed …
Why Solvency? The United Title Failure
• Broad re-write based on TDI–appointed Study Committee’s
Report to the TDI Commissioner and made important changes
to the then existing law.
• Bill was a cooperative effort by Stewart Title Guaranty
Company, the Texas Land Title Association, the Texas Title
Guaranty Association and Texas Insurance Department over
legislative sessions and changes to TDI leadership and staff.
• Among other changes, introduced the idea to require proof of
Agent Capitalization and Solvency to do business in Texas.
HB 4338
• Stewart’s Solvency Bulletin TX 2014001
• TDI Adm Rule S.1, Minimum Capitalization Standards for Title
Agents and Certification and Procedure to Determine Value of
Assets including the timetables and capitalization amounts
• Insurance Code, Sections 2651.012, 2651.158 and 2651.012.
• TDI Commissioner’s Order 2806
Solvency Requirements - Where to Start
• A title agent must always maintain unencumbered assets with
a market value in excess of liabilities, exclusive of abstract
plants, as specified in Section 2651.012(c).
• 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, next slide).
• 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.
Solvency and Capitalization
Capitalization by County Population
Population of County
(2010 Census Data)
Unencumbered
Assets
Less than 10,000 $-0- (exempt)
10,000 – 49,999 $25,000
50,000 – 199,999 $50,000
200,000 – 999,999 $100,000
1,000,000 or more $150,000
• One or a combination of the following:
– cash or cash equivalents;
– liquid assets;
– real estate, in excess of any encumbrances;
– investments, such as mutual funds, certificates of deposit, stocks
and bonds;
– Surety Bond, which complies with Administrative Rule S.7;
– Deposit made in accordance with Section 2651.102;
– Letter of Credit that meets the requirements of Section
493.104(b)(2)(C);
– Solvency Account that meets the requirements of Section
2651.0121
What Assets to use to prove Solvency?
• TDI Adm Rule S.1 set forth the original schedule for compliance
with the minimum capitalization standards and ranges from
immediate compliance for new agents and to up to 9 years
(11/1/2022) based on the number of years the agent has held a
license in the State of Texas as of 9/1/2013.
• An agent just starting up or which has not been licensed since
9/1/2013 must reach the amount for their county immediately.
• An agent licensed before 9/1/2013 had the number of years it
was licensed as of 9/1/2013, up to 9 years to comply.
• An agent that merged with an agent licensed older than it, had
the number of years the older company had.
Original Dates To Comply
Original Dates To Comply
# of Years
Texas License
Held
Deadline for Full
Compliance
(From 9/1/13)
# of Yrs. To
Reach Full
Compliance
% of Asset
Amount Needed
Each Year
Less than 3 Immediately 0 100%
>3 but <4 November 1, 2016 3 33%
>4 but <5 November 1, 2017 4 25%
>5 but <6 November 1, 2018 5 20%
>6 but <7 November 1, 2019 6 16.66%
>7 but <8 November 1, 2020 7 14.29%
>8 but <9 November 1, 2021 8 12.5%
>9 years November 1, 2022 9 11.11%
• 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; but TDI may follow up with the agent to request
additional information regarding the integrity of the assets
being pledged. This information likely requested during
the regular TDI audit.
• T-S1 can be found on the TDI website at
www.tdi.texas.gov.
Form T-S1, Title Agent’s Unencumbered Assets
Certification Form
• The initial T-S1 certification must be submitted to TDI with the agent’s
first annual audit of escrow accounts (depending on the agent’s
fiscal year end).
• 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 (irrespective of the agent’s fiscal year end).
NOTE: late reports will subject you to TDI fines.
• TDI Adm Rule S.1 details the start dates/reports for instances of
changes in ownership, acquiring an agency through inheritance,
merger, and consolidation.
T-S1 Certification, When And How
• Determine your minimum capitalization level, schedule for immediate
compliance and the method(s)/assets you will use to meet the minimum
capitalization requirement.
• A title agent that applies for its first license and does not elect to create a
Solvency Account, it shall be required to meet 100% of the required
capitalization up front by: (1) hold unencumbered assets or (2) make a
deposit in the amount of 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.
• The initial filing of Form T-S1 will normally accompany the annual audit of
escrow accounts submitted to TDI (the exact date depends on the agent’s
fiscal year end), unless the agent makes a deposit under Insurance Code
§2651.012(f).
• Subsequent filings of T-S1 must be submitted annually between
September 1 and September 30 (irrespective of the agent’s fiscal year end).
What New Agents Should Do
Under TDI Adm. Rule S.2, a Solvency Account can be set up using
Form T-S2 to meet the requirements. Form T-S2, is a Tripartite
Agreement that must be executed by the agent, the agent’s bank and
TDI.
• 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. Note: Policies in excess of
$59,500 will require 1% of the premium ($59,500= $585x85%=
$550.65 *1%=$5.50 rounded to $5.00).
• Deposits must be made to the Solvency Account quarterly (within 31
days of the end of each calendar quarter). Best to do it on each
policy as issued. There is no set deadline for reaching the required
level of funds (required by Sec. 2651.012).
Rule S.2: Solvency Account as an Option
• Another one of the several approved methods of obtaining
solvency levels is a surety bond.
• TDI has to approve the bond form.
• Bond companies during the Recession didn’t want to issue.
Things have now changed to make this a real option.
See, TDI Adm. Rule S.7, Surety Bond for Title Agents to Comply
with Minimum Capitalization Standards and Texas Title Insurance
Agent’s Minimum Capitalization Bond form.
Rule S.7: Surety Bond as an Option
Under TDI Adm. Rule S.3, an agent can request and obtain the release of
assets, including funds held in a solvency account thru Form T-S3. You
still have to annually prove solvency from a different source(s).
• What you should know:
– Use Form T-S3 for requests to release funds; however funds will
only be released at the discretion of TDI.
– Form T-S3 provides a checklist for the actions required to request
a release.
– No funds can be returned to an agent that has ceased operations
unless the TDI agrees to release the funds.
– Solvency Account can earn interest, collectable after agent
reaches the required level of capitalization (Rule S.2-E)
Rule S.3: Solvency Account Release Agreement
• TDI Adm. Rule S-5, Filing of Title Agent’s Certification of Quarterly
Tax Report. Good indicator of solvency…
• Quarterly (w/in 45 days thereafter), every title agent and direct
operator must submit a copy of their quarterly payroll tax report
(941) to TDI, attached to Form T-S5 and 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. If no employees, must show no material change in
financial condition on the Form T-S5.
• Can be submitted electronically and information regarding submitting
the information electronically can be found on TDI’s website.
Rule S.5: IRS Withholding Report
• Guaranty fee imposed on every title policy issued in Texas by TTIGA. (Note: TTIGA
Board set a $5 fee originally, reduced to $0 in 2014, then back to $3 in effective April 1,
2016). See, Stewart Bulletin TX 2016002.
• TDI must notify TTIGA when an agent is determined to be “impaired”.
• TTIGA must pay from guaranty fund TDI expenses to examine and audit impaired agent.
• TTIGA can advance funds to pay expenses of administering an impaired agent.
• No entity that has gone through impairment can resume business until it repays TTIGA’s
expenses.
• All owners, directors and employees of a impaired agent have a legal duty to
cooperate with TTIGA and provide access to offices, files and electronic storage.
– Failure to cooperate = sanctions by the TDI!
• TTIGA can employ or retain persons to assist it in winding up an impaired agent to:
• i. Close real estate transactions
• ii. Disburse escrow funds
• iii. Record documents
• iv. Issue final title insurance policies.
TTIGA Expansion
a. Each title insurance company shall provide annually to the department a list
of officers authorized to provide TDI with financial solvency information on
an agent. See, Rule S-4; Form T-S 4 and T-S4-A.
b. Financial solvency information on an agent provided to TDI is not considered
to be “public information”, but TDI may disclose financial information
received to a title insurance company that has appointed, or that is
considering appointing, the title agent.
c. TDI may also release financial solvency information received under this
subsection to a title agent under Section 2651.206, Insurance Code, if the
information is evidence on which an audit report or examination report relies.
d. A title insurance company that receives financial solvency information may
not release the information except under a subpoena issued by a court of
competent jurisdiction.
– TDI Rules and Forms: S.4; T-S4, Disclosure Form T-S4-A
Exchanging Agent Information
• Files kept in agent offices or in storage must be made
available to the underwriters of an agent and to TTIGA for
copying during normal business hours and for up to 60
days in case an agent fails.
• United Title failure - TDI had to send armed Marshalls to
landlords to gain access to offices for itself and the
underwriters.
File Availability
• United Title owed many agents and underwriters for premiums
due. That portion of the premium was not under state control and
could have been claimed by the parent’s bankruptcy trustee.
• Now, premiums owed for division of premium under P-24 are to
be held in trust, but doesn’t require a separate trust account.
The purpose of placing the funds into trust is to enhance the
status of the funds in case of the failure of the agent.
• If you set up a separate account for underwriter premiums, TDI
cannot audit that account other than to see the amount of funds
that were placed into the account and correlate those funds to
underwriting premiums earned.
Premiums Held In Escrow
• All title plants, new and old must have an inception date
of at least January 1, 1979.
• As per 2009 study, TDI found that a large % of Texas title
plants already went back to sovereignty or had inception
dates older than 1961.
• So the impact of requiring a 1979 inception date was
marginal, but added immediate value to the ownership,
lease/subscription of a title plant.
P-1, P-12 : Imposing a 1979 Inception Date
on Texas Title Plants
In the past, title agents were licensed only through their underwriters so each held a
separate license for each underwriter.
Starting in 2014, the agents are licensed directly with TDI and the underwriters are
appointed onto the agent’s license. An agent must be appointed by at least one underwriter
to receive the initial license.
To engage in the business of title insurance in a particular county, a title agent must:
– be issued a license under Rule L-1.I. (file long form FINT143*, pay the $50 fee)
and comply with the requirements for maintaining that license in an active status,
– possess a valid, active appointment for that county from a title insurance
company's appointing official, and
– own or lease, and control an abstract plant, or participate in a bona fide joint
abstract plant operation in that county.
* Includes biographical info, business entity info/ filings, initial underwriter
appointment form, bond/deposit/letter of credit
Agent Licensing
Licenses last 2 years after date of issuance. To Renew:
• File Renewal Form FINT03, pay fee ($35)
• Must Verify:
– Form of business of the entity renewing
– Unencumbered Asset/solvency verification
– Reporting history with TDI, Audit history, past history, criminal history
– Continuing Education, Training Requirements
• Franchise Tax Account Status/ Confirm Franchise Tax Public Information
Report
Non-compliance = disciplinary action including revocation/non-renewal of agent
license, issue cease and desist order, administrative penalties, and ordering
restitution
See, Adm. Rule L-1 for Agents
Agent Licensing - Renewals
• New management personnel, including title managers,
officers, directors, shareholders who manage or administer the
day to day operations have one year to take a professional
training course for title agent management personnel if they
have not taken it before becoming an on-site manager, or did
not previously have five years’ experience as a Texas title
agency manager.
• The idea is that incoming agents to Texas need to understand
our laws and regulations and how to run a Texas company.
New Agent Initial Education
The education must be provided by the same providers
established in P-28 and must cover:
(1) the basic principles and coverages related to title insurance;
(2) recent and prospective changes in those principles and
coverages;
(3) applicable rules and laws;
(4) proper conduct of the license holder's title insurance business;
(5) accounting principles and practices and financial responsibilities
and practices relevant to title insurance; and
(6) the duties and responsibilities of a title insurance agent.
New Agent Initial Education
Agent Continuing Education
LICENSE PERIOD Total Required Hours Ethics
Less than 4 months 0 0
4 months up to and including 6 months 4 0
7 months up to and including 9 months 5 0
10 months up to and including 12 months 6 1
13 months up to and including 15 months 7 1
16 months up to and including 18 months 8 1
19 months up to and including 21 months 9 1
22 Months or more 10 1
• Title agent(s) or Direct Operation(s) appoint, bond, and apply for each
escrow officer’s license under their employment. Some escrow officers have
multiple escrow officer licenses, one for each title agency they work with.
• HB2492 passed effective Sept.1, 2015, amended Ins. Code, Section
2652.051(a), to require the individual escrow officer, rather than title
insurance agent or direct operation, to file an application for an escrow
officer's initial license with TDI (Form FINT132), while still requiring
appointment and bonding (FINT123) by the title insurance agent or direct
operation.
• Thus, the individual escrow officer will have one license that they must
maintain and then be appointed and bonded by Agent/DO.
• TDI will not enforce the provisions of HB 2491 until changes have been
made to the Texas Title Insurance Manual by rule, to be completed during
the summer of 2016. See also, Rule L-2
Change in Escrow Officer Licensing
• Escrow Officers are allowed to live in an adjoining state so long as they have
a bona fide job with a licensed Texas Agent
• Escrow Officer bond for such bi-state escrow officers is now $10,000, up
from $5,000.
• In-state escrow officer bond remains $5,000.
• If agent has more than 10 total escrow officers appointed, bond cannot be
more than $50,000 total.
Escrow Officer Licensing Bonds
• Escrow officers have similar education requirements
• All escrow officers licensed for at least 10 months must
complete 6 or more hours of continuing education, depending
on the length of time licensed. Basic Manual, P-28.A.3.
• Those hours must include at least 1 hour of ethics.
• To meet the Ethics requirements, course must be accredited
by either TDI or the State Bar of Texas.
Escrow Officer Continuing Education
Stewart Title Guaranty Company
Charlie Craig
Senior Vice President
Associate General Counsel
SW States Regional Counsel
(512) 236-0405
Be Careful Out There
