In December 2017, the New York State Department of Financial Services (DFS) enacted Regulation 208, a bill which limited the marketing spend and client expenses of title insurance companies. Although the regulation was ultimately reversed this past July, many have been left questioning the current state of the industry and wondering what the future may hold for further regulation.
Not up to speed on the regulation? Here’s a complete look at how the New York State DFS came to pass Regulation 208, and where it stands now:
Setting the Stage
The New York State DFS had grown increasingly concerned about the amount that title insurance professionals were spending on marketing and business practices, including purchasing meals, gifts, and other perks for attorneys, agents, and other partners. The DFS believed that these expenditures unfairly impacted consumers and resulted in higher closing costs, and as a result, sought to regulate a variety of these practices.
The Enactment of Regulation 208
When the DFS enacted Regulation 208, it sought to achieve 3 main objectives:
- Prevent title insurance professionals and businesses from passing marketing expenses onto consumers through higher premiums;
- Stop those businesses from encouraging consumers to pay for in-house closer’s gratuities and pick-up fees;
- Put a limit on excessive ancillary fees (at 200% of the cost to the title company or fair market value of the service, whichever is less).
As part of the regulation, violators faced penalties ranging from $5,000 to 10 times the amount of compensation paid to an agent at closing. Many professionals in the title insurance industry argued that the regulation was overly broad and ultimately placed undue, and in certain cases debilitating, restrictions on necessary activities that were outside of the scope of the DFS’s control.
Regulation 208 goes to the Supreme Court
In an effort to overturn the regulation, a number of title agencies took their cases to the New York State Supreme Court, claiming that it was inconsistent with Insurance Law § 6409(d), the foundation for Regulation 208. They argued that the DFS didn’t have sufficient authority to enact Regulation 208; that it could be reduced to absurdity, as title companies would be unable to market themselves; and that this insurance law only prohibited incentives in the form of kickbacks, countering the DFS argument that the law prohibited all types of incentives. Additionally, the petitioners argued that, because Regulation 208 had been enacted without any form of economic analysis, some of its provisions and requirements were wholly arbitrary.
Regulation 208 is Annulled
On July 5, 2018, the court overturned Regulation 208, ultimately rejecting each point of the DFS’s argument. The court held that the regulation unjustly prohibited title companies from marketing the business itself, and reinforced that the DFS does not have the right to regulate standard marketing practices or expenses. The court also rejected the notion that in-house closers could be treated differently than independent closers, ruling that neither party could be barred from collecting pick-up fees. Lastly, the court found that any cap on ancillary fees was arbitrary, given that the DFS was unable to provide any concrete data to support the notion that a 200% cap protected consumers from excessive fees.
The day after the bill was overturned, the DFS filed an appeal stating:
“DFS remains steadfast in our belief that Regulation 208 is a necessary supervisory tool to ensure appropriate market conduct and to protect New York consumers. We remain certain of our legal opinion and are confident we will prevail on appeal.”
We reached out to Richard Horn, former CFPB attorney who led the final TRID rule, to hear his thoughts on Regulation 208. “Title companies in New York should pay close attention to this case. DFS will likely appeal the case to the end, since these issues of statutory interpretation are not clear cut. Regulators in other states may also be more aggressive in exams and investigations when looking at these mini-RESPA issues to pick up the slack left by the current leadership of the CFPB.”
He suggests conducting a compliance review to focus on state laws, as well as federal RESPA regulations, to identify any areas of potential risk. It will be interesting to monitor future developments on this issue to see if the appeal goes further, or if the legislation decides to address the issue in a manner similar to California's SB133.
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About the Author: Anatoliy Pavlishin is Head of Title & Escrow at Qualia, working with product, title, and escrow teams to ensure the platform's compliance. Prior to joining Qualia, he was a Senior Escrow Officer and Auditor at Fidelity National Title for over 12 years. Pavlishin was named as a 2017 HousingWire Insider award winner.