Guess who’s coming to dinner? No one.
If you could tune out the clinking glasses and the mutual pats on the back at Cooper-Horowitz’s annual bash at Michael Jordan’s steakhouse this week, you might have witnessed an unusual sight: Title insurance players looking anxious, huddled in a corner and discussing upcoming regulations that would change their business as they know it.
New state rules which take effect Dec. 18 aim to crack down on bad actors in the title insurance industry and will put a harsh spotlight on how firms spend their marketing dollars to win business. In order to curb inducements and excessive marketing, they prohibit title companies from offering clients (or prospective clients) meals and beverages, entertainment, outings, vacations or parties. How they will actually work is anyone’s guess, but what’s clear for now is they’ve got people spooked.
“Everyone in the industry is completely tied up in furious knots over this,” said one title executive, who spoke on condition of anonymity. “There is so much angst — and anger — over these regulations.” The level of detail in the regulations is unprecedented, he added. “I mean, there are virtually no entertainment expenses of any sort that are allowed.”
Title insurance is an opaque industry, even by the standards of real estate, and some players are notorious for going all-out to win business, wining and dining clients and potential clients with parties, trips, and tickets. The state has made numerous attempts over the years to curtail so-called “inducements,” but actual enforcement from Gov. Andrew Cuomo’s office has been lax, allowing for firms to go about business as usual.
The latest effort, however, is being taken seriously. After years of being the life – and hosts – of the party, leaders in the industry are trying to keep a low profile, which means that the VIP boxes at Madison Square Garden, Yankee Stadium and the Barclays Center, though already paid for, will remain empty for the foreseeable future. In addition to the marketing ban, a provision will also require underwriters to comply with certain transparency requirements — or be forced to reduce their rates by 5 percent.
“To me, this is unconstitutional,” said Adam Leitman Bailey, a real estate attorney who frequently works with title insurance companies. “You can’t limit the ability of a business to bring in more business.” Sure, there are bad apples, he said, as with any industry, but “I don’t think giving out tickets is shady. Taking a client out to lunch and dinner — those are things that every business in America does. Why are they taking it away from title companies?”
To critics of the title industry, however, a crackdown on what they say is excessive marketing expenses is long overdue.
In New York State, the rates for title insurance — a form of insurance that guarantees buyers obtain “clean title” to their property — are set by an organization known as the Title Insurance Rate Service Association (TIRSA), whose members include the industry’s largest players. Without competitive pricing, many agents use entertainment — and sometimes lavish parties or gifts — to distinguish themselves from the pack and win business.
“From an agent perspective, the entertainment piece has been very important to them,” said one industry executive. “It’s one of the few levers an agent can flex, and it’s been a major tool to gaining business.”
The new regulations, introduced in October, stem from an investigation by the Department of Financial Services into unscrupulous practices, which DFS said revealed that insurers and agents “spent millions of dollars on inducements that the industry has charged back to consumers as ‘marketing costs.’”
But sources said a handful of unscrupulous players give the industry a bad rap. “I’m not running around dropping thousands of dollars,” one agent said. “But if I want to go to dinner with you and take you out, I can’t and that kind of sucks.”
Since the fall, the New York State Land Title Association (NYSLTA), which represents agents and underwriters. has fought the regulation behind the scenes. The membership group retained the white-shoe law firm Gibson Dunn & Crutcher to represent it in any legal challenge. And after scrapping plans to seek a temporary restraining order, several sources said that members of NYSLTA are weighing an Article 78 action — which challenges government actions. In a series of meetings this fall, NYSLTA told members it was looking to raise $500,000 to cover legal bills, the sources said.
“Everyone is showing up at these meetings and complaining vigorously,” one member said.
Bob Treuber, executive director of NYSLTA, did not comment on the group’s specific strategy. He did say, however, that the regulations would have “major fallout” for the industry, not to mention consumers and other real estate players.
“The stated intent of these regulations was advertised as helping to eliminate bad actors (a mission we support) and reducing the cost of closing for New Yorkers,” he said in a statement to The Real Deal. “However, the main effect of these regulations will be the opposite.” The regulations, Treuber said, will force compliant companies to cut staff or close up shop, “adversely affecting small businesses, many [of] which are mom-and-pop companies that have been in business for decades.” He predicted the rules would have a “minimal” impact on rates but could disrupt the refinancing market, delay closings and put a strain on the overall housing market.
This week, at least six state lawmakers sent letters to DFS superintendent Maria Vullo, urging her to postpone the regulations by six months. (DFS has overseen the industry since 2014.)
They included state Sens. James Seward of Oneonta and Marty Golden of Brooklyn, as well as Assembly members Kevin Cahill of the Hudson Valley, Edward Braunstein of Queens and Dan Quart of Manhattan, who called the regulation “poorly conceived” and warned it would “destabilize” the real estate industry. In Golden’s letter, dated Dec. 13, he warned that the regulation would have a “series of unintended consequences resulting in higher costs for consumers, while creating havoc in the real estate market.”
Not everyone is opposed to the regulations. OneTitle, a three-year-old underwriter that sets its own rates and claims that as a result, its premiums are 10 to 25 percent lower than competitors, said in an email to clients and members that the ruling “shifts the conversation back to where it should be: a focus on which title option provides you and your clients with the best value and the best service.”
But even some backers of the regulation say it unfairly punishes title closers, independent contractors who perform administrative tasks associated with closings and whose income relies on tips and appearance fees at closings. Under the new regulations, all gratuities for closers are illegal.
“If they were worried about abuse, what abuse is this?” said one real estate attorney. “I know single parents with two kids who are title closers for a living. If it’s not putting them out of business, it’s definitely affecting the money they make.”