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ATTORNEY INFORMATION

Because of opinions expressed by the Texas Insurance Department concerning rebates, legal credit is available only to:  Attorneys who own title agencies that are Stewart Title Guaranty Agents  Attorneys employed by a title insurance agent licensed with Stewart Title Guaranty or Stewart entities  Fee attorneys who have an Escrow Officer license through a Stewart Title Agent or Stewart entity We welcome any other lawyers to listen, but cannot provide continuing education credit to you.

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Licensing and Solvency 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?

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

• f 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

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

• nly 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

• 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

• 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 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

• 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
• perator 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
• f 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
• f 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

• n 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 –

• wn 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,
• fficers, 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
• ur 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 4 months up to and including 6 months 4 7 months up to and including 9 months 5 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

• fficer's initial license with TDI (Form FINT132), while still requiring

appointment and bonding (FINT123) by the title insurance agent or direct

• peration.
• 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

• n 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 ccraig@stewart.com

Be Careful Out There

To Receive CE Credit

Each individual seeking credit hours must send their own certificate request to: CEcertificate@stewart.com

Please include the following information:

• Provide only this Presentation Name in the Subject Line of your e-mail –

“Licensing & Solvency Update” In the body of your e-mail:

• Name of Participant (as it appears on your Escrow Officer License);
• Presentation PASSWORD given at the end of the webinar;
• License Number Only (located on left side of Escrow Officer Certificate of License – for

example: License Number: 1234567-890123)

For Attorney CLE Credit also include:

• Texas State Bar Number
• Affiliation with Stewart

– Employed by Stewart Title Guaranty Company; – an affiliate; or – a Stewart agent

For more details, see the FAQs at:

http://www.stewart.com/content/dam/stewart/Microsites/texas/pdfs/FAQs_About_Certificate_Requests.pdf

Please contact us ONLY if you haven’t received your certificate within 10 business days at: CEcertificate@stewart.com

You can access the full presentation materials 10 business days after this presentation as well as all current courses at:

www.stewart.com/texas under the “Texas TIPS” tab

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Next Month’s Texas TIPS Online presentation is

May 19, 2016 “Claims Procedures”

presented by:

Charity Makela For Questions/Comments Email john.rothermel@stewart.com

• r

heidi.junge@stewart.com

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