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April 22, 2010

VIA OVERNIGHT MAIL


Director Mary Jo Hudson
Ohio Department of Insurance
50 W. Town Street, Third Floor
Suite 300
Columbus, Ohio 43215

Re: Proposed Amended Rule OAC 3901-7-01

Dear Director Hudson:

On behalf of the members of the Ohio Association of Independent Title Agents


(OAITA) and the independent real estate settlement services industry stakeholders who
we support, we are authorized to make the following comments in light of the proposed
rule put forth by the Ohio Department of Insurance (ODI) entitled, “Annual Review of
Title Insurance Agent Escrow Accounts,” or OAC 3901-7-01.

The OAITA consists of nearly one hundred independently-owned and operated


small business owner-members who operate as independent title insurance agents, title
insurance agencies, title abstractors, regional title insurance underwriters, closers, escrow
agents, real estate agents and attorneys from across Ohio. To our constituents, your
agency rulemaking efforts have the greatest impacts as we represent the small business
owners most affected by additional costs imposed by the proposed amended rule.

As a preliminary matter, it should be noted that since July of 2009 the ODI has
had no formal contact with our organization. Despite our sincere desire to engage in
discussions regarding this proposed amended rule and our previous entreaties to
accomplish same1, the ODI has refused to have any meaningful discussion regarding the
economic impacts of this rule with our members. We remain open to that possibility
despite the apparent lack of willingness on the part of the ODI to engage our members in
this discussion. Nevertheless, please be advised of the following.

1
See Letter to Director Mary Jo Hudson, dated July 22, 2009 and Letter to Stephen Hombach, dated
August 31, 2009.
2 Letter to Director Mary Jo Hudson
April 22, 2010

1. Overview of Proposed Rule 3901-7-01

As originally drafted and made effective January 1, 2007, OAC 3901-7-01 was
created to establish the criteria for the annual independent review of title insurance
agents’ escrow, settlement, closing, and security deposit institution accounts.2

The original rule, which currently remains in effect, requires title insurance agents
to report the following: (a) account information for all depository institutions the agent
conducts business with3; (b) the results of three-way reconciliations (depository
institution statement to book balance to open escrow trial balance) for the most recent
monthly period4; (c) a listing of all jurisdictions in which the agent conducts settlements5;
(d) a certification of required insurance coverage6; and (e) a listing of all the agency’s
affiliated companies that are owned or controlled, in whole or in part, by a person or
persons prohibited from acting as a title agent pursuant to division (B) of Ohio Rev. Code
§ 3953.21 or by a builder or developer.7

The proposed rule seeks, among other things, to correct certain clerical mistakes
made in the drafting of the current rule (i.e., adding the term “insurance” to the defined
term “agent” in OAC 3901-7-01(A) and (C)(2), or clarifying filing requirements relative
to the as-yet-to-be prescribed ODI form for reporting the review findings). In addition,
the proposed rule separates exempt agents from non-exempt agents in OAC 3901-7-01(E)
and (F), creates a new filing requirement section under OAC 3901-7-01(I) and eliminates
the current form system for reporting the review findings to the ODI.

Most notably for the OAITA’s purposes, the proposed amended rule eliminates
the definition of “affiliated company” previously found in OAC 3901-7-01(C)(1) which
had continued the well-established legislative intent demonstrated throughout Title 39 of
the Ohio Revised Code by extending the regulatory reach of the insurance code to any
non-licensed holder of 10% or more of a licensed company engaged in the “business of
insurance” or the same definition that already exists in Ohio Rev. Code § 3901.32(B).
Obviously, the ODI, in removing this definition from the proposed amended rule OAC
3901-7-01 recognizes the fact that the Ohio legislature has already defined “affiliated
company” and “control” per Ohio Rev. Code § 3901.32(B). The definitions found in
Ohio Rev. Code § 3901.32(B) remain the only such definitions found anywhere in the
Ohio Revised Code.

The proposed amended rule also eliminates the current form of OAC 3901-7-
01(F)(2)(b) which states as follows:

2
OAC 3901-7-01(A)
3
OAC 3901-7-01(F)(2)(a)
4
OAC 3901-7-01(F)(2)(c)
5
OAC 3901-7-01(F)(2)(d)
6
OAC 3901-7-01(F)(2)(e)
7
OAC 3901-7-01(F)(2)(b)
3 Letter to Director Mary Jo Hudson
April 22, 2010

“Obtain a listing of all the agency’s affiliated companies


that are owned or controlled, in whole or in part, by a
person or persons prohibited from acting as a title agent
pursuant to division (B) of section 3953.21 of the Revised
Code or by a builder or developer. Have the agent certify
that the listing of affiliated companies is complete and
accurate. The listing should contain all of the information
that is included in appendix B to this rule.”

In our July 22, 2009 correspondence to you concerning prior attempts at


amending this rule we identified a serious defect in the above definition. Namely, the
fact that affiliate title insurance agencies which exist as controlled business arrangements
do not own or control other affiliate companies and have nothing to report under the
current rule, despite the fact that it is “owned” or “controlled” either directly or indirectly
by prohibited persons under Ohio Rev. Code § 3953.21(B). Instead, a parent title
insurance entity “owns” a fifty percent interest in the controlled business arrangement
and “shares” ownership of the remainder with a prohibited person(s). Thus, for purposes
of compliance with both the current and proposed rule, a controlled business arrangement
owned by a prohibited person could circumvent the reporting requirement altogether.

By removing the above-definition, you have effectively resolved one serious


defect -- the fact that controlled business arrangements would never have anything to
report under the current rule -- and replaced it with another -- the fact that controlled
business arrangements now have no requirement to annually certify that they are not
currently owned by a person prohibited from the business of title insurance under Ohio
Rev. Code § 3953.21(B). In both scenarios, you have given controlled business
arrangements a free pass to continue operating despite Ohio’s strict statutory prohibitions
against such business ventures. Even assuming the purported legitimacy of controlled
business arrangements in Ohio, you now have no way to know whether the information
contained in the original license application from the controlled business arrangement
still represents the true state of ownership or whether prohibited persons do, in fact,
possess ownership and/or control of a title insurance agency.

How can an administrative body enforce the clear statutory mandates without
information? Why not let the self-reporting feature of the escrow account review rule
provide you with the information your investigators seem to lack? Where is the required
oversight? These repeated failings are highlighted below.

2. Proposed Rule OAC 3901-7-01(F)(2)(b) Should Be Expanded Per


Ohio Rev. Code § 3901.32 and § 3901.33.

Ohio Rev. Code § 3953.21(B) requires as follows:

“No bank, trust company, bank and trust company, or other


lending institution, mortgage service, brokerage, mortgage
guaranty company, escrow company, real estate company
4 Letter to Director Mary Jo Hudson
April 22, 2010

or any subsidiaries thereof or any individuals so engaged


shall be permitted to act as an agent for a title insurance
company.”

It was assumed that by originally including language that attempted to authorize


the collection of controlled business arrangement data as found in current OAC 3091-7-
01(F)(2)(b) you intended to use the escrow account review process to ensure that
prohibited persons were not engaging in the business of title insurance per Ohio Rev.
Code § 3953.21(B). While the language of that attempt was seriously flawed, as we have
previously noted, at least you took the important first step of attempting to seek the data.

Now with your decision to eliminate the collection of this information in the
proposed amended version of the rule, it must equally be assumed that you do not intend
on researching any information relative to the prohibited person status of a title insurance
agency. Without collection of information by ODI of those title insurance agencies that
are subject to OAC 3901-704 presumptions of “control,” it is difficult to understand how
ODI can determine which licensed title insurance agencies may be subject to an inquiry
under OAC 3901-704 (E)’s prohibition that:

“A business entity may not become licensed or remain


licensed where the entity is merely a sham arrangement
used as a conduit for inducements or compensation for
business payments in violation of section 3953.26 and/or
section 3933.01 of the Revised Code. * * *.

How does the collection of less information concerning anti-competitive business


practices in the title insurance industry help protect Ohio’s small business owners from
“sham arrangements”?

In order to remedy these failings, the ODI must change proposed OAC 3901-7-
01(H)(2)(b) to require as follows:

“Obtain from the title insurance agent, title insurance


agency and any subsidiaries thereof, a listing of all persons
that own at least ten percent of the voting securities of the
title insurance agent or title insurance agency, whether
directly or indirectly, or control the title insurance agent or
agency, whether directly or indirectly. Control shall be
presumed to exist if a person, directly or indirectly, owns,
controls, holds with the power to vote or hold proxies,
representing ten percent or more of the voting securities of
any other person.”

Revised in this fashion, the ODI can collect the same type of data already required under
the title insurance holding company system statute found at Ohio Rev. Code § 3901.32
and § 3901.33, without limiting the information to just prohibited persons under Ohio
5 Letter to Director Mary Jo Hudson
April 22, 2010

Rev. Code § 3953.21(B). Clearly, this was information the Ohio General Assembly
deemed important to collect and is already required under the title insurance holding
company statute Ohio Rev. Code § 3901.33. Further, the above-cited language would
require all title insurance agents and title insurance agencies to annually report and certify
their corporate structures. In our ever-changing environment, this information is
invaluable to proper enforcement of rules and statutes against licensed entities.

3. The ODI Needs a Dedicated Title Insurance Division to Enforce


Violations of the Insurance Code.

The net result of OAC 3901-7-01 and similar rules recently promulgated by the
ODI is that enforcement obligations will undoubtedly increase. To our knowledge, there
is only one ODI employee who has full-time obligations concerning the title insurance
industry and issues relative to the promulgation, interpretation and enforcement of
insurance-related rules and statutes. There are other ODI employees who commit lesser
amounts of time to title insurance concerns. Even so, this response leaves much to be
desired.

The ODI requires a title insurance division to conduct its enforcement and
oversight obligations under Ohio law. We have already engaged in these discussions
with the members of the insurance committee at the Ohio House of Representatives. It is
our opinion that the Director’s mission, as it pertains to title insurance, could be greatly
enhanced with a dedicated title insurance division. Further, it is our belief that rules such
as OAC 3901-7-01 could be better enforced from the perspective of title insurance field
examiners staffed by personnel from the ODI, rather than the current self-reporting
requirements found in the proposed rule.

The title insurance industry in Ohio consists of four insurer groups controlling
more than 96% of Ohio’s title insurance market. The ODI has one dedicated full-time
title insurance employee. There are over 3,000 title insurance agents and agencies in
Ohio. Ohio’s title insurance industry is dangerously consolidated. Now is not the time
for the ODI to take a passive role in its oversight responsibilities. We urge you to
embrace the idea of forming a title insurance division and to support title insurance
reforms through the Ohio General Assembly.

Yours truly,

/s/ Trustees of the Ohio Association of Independent Title Agents

Douglas A. King, Esq., President


Kimberli Himmel, Vice President
Steven J. Squeo
Robert H. Myers, Jr., Esq.
Annamarie Tucky
6 Letter to Director Mary Jo Hudson
April 22, 2010

OAITA/rbh

Cc: Lori Stewart (via e-mail)


Gregory W. Happ, Esq. (via regular mail)
National Association of Independent Land Title Agents (via regular mail)
Ohio Land Title Association (via regular mail)
American Land Title Association (via regular mail)