Objective

To determine if the Department of Financial Services (DFS) adequately monitors the State’s title insurance industry (Industry). The audit scope covers the period October 3, 2011 through October 9, 2018.

About the Program

DFS is responsible for regulating all insurance in New York State, including title insurance. Title insurance protects the property owner and mortgage lender against future claims for any unknown defects in the title to the property at the time of sale. The cost of title insurance is higher in New York State than in comparable states, as noted by DFS officials in a January 2018 written statement to the Assembly Standing Committee on Insurance. For 2016, DFS reported $11.9 billion in net title insurance premiums.

New York State Insurance Law (Insurance Law) requires DFS to conduct an examination at least once every five years of every authorized domestic insurer that makes or files rates. Additionally, DFS reviews specific functions the Title Insurance Rate Service Association (TIRSA) performs for its members and DFS. TIRSA, a not-for-profit corporation established by the Legislature in 1993, is the statistical agent of DFS and a rate service organization. In its role as a statistical agent, TIRSA is responsible for compiling statistics that track aggregate and individual insurer losses, as well as expenses and revenues for all title insurance companies in the State. As a rate service organization, TIRSA is responsible for submitting rate applications for DFS approval on behalf of insurers who authorize TIRSA to do so. The Insurance Law provides that rates shall not be excessive, inadequate, unfairly discriminatory, destructive of competition, or detrimental to the solvency of insurers. Currently, four of the seven domestic title insurance companies authorize TIRSA to submit rates on their behalf.

Section 2139 of the Insurance Law was enacted in 2014, requiring every title insurance agent to be licensed by DFS. DFS is authorized to monitor abuses by agents and to suspend or revoke licenses when necessary. Additionally, compensating someone for a referral for title insurance is a violation of Section 6409 of the Insurance Law.

Furthermore, the DFS Superintendent has authority pursuant to Section 301 of the Financial Services Law to conduct investigations, research, studies, and analyses of matters affecting the interests of consumers of financial products and services, including tracking and monitoring complaints. Additionally, DFS has been working to address activities and expenses that officials say are inappropriate and that have unnecessarily increased the cost of title insurance for New Yorkers. DFS’ efforts included proposed Regulation 208, which was subsequently annulled by the Courts. The State appealed the decision, which was then overturned by the Appellate Division, First Department. In its decision, the First Department upheld the validity of Regulation 208’s prohibition on improper inducements.

Key Findings

• While DFS – due to perceived weaknesses in the Industry – has worked to strengthen its oversight through the regulatory process, enforcement of the existing regulations has lagged. Fines and other penalties for inappropriate expenses and improper business conduct have not been commensurate with the concerns DFS has expressed in these areas. In 2014, legislation was enacted to license title insurance agents. As of August 2018, 2,727 title agents had been licensed by DFS. Between September 2014 (when the requirement to license title insurance agents went into effect) and March 2018, DFS issued 27 fines for licensing, totaling just over $57,000. Of those fines, only four – for just under $23,000 – were for business conduct, including: transacting insurance business in New York without a license ($6,800); and engaging in the business of insurance with a felony conviction involving dishonesty or a breach of trust, without the written consent of a regulatory official ($13,000). The small number of fines does not seem to reconcile with DFS’ well-documented concerns in this area. Additionally, during our audit period, no title insurance companies were fined.
• DFS is required to conduct an examination of TIRSA every five years. The most recent examination included a review of market conduct, actuarial, and information technology areas. The examination’s report contained 21 recommendations, including some to address weaknesses related to data reasonableness, compliance with recommendations from previous examinations, and lack of policies and procedures in specific areas. When asked about compliance with those recommendations, DFS officials – while insisting corrective action had been taken – could not provide written evidence to support what steps had been performed. DFS also conceded that it has been aware of reliability issues with data generated or used by TIRSA since March 2009, when an earlier report identified these issues. DFS officials stated they have been working with TIRSA on these
  issues. Nevertheless, the most recent examination noted that TIRSA had limited internal mechanisms in place to ensure that the resulting data was reasonable and rates were set using accurate data. Further, DFS has not demonstrated that this situation has been resolved. This is particularly concerning because TIRSA is responsible for calculating and submitting title insurance rate changes to DFS for a majority of the domestic title insurance companies.
• DFS officials placed impediments on our audit, including delays in access to records needed to evaluate the effectiveness of their oversight. As a result, there is a risk that material information concerning DFS’ oversight of the Industry was withheld from us.

Key Recommendations

• Formally assess enforcement actions and monitoring activities to determine if DFS’ Industry oversight is effective.
• Develop and implement procedures for the utilization and quality assurance of information that DFS uses to make decisions related to the Industry.
• Follow up to ensure recommendations resulting from examinations are monitored and implemented.
• Allow unfettered access to people and documents relevant to audits and create a plan of action to fully comply with all future audit requests.