The Board of Insurance Commissioners has had under investigation for some time the matter of withhold issuance of a Mortgagee's Policy and consequent failure to issue a Mortgagee's Policy endorsement.
Since this practice constitutes an open violation of Article 9.22, Texas Insurance Code, 1955, so as to subject the company involved to the possible statutory penalty of having its certificate to do business revoked, this Bulletin is intended to advise all concerned of the position of the Board of Insurance Commissioners with respect thereto.
For your convenience, copies of applicable statutes and implementing rules and rates of the Board of Insurance Commissioners have been appended to this Bulletin.
The Board's investigation shows that this type of rebating may be accomplished by an investment company or mortgage broker sending to the title insurance company or agent, loan closing instructions substantially as follows:
"It is contemplated that Federal National Mortgage Association will be the ultimate purchaser of this loan; therefore, do not issue your title insurance policy until the transfer to FNMA is recorded."
The investment company or mortgage broker will subsequently write the title insurance company or agent substantially as follows:
"Enclosed you will find the executed transfer of Deed of Trust to FNMA. As soon as you have recorded the transfer, you will please have the title insurance policy issued to 'Federal National Mortgage Association and/or The Federal Housing Commissioner, their successors and assigns as their interests may appear.'"
If the title insurance company or its agent closes the loan in accordance with the foregoing instructions the following violations will have occurred:
The issuance of the Mortgagee's Policy which should have been made to, and paid for in full by, the investment company or mortgage broker will have been withheld for issuance in a subsequent transaction and the premium applicable to the first transaction will have been applied to the subsequent transaction. (Rule 1. Rebates and Discounts, Title Insurance Manual).
The Mortgagee's Policy Endorsement which should have been issued showing the Federal National Mortgage Association and/or Administration of Veterans Affairs and/or Federal Housing Commissioner as a party assured, has been eliminated and payment of the applicable premium has been entirely avoided. (Rule 13, Endorsement of Mortgagee's Policies and Rule 26, Mortgagee's Policy Endorsement, Title Insurance Manual).
The title insurance company has effectively rebated to the investment company or mortgage broker the full premium for the Mortgagee's Policy, which should have been issued to the investment company or mortgage broker instead of FNMA and for the Mortgagee's Policy Endorsement which should have been issued to FNMA (Article 9.22, Texas Insurance Code, 1955), thereby subjecting its certificate to do business to possible revocation (Article 1.10 (7), Texas Insurance Code, 1955).
Since the law places upon the Board of Insurance Commissioners the duty to see that all laws respecting insurance and insurance companies are faithfully executed, it will have no alternative other than to take the action prescribed by law against any company which, either directly or through an agent, violates the cited anti-rebating statute and rules, regardless of what closing instructions may be received.
Very truly yours,
BOARD OF INSURANCE COMMISSIONERS
/s/ Morris Brownlee
1955 Texas Insurance Code
Art. 1.10. Duties of the Board
In addition to the other duties required of the Board, it shall perform duties as follows:
1. Shall Execute the Laws. -- See that all laws respecting insurance and insurance companies are faithfully executed.
7. Shall Suspend or Revoke Certificate. -- The Board shall suspend the entire business of any company of this State, and the business within this State of any other company, during its non-compliance with any provision of the laws relative to insurance, or when its business is being fraudulently conducted, by suspending or revoking the certificate granted by it. The Board shall give notice thereof to the Insurance Commissioner or other similar officer of every state, and shall publish notice thereof. The Board shall give such company at least ten (10) days notice in writing of its intention to suspend the company's right to do business or revoke the certificate of authority granted by it, stating specifically the reason why the Board intends such action.
Art. 9.22. Rebates and Discounts
No commissions, rebates, discounts, or other device shall be paid, allowed or permitted by any company, domestic or foreign, doing the business provided for in this chapter, relating to title policies or underwriting contracts; provided this shall not prevent any title company from appointing as its representative in any county any person, firm or corporation owning and operating an abstract plant in such county and making such arrangements for division of premiums as may be approved by the Board.
Basic Manual for the Writing of Title Insurance in Texas
1. Rebates and Discounts--No company shall close a real estate transaction or title search service for the closing of such transaction and withhold issuance of a title policy thereon for issuance in a subsequent transaction and apply the premium (or any part thereof) applicable in the first transaction upon the premium in the subsequent transaction.
13. Endorsement of Mortgagee's policies--Where a Mortgagee's policy of Title Insurance has been issued covering the lien securing an indebtedness and such indebtedness and lien have been subsequently sold, transferred, and assigned to Federal National Mortgage Association and/or Administrator of Veterans Affairs and/or Federal Housing Commissioner, or any other assignee of assured, the title insurance company which issued the original policy may issue an endorsement thereto to show the Federal National Mortgage Association and/or Administrator of Veterans Affairs and/or Federal Housing Commissioner and/or any other assignee of assured as a party assured. The endorsement shall be in the form herein promulgated, and as a condition to the issuance thereof, the issuing company may require a showing from the assignor that such assignor has not accelerated the maturity of the indebtedness or if he has, that there has been a proper reinstatement of the obligation. It shall be permissible for the issuing company to show the current owner of the fee simple title to the property in said endorsement.
26. Mortgagee's policy Endorsement--A premium charge of $15.00 shall be made if the endorsement is issued within a period of one year after the date of the original policy and 50% of the manual premium applicable to the original Mortgagee's policy under the schedule of Basic Charges prescribed by Rule 17 of the Manual in those instances where the endorsement is issued more than one year after the issuance of the original Mortgagee's policy.
On April 30, 1956 the Board of Insurance Commissioners entered an Order having the effect of suspending the availability of the Mortgagee's Policy Endorsement to any assignee of assured other then Federal National Mortgagee Association, Administrator of Veterans Affairs and Federal Housing Commissioner. Such suspension is still in effect and should be considered in connection with Rule 13, Endorsement of Mortgagee's Policies appearing on the preceding page.