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Although in a minority of states an underwriter may charge a fee for a closingprotection letter (“CPL”), the data considered in this Study do not support the need forlegislation in Maryland that would permit underwriters to charge consumers a fee for aCPL. Current widespread use of CPLs, which are required by lenders in Maryland inexchange for funding a real estate closing, and for which consumers currently are notcharged, protect the real estate buyer or borrower and the buyer’s lender. Marylandconsumers are protected by effective enforcement actions and CPLs. The MIA is notaware of any defalcation for which an affected consumer was not made whole.Additionally, surety bonds and title insurance policies protect the seller or third parties toa real estate transaction.There are other protections for title insurance underwriters, however, that appearripe for consideration. To better track the scope of an individual underwriter’s risk ofexposure to loss resulting from producer defalcations, underwriters could require theirappointed title insurance producers to report monthly the total number of transactions andthe value of those transactions. Furthermore, an underwriter that has experienced adefalcation within the last five years could be required to submit monthly reports to theCommissioner regarding the steps it is taking to track and manage the limits of its riskexposure. In addition, Maryland could increase the surety bond amount (now $150,000)to better protect third parties, including underwriters. Virginia requires a surety bond inthe amount of $200,000.Although the costs of risk management tools vary, the preemptive tool ofaggressive on-site reviews by title insurance underwriters appears the most cost-effective.In the MIA’s experience, defalcations typically are not caused by a one-time theft, but are2
the result of ongoing, lax business practices, which create an environment vulnerable totheft. The MIA is accepting comments on draft proposed regulations that will set forthdetailed requirements for annual on-site reviews and provide standard forms forreporting. These improvements will strengthen the current on-site review process andshould reduce the number and severity of defalcations in Maryland.II.STUDY REQUIREMENTSDuring the 2012 Session, the Maryland General Assembly passed House Bill 866,Ch. 683, Acts of 2012, 1 which requires the Insurance Commissioner (“Commissioner”) tostudy the real estate settlement or closing 2 protection practices of the title insuranceindustry (the “Study”). The Study was to include a review of mechanisms for, andassociated costs of, compensating consumers, underwriters, mortgage lenders, and otherparties for monetary losses that result from the theft, misappropriation, or misuse of fundsheld in escrow by a title insurance producer in connection with a real estate settlementand to report on the findings and recommendations for changes to the State’s real estatesettlement protection practices. Chapter 683 required the Commissioner to consider:(1) title insurance producer defalcations reported to the Maryland InsuranceAdministration (“MIA”) by title insurers; 3(2) title insurance producer defalcations discovered by the MIA as a result of acomplaint received by the MIA;(3) the extent to which any regulations relating to the on-site review by titleinsurers of their appointed title insurance producers have addressed theproblem of title insurance producer defalcations;(4) the availability and affordability of fidelity bonds, escrow bonds, reinsurance,or other coverage to protect title insurers against the theft, misappropriation,1 A copy of Chapter 683 is contained in Appendix 1.2 In this Report the term “real estate settlement” will be used to mean the meeting or “closing” duringwhich a final transfer of real property becomes effective in a purchase or refinance transaction.3 The term “underwriter” is used throughout this report to reference a title insurer.3
Page 2 and 3: Report of the Study ofClosing or Se
Page 4 and 5: TABLE OF CONTENTSI. EXECUTIVE SUMMA
Page 8 and 9: or misuse of closing or settlement
Page 10 and 11: (4) Division of Consumer Protection
Page 12 and 13: title insurance producer or agency
Page 14 and 15: As part of its Insurer Survey, the
Page 16 and 17: or dishonest practices, the underwr
Page 18 and 19: eported having a least one escrow a
Page 20 and 21: ond also may be purchased by an und
Page 22 and 23: 4. Other Protection Available to Un
Page 24 and 25: 1. Preventive MeasuresProducer Lice
Page 26 and 27: lender’s funds or documents. The
Page 28 and 29: In the event of the insolvency of a
Page 30 and 31: insurance task force. The informati
Page 32 and 33: in excess of 20 cents in claims on
Page 34 and 35: create an environment vulnerable to
Page 36 and 37: Appendix 1MARTIN O'MALLEY, Governor
Page 44 and 45: AppendixAppendix22MARTIN O’MALLEY
Page 46 and 47: Appendix 2c. If you answered “No
Page 48 and 49: Appendix 2Certification of Informat
Page 50 and 51: Appendix 2QUESTION #3Schedule BStat
Page 52 and 53: Appendix 3
Page 54 and 55: Appendix 3SURVEYTitle Insurance - C
Page 56 and 57:
Appendix 3a. Does your title insura
Page 58 and 59:
Appendix 3QUESTION # 2Schedule ADor
Page 60:
Appendix 3QUESTION # 10Schedule CMi
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