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Audit Hot Buttons

Texas Land Title Institute

December 5‐6, 2013

Robert York Brenda Nelson

Manager, Title Examinations Agency Representative

Texas Department of Insurance Old Republic National Title Ins Co.

P.O. Box 149104 777 Post Oak Blvd., Suite 240

Austin, Texas 78714 Houston, Texas 77056

512‐322‐5027 888‐678‐1700

Brenda Nelson Brenda joined Old Republic National Title Insurance Company in February 2010 as a Texas State Agency Representative. She assists independent agents with their escrow functions and operational and administrative processes. Brenda was born and raised in Southern California. After graduating from Columbia College in Missouri, she started a company in California managing accounts receivables for area hospitals. She sold the company when her family relocated to Texas in 1993. Once in Texas she began her title insurance career as an abstractor. She was promoted to an Escrow Assistant and quickly ascended up to Vice President of Operations over the course of her career. She enjoys the interaction with her clients and respects the relationships she has gained with her client and title family.

Robert A. York earned a bachelors degree in 1986 from Texas A&M University, where he majored in accounting. Robert has worked for the State of Texas since 1986 as an auditor, audit reviewer, or audit manager. Robert started working in Title Examinations as the Audit Coordinator in 1997, became the Assistant Manager in 2001, and has been the Manager of Title Examinations since 2002. Robert has lived in 10 cities in 4 different states, but was born in Texas and has stayed in Texas for the last 34 years.

I. Statistics

A. TexasDepartmentofInsurance’s(TDI)goalistoauditeveryagentonceeverytwoyears.

B. BasedonthenumberofagentsinTexastheTexasDepartmentofInsurancemustcomplete287comprehensiveauditsayearor72auditsperquartertomeettheirgoal.

C. InthelastTexasTitleInsuranceGuarantyAssociation(TTIGA)report(attachedasExhibitA)indicatesTDIwillmeetthisgoalfor2013.

D. EachagentshouldexpecttohaveaTDIauditorintheirofficeeverytwoyears.

II. CurrentQuarterStatistics

A. TexasDepartmentofInsuranceauditorscompleted93complianceauditsthisquarter.

B. ThiswasthesecondhighestnumberofauditsTDIhasevercompletedduringaquarter.

C. DuetothishighvolumeofauditstheTTIGAreportmayshowhighernumberofviolationsthanaverage,eventhoughthepercentageofagentscited(comparedtothetotalnumberofagentsaudited)mightbelowerthanaverage.

III. UpdatefromTexasDepartmentofInsurance

A. TeamMate–TheTDIfieldauditorsrecentlyreceivednewhardwareandsoftwarethattheywillbeusingforthecomplianceaudits.ThenewTeamMatesoftwaretheyareusingmightresultinmanyauditorsrequestingthattitleagentsprovidetheagencyrecordselectronically,ifpossible.Allauditworkpaperswillbestoredelectronicallynow,insteadofhardcopies.

B. SuspensionofthePolicyGuarantyFee–thetitleagentswillstopcollectingpolicyguarantyfeeson1/1/2014butwillstartcollectingGuarantyAssessmentRecoupmentFeesonthatsameday.TheGARCfeeswillberemittedtotheGuarantyAssociationquarterlypursuanttoProceduralRuleP‐30.Therulerequiresthefeestobemaintainedinanauditedescrowortrustaccount

C. Newquarterlyreportingrequirements–ThefilingoftheQuarterlyTaxReportsstartswiththefirstquarterof2014.Alltitleagentsanddirectopswillneedtosubmitacopyoftheirquarterlypayrolltaxreport(941)toTDIattheendofeachquarter,alongwithevidencethatthetaxeswerepaidpursuanttoAdministrativeRuleS‐5.

D. TheTitleLicensingOfficeoftheTexasDepartmentofInsurancewillbeginusingnewlicensingsoftware.

E. Continuingeducationwillchangeforbothescrowofficersandmanagement.Escrowofficerswillberequiredtohaveonehourofethics.Newon‐sitemanagersthatdonotmeettherequiredexperiencewillberequiredtotakecontinuingeducationhours.

IV. InsuranceCodeViolationswhereOrderwassignedbyCommissionerRathgeber

A. Section2501.006–violationresultedinfineof$1,000toagent

Sec.2501.006.CLOSINGTHETRANSACTION.(a)Forpurposesofthistitle,"closingthe

transaction"describestheinvestigationthatismade:

(1)onbehalfofatitleinsurancecompany,titleinsuranceagent,ordirectoperation

beforethetitleinsurancepolicyisissued;and

(2)todetermineproperexecution,acknowledgment,anddeliveryofallconveyances,

mortgagepapers,andothertitleinstrumentsnecessarytoconsummateatransaction.

(b)Closingthetransactionincludesadeterminationthat:

(1)alldelinquenttaxeshavebeenpaid;

(2)inthecaseofanownertitleinsurancepolicy,allcurrenttaxes,basedonthelatest

availableinformation,havebeenproperlyproratedbetweenthepurchaserandseller;

(3)theconsiderationhasbeenpassed;

(4)allproceedshavebeenproperlydisbursed;

(5)afinalsearchofthetitlehasbeenmade;and

(6)allnecessarypapershavebeenfiledforrecord.

B. Section2703.052–violationresultedinfineof$5,000penaltyplusrestitutionof$36,979.50.

Sec.2703.052.DUTYOFTITLEINSURANCECOMPANY.(a)Onareporttoatitle

insurancecompanymadebyaninsuredafteratitleinsurancepolicyhasbeenissued

thatalien,encumbrance,ortitledefectexiststhatisnotexceptedunderthepolicyor

otherwiseexcludedfromcoverage,thecompanyshallpromptlyinvestigateto

determinewhetherthelienorencumbranceisvalidandnotbarredbystatuteorother

law.

(b)Atitleinsurancecompanythatconcludesthatavalidlienorencumbrancethatis

notbarredbystatuteorotherlawexistsorthatatitledefectexistsshall:

(1)instituteallnecessarylegalproceedingstoclearthetitletotheproperty;

(2)indemnifytheinsuredaccordingtothetermsofthepolicy;

(3)reinsureatcurrentvaluethetitletothepropertywithoutmakingexceptiontothe

lien,encumbrance,ordefectorindemnifyanotherinsurerforreinsuringthetitle

withoutmakingexceptiontothelien,encumbrance,ordefect;

(4)secureareleaseofthelien,encumbrance,ordefect;or

(5)takeacombinationoftheactionsdescribedbythissubsection.

C. Section2502.051–violationresultedinfinetotwoagents,onefor$55,000(alsoincludesadditionalmoniesforviolationbelow)andtheotherfor$40,000.

Sec.2502.051.REBATESANDDISCOUNTSPROHIBITED.Acommission,rebate,

discount,portionofatitleinsurancepremium,orotherthingofvaluemaynotbe

directlyorindirectlypaid,allowed,orpermittedbyapersonengagedinthebusinessof

titleinsuranceorreceivedoracceptedbyapersonforengaginginthebusinessoftitle

insuranceorforsolicitingorreferringtitleinsurancebusiness.

D. Section2652.201–violationresultedinfineof$55,000(seeabove)

Sec.2652.201.GROUNDSFORLICENSEDENIALORDISCIPLINARYACTION.(a)The

departmentmaydenyanapplicationforalicenseordisciplineanescrowofficerunder

Sections4005.102,4005.103,and4005.104ifthedepartmentdeterminesthatthe

applicantorlicenseholderhas:

(1)willfullyviolatedthistitle;

(2)intentionallymadeamaterialmisstatementinthelicenseapplication;

(3)obtainedorattemptedtoobtainthelicensebyfraudormisrepresentation;

(4)misappropriatedorconvertedtotheescrowofficer'sownuseorillegallywithheld

moneybelongingtoatitleinsuranceagent,directoperation,oranotherperson;

(5)beenguiltyoffraudulentordishonestpractices;

(6)materiallymisrepresentedthetermsandconditionsofatitleinsurancepolicyor

contract;or

(7)failedtocompletealleducationalrequirements.(b)Thedepartmentmaynotdeny

anapplicationforalicenseordisciplineanescrowofficerunderSection4005.102,

4005.103,or4005.104solelybecausetheindividualresidesinanadjacentstateand

actsasanescrowofficerinthisstateasabonafideemployeeofatitleinsuranceagent

ordirectoperationinthisstate.

E. Preparedcommitmentswithfalseinformation–EscrowOfficerlicensedrevoked.

F. Preparedcommitmentswithfalseinformation–EscrowOfficerlicensedrevoked.

V. CompletelyAvoidableFines

A. Failuretotimelyremitguarantyfees–violationofAdministrativeRuleG‐1

B. Failuretotimelyremitannualescrowauditreport–violationofSection2552.251

C. FailuretotimelyremitStatisticalReport–violationofSection2703.153

VI. FinancialConcerns

A. ActivecasesinFinancial,EnforcementandFraud

1. Sixteencaseswerereferredthisquarter

a) Threefortroubledtitleagents

b) TwoforMiscellaneousviolationsofTexasIns.Code

c) Twoforrebating

d) Threeforlicenserevocation

e) Fiveforlatereportsorfeeremittances

f) OneformisappropriationofFiduciaryFunds

2. Insolvency

Fouragent’sfinancialstatementsindicatedagentwasinsolventorhadcashflowproblems

3. MinimumCapitalizationRequirements

a) AdministrativeRuleS1authorizestheestablishmentofsolvencyaccountstoachievecompliancewiththeminimumcapitalizationrequirement

b) AdministrativeRuleS2requirementforestablishingandmaintainingsolvencyaccount.

c) AdministrativeRuleS3describestheproceduretorequestreleaseofassetsincludingsolvencyaccountfunds.

d) AdministrativeRuleS7indicatesaTitleAgentcanuseasuretybondtomeettheminimumcapitalizationrequirements.

VII. OtherViolations

A. AbstractPlants

1. NotincompliancewithSection2501.004andP‐12

2. WhatislookedatinregardstoAbstractPlants?

3. Iftheplantanagentsubscribestoisnotincomplianceistheonlysolutiontochangetheirsubscription?

B. AffiliatedBusinessArrangements

AnyAffiliatedBusinessArrangementmustbedisclosedtotheconsumerasrequiredbyRESPA§3500.15

VIII. AdministrativeRules

A. LicensingViolations

1. Conductingtheunauthorizedbusinessofinsurance

2. Providingpoliciestonon‐licensedentity

3. Soldtitleevidenceforcountieswhichagentwasnotlicensed

4. UseofanunlicensednameorDBAname

5. Unlicensedpersonactingasanescrowofficer

6. Issuedpoliciesforpropertyincountywherenotlicensed.

IX. Solutions

A. Trainingofemployeestoavoidinfractions

1. ReceiptsandDisbursementsdon’tmatchHUDasrequiredby2702.053

2. NoinvoicetomatchdisbursementasrequiredbyMEAPIC#16

3. ScheduleDnotinfileorincomplete

4. AllrecipientsofanyportionofRealEstateCommissionnotdisclosedonsettlementstatementasrequiredinTDIBulletin160

5. Bringtodateoncommitmentisnotwithin30daysofclosingdate(mostunderwritingagreementsrequirecommitmentstobewithin30days.Checkyouragencyagreement)

6. Timelyrecordingofrequireddocuments

7. Assuringfundsare“goodfunds”

8. Incorrectpremiumcharged

9. Refinancecreditnotgivenorcalculatedincorrectly

10. Verbalorwrittenguaranty,affirmation,indemnificationorcertificationissued.(P‐35–morethanlikelysigningclosinginstructions)

B. MaintainCompleteGuarantyFiles

1. Eachversionofthecommitmentmuchbeinthefile

2. CompletedT‐00

3. Evidenceoftimelyrecordingofdocuments

4. Invoicesforalldisbursements

5. FinalversionoftheReceiptsandDisbursementsledger

C. MinimumEscrowAccountingProceduresandInternalControls

1. Managementapprovalof3‐wayreconciliations

2. Managementapprovalfordisbursementsmadeonaccountsopenedformorethan6monthsandreviewofdispositionoffunds

3. Managementapprovalfortransferoffundsbetweenguarantyfiles

4. Escrowreceivablesneedtobeclearedtimely.NegativebalancesontheEscrowTrialBalancemustbeinvestigated.

D. PostClosingAuditIssues

1. RecordingRefunds

2. EscrowTrialBalance

3. StaleDatedChecks

4. EscheatingtotheState

X. ElectronicSignatures

A. Industryismovingtowardsdocumentsbeingsignedelectronically.

B. WhataretheconcernsTDIhasinregardstoelectronicsignatures

C. TexasDepartmentofInsuranceallowspromulgateddocumentstobesignedelectronicallyifutilizingasafeguardedelectronicsignature.

1. TitleCommitmentofTitleInsurance

2. TitlePolicy

D. TDIhasalwaysstatedthatelectronicsigningoftheHUD‐1settlementstatementisnotallowed.

XI. PaperlessAgents

A. ProceduralRule17isveryclearastotherequirementsformaintainingfileselectronicallyaswellastimeframeforretention.

P‐17.ElectronicallyProducedForms

1. PermissiontoElectronicallyProduce

ItshallbepermissibleforaCompanytocomputergenerateorelectronicallyproduceanyTexaspromulgatedform.IfaCompanyelectstouseelectronicallyproducedforms,theCompanyshallusetheappropriatepromulgatedlanguagefortherelevantformassetforthintheBASICMANUALOFRULES,RATESANDFORMSFORTHEWRITINGOFTITLEINSURANCEINTHESTATEOFTEXAS.An"electronicallyproducedform"shallbesignedeitherwithanoriginalsignatureorbyasafeguardedelectronicsignatureasprovidedinsubsection(e)ofthisruleandissuedbytheTitleInsuranceAgentorDirectOperationorTitleInsuranceCompanypreparingtheformandshallstatethenameoftheTitleInsuranceCompanyhavingliabilityunderthetitleinsuranceform.

2. PermissibleChangestoPromulgatedForms1. Itshallnotbenecessaryforanelectronicallyproducedformissuedbya

Companytocontain:1. thefacsimilecorporateexecutionoftheTitleInsuranceCompany;or,2. thefacsimilecorporateattestoftheTitleInsuranceCompany;or,3. thefacsimilecorporatesealoftheTitleInsuranceCompany.

2. WiththepermissionofitsTitleInsuranceCompany,itshallbepermissibleforacompanytomakethefollowingnon‐substantivechangestoanelectronicallyproducedform:

1. omitthepromulgatedblankforinsertinganendorsementnumber;2. omittheuseofendorsementnumbersiftheTitleInsuranceCompany

electsnottoindividuallyinventoryendorsements;3. addaccountinginformation(suchas,withoutlimitation,countycodes,

statisticalcodenumbers,raterulereferences,andpremiumamounts)tothetoporbottommarginofanelectronicallyproducedform;and,

4. formatgeneralidentifyinginformationtobeprintedinconvenientlocations.Forpurposesofthissub‐paragraph,generalidentifyinginformationincludessuchitemsas(i)nameofTitleInsuranceCompany;(ii)nameortitleofform;(iii)form"T‐__"number,ifapplicable;and,(iv)signatureblanksfortheCompany.

3. DirectlyIssuedPolicies

ThisruleshallnotaffecttherequirementforcountersignatureofaDirectlyIssuedPolicypursuanttoProceduralRuleP‐31,whichpolicymaybecomputergeneratedorelectronicallyproduced.

4. ConsumerProtection

TheCompanymustcomplywiththeprovisionsoftheElectronicSignaturesinGlobalandNationalCommerceAct,includingtherequirementsforConsumerDisclosuressetforthinSection101(c)ofsaidact,andtheUniformElectronicTransactionsAct,TexasBusinessandCommerceCode,Chapter43,whereapplicable.

5. ElectronicSafeguards

Informationthatisgenerated,scanned,orotherwisestoredelectronicallymustaccuratelyreflecttheinformationsetforthinthedocumentorrecordasofthetimeit

wasfirstgeneratedinitsfinalformandmustremainunalteredandaccessibleforlaterreferenceandaudit.

6. DocumentRetention

ThisruleshallnotaffecttherequirementsofdocumentretentionpursuanttoArticle9.34,TexasInsuranceCodeandtherulespromulgatedthereunder,exceptthatdocumentsorrecordswhichareinitiallycomputergeneratedorelectronicallyproducedinconformitywiththisrulemayberetainedinthatmedium.

7. Duetothehigherlevelofsecurityandexpeditedrecordingtimeaffordedbyelectronicallyfilingorrecordinginstruments,promulgatedformsorotherdocumentsincidenttorealorpersonalpropertytransactions,theactualchargesorareasonableestimateofcharges,includingactualchargesorareasonableestimateofchargesbyatrustedthird‐partyprovidertoanauthorizedfiler,forelectronicallyfilingorrecording(e‐filing)suchinstruments,formsordocumentsmaybepassedthroughtotheconsumer.Suchactualchargesorareasonableestimateofchargesmaynotbemarkedup.

B. Agentmustrecreatethefileexactlyasoriginal

C. AllversionsofthecommitmentandHUD‐1settlementstatementmustbemaintainednotatingoneachtheversionnumberorsequence.

11/25/2013

1

Audit Hot ButtonsRobert York Brenda Nelson

Texas Dept of Insurance Old Republic National Title

Austin, Texas Houston, Texas

Statistics

TDI’s goal is to audit every agent once every 2 years.

TDI must complete 287 comprehensive audits a year or 72 audits per quarter to meet goal.

Latest TTIGA report indicates they will meet this goal for 2013.

Good news - expect to see your TDI auditor every two years.

2013 TEXAS LAND TITLE INSTITUTE - Audit Hot Buttons Page 2

11/25/2013

2

Additional Statistics

TDI completed 93 compliance audits this quarter.

Second highest number of audits TDI ever completed during a quarter.

Due to high volume of audits TTIGA report may show higher number of violations than normal.


Update from TDI

Updates taking place:TeamMate

Suspension of the Policy Guaranty Fee

Recoupment Fee Collection

New Quarterly Reporting Requirements

Title Licensing will begin using new software

New ethics requirement for EO’s

New Management education requirements


11/25/2013

3

Insurance Code Violations

Texas Insurance Code Orders signed with fines and license revocation:

Section 2501.006

Section 2703.052

Section 2502.051

Section 2652.201

Prepared commitments with false information.


Fines

Completely Avoidable Fines

Failure to timely remit guaranty fees

Failure to timely remit annual escrow audit report

Failure to timely remit Statistical Report


11/25/2013

4

Financial Concerns

Activecases at6/1/2013

Cases ReferredQtr 13-4

CasesClearedQtr. 13-4

Active Cases at 8/31/2013

Financial Program

Confidential Supervision 1 0 0 1

Receivership 5 0 1 4

Troubled Title Agents 12 3 3 12

Enforcement

Misc violations of the TIC 5 2 5 2

Rebating 1 2 2 1

License Revocation 3 3 3 3

Late reports 9 5 5 9

Fraud Unit

Misappropriate fiduciary funds 26 1 0 27

Total 62 16 19 592013 TEXAS LAND TITLE INSTITUTE - Audit Hot Buttons Page 7

Referred Cases

Active Cases in Financial, Enforcement& Fraud

16 cases referred this quarter. Two for Miscellaneous violations of Texas Ins. Code

Two for Rebating

Three for License Revocation

Five for Late Reports or Fee remittance

One for Misappropriation of Fiduciary Funds

Three for Troubled Title Agents


11/25/2013

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Questions??

Troubled Agent…..What makes a troubled title agent?

What occurs for them to be referred to financial program?

Three agent cases have been cleared from the financial program. How do they get removed? Do they work on remediation with the Department to be removed from the program?

What is an example of Misappropriation of Fiduciary Funds?


Insolvency

Financial Statements of Agent showsAgent to be insolvent

Agent has cash flow issues

Is this why we have the new Minimum Capitalization requirements?

When do the new requirements start?


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Other Violations

Abstract PlantsNot in compliance with Section 2501.004

and P-12 What is looked at in regards to Abstract Plants?

If an Agent’s plant subscription is not in compliance is the only solution to change their subscription?

Affiliated Business ArrangementsAgents have been cited for ABA’s not being

disclosed. These must be fully disclosed to consumer.


Administrative Rules

Licensing –Conducting unauthorized business of insurance

Provided policies to non-licensed entity

Sold title evidence for counties which agent was not licensed.

Use of an unlicensed name or DBA name

Unlicensed person acting as an escrow officer

Issued policies for property in county where not licensed.


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Solutions

Training of employees to avoid infractionsReceipts and Disbursements don’t match HUD

No invoice to match disbursement

Schedule D not in file or incomplete

All recipients of any portion of RE Commission not disclosed on settlement statement

Bring to date of commitment is not within 30 days of closing date (most underwriting agreements require commitments to be within 30 days. Check your agency agreement)


More Solutions

Training employees continuedRecording timely

Good funds

Incorrect premium charged

Refinance credit not given or calculated incorrectly.

Verbal or written guaranty, affirmation, indemnification or certification issued.


11/25/2013

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Electronic Signatures

Moving towards signing documents electronically

TDI concerns?

TDI allows promulgated documents to be signed electronically if utilizing a safeguarded electronic signature.Commitment

Policy

What about the HUD-1?


Audit Hot Buttons

Audit issues for Paperless AgentsRead P-17 as to requirements

Recreating file exactly as original

All versions of commitment and HUD must be maintained notating on each the version number or sequence.


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Guaranty Files

Maintain Complete Guaranty FilesEach version of the commitment

Completed T-00

Evidence of timely recording of documents

Invoices for all disbursements

Final version of the Receipts and Disbursement Ledger


Minimum Escrow Accounting Procedures and Internal Controls

Management approval of 3-way recon

Management approval for disbursement made on accounts opened for more than 6 months and review of disposition of funds

Management approval for transfer of funds between guaranty files

Escrow Receivables need to be cleared timely. Negative balances on Trial balance must be investigated.


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Post Closing Audit Issues

Post Closing Audit issuesRecording Refunds

Escrow Trial Balance

Stale Dated checks

Escheating


Audit Hot Buttons

Good news:Compare citing to last year same quarter

Relationship with TDI (more communication, team work)

With changes to TeamMate TDI is moving toward electronic files requests during audits and so agents who are paperless will not have to print.


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