Reasons to Form a Title Insurance Agency CUSO
People often ask me what a good business is for CUSOs. My reply always includes title insurance agency CUSOs. The reasons are as follows:
- Title insurance is a necessary part of many mortgage loan transactions. If your credit union is doing mortgage lending, you have a built in customer base for the title insurance business for your loans.
- The margins in the business are quite attractive. Title insurance agencies generally earn 80% to 85% of the premium. The premiums are generally filed with the state insurance commission and are not permitted to be discounted or rebated to the borrowers so the premiums are money “left on the table” if the credit union does not take advantage of a revenue share.
- The business risk can be isolated in the CUSO and protect the credit union.
- The credit union can partner with an experienced title insurance agency that can make this a turn key operation for the credit union.
- Finally, if the CUSO owns the business it can better accommodate members during busy times.
Organizing the CUSO
A title insurance agency is subject to the Real Estate Settlement Procedures Act of 1974 (RESPA) which means that it cannot pay referral fees. RESPA does permit owners of a title insurance agency to share the profits of the company but not based on the volume of business or some other method that it tied to the volume of business. Thus the credit union cannot receive referral fees under Incidental Powers but can receive an ownership distribution based on its percentage of ownership of a CUSO providing title insurance services, thus the need for a CUSO. There are two CUSO models. The most common model is for the credit union to enter into a joint venture with an existing title insurance agency that runs the title insurance agency under a management contract. All net income is split between the credit union and the title insurance agency. Typically, the ownership split to the credit union is between 80% and 50% depending on volume. There is usually only one credit union in the joint venture as you can run into potential inequities and a dissatisfied credit union partner if the percentage of business that a credit union brings in is out of alignment with the percentage of ownership and profit sharing. Remember that you cannot split profits based on the source of business and you cannot periodically change the ownership percentages to match the business source percentages. The less common model is for the credit union to buy or create a title insurance agency on its own with the assistance of an experienced title insurance professional. Sometime the insurance professional will have an ownership interest in the CUSO. Often, the professional will bring his or her existing client base to the CUSO and broaden the business base. While the CUSO may be out of compliance with the non-member business limitations initially, this situation corrects itself once the CUSO starts marketing to the members. The existing business helps on the initial cash flow and helps meet the RESPA requirement to actively compete in the marketplace.
Making the CUSO RESPA Compliant
In the “old” days, title insurance agencies entered into joint ventures with financial institutions, developers, builders and real estate brokers which were paper entities that were sham organizations that were the means to pay referral fees. Those days are over. HUD has engaged in enforcement proceedings against these sham joint ventures. There is a case pending against a CUSO that is alleged to be a sham. HUD has prepared a list of the following elements that will avoid a joint venture from being considered a sham by HUD.
1. Sufficient initial capital and net worth – The joint venture must have sufficient initial capital and net worth to conduct a settlement services business that is considered typical and necessary in the area of operation.
2. Staffed with its own employees – The joint venture should have its own employees, rather than employees “loaned” from one of the entities that created it (parents). Even if the joint venture has its own employee, if that employee is loaned or leased from a parent and continues to be supervised by a parent, this would be an indication to HUD that the joint venture is not a bona fide provider. Thus, the joint venture should have at least one employee who works exclusively for the joint venture.
3. Manage its own business affairs – The joint venture must manage its own business affairs. While the employees of the joint venture may be former employees of either of the parents, the employees must not continue to do the work they previously did for the employer parent, and the employees must not be managed by the parent.
4. Separate office or pay general market rent for shared facilities – If the joint venture shares office space with a parent, it should pay fair market rent for such office space.
5. Provide substantial services – Each entity must perform actual services for itself.
6. Amount of services the joint venture performs – The joint venture must perform a sufficient amount of services. If the joint venture processes all contracts, loans, and title orders procured by one parent, is the title agent on the HUD-1 and acts as the title insurance agent, the services provided by the joint venture would appear to be substantial enough satisfy this element.
7. Amount of services contracted out to a parent – In a case where the joint venture does little real work and contracts out a substantial part of the core work to a parent, HUD could determine that the joint venture is not a bona fide provider. Thus, it is important to keep in mind that both the joint venture and the parent title company must provide real work. The parent title company must perform the necessary functions to bring any and all contracts to fruition with respect to closing or settlement including ordering a title commitment, preparation of settlement documents, conducting the closing, acting as escrow agent, disbursement of funds and title policy production.
8. Pay for contracted services are reasonable – The party performing the contracted services must receive a payment for services that bears a reasonable relationship to the value of services provided so all expenses must be able to be justified by marketplace standards. The parents must be paid solely (a) for the services rendered, and (b) a return on its investment that is not based on referrals of business. Under this second prong, the return on investment must be based on the amount contributed to the capitalization of the company rather than on referrals made.
9. Actively competing in the marketplace for business. The joint venture must compete for business in the marketplace not just relaying upon referrals form the credit union. If all of the joint venture’s business is obtained from a parent, HUD would consider this as an indication that the joint venture is not a bona fide provider. It is recommended that the CUSO have some marketing directed to non-member business.
10. Sending business exclusively, or primarily to a parent – Elements 9 and 10 are closely linked. Under this element 10, the joint venture may exclusively outsource to the parent title company; however, the parent credit union must not be the sole source of the joint venture’s business.
The title insurance business is a very viable business but it requires a business commitment that includes the cost of an experienced employee. With sufficient volume, the business proposition is well worth the effort.