The Real Deal New York

Title industry asks judge to throw out state’s new regulations

Oral arguments in the industry’s case against the DFS took place Thursday
By Eddie Small | June 14, 2018 06:10PM

Mylan Denerstein and 71 Thomas Street (Credit: PropertyShark)

Title insurance representatives asked a New York State Supreme Court judge on Thursday to completely annul the Department of Financial Services’ new regulations on their industry, arguing that they represented a significant overreach of the agency’s authority.

The New York State Land Title Association, Great American Title Agency and Venture Title Agency had filed suit against the DFS over the new regulations in February, and both sides held oral arguments in the case on Thursday afternoon in front of Judge Eileen Rakower. Rakower said she will rule on whether to throw out the new regulations within the next 30 days.

The lawsuit claims that the new DFS rules are wreaking havoc on the industry and causing layoffs, company closures and lower services. The title companies’ attorney Mylan Denerstein, a partner at Gibson, Dunn & Crutcher and former chief counsel to Gov. Andrew Cuomo, spoke at length about all the problems companies had with the new regulations— including that the DFS had no authority to enact them in the first place.

“In the guise of reducing closing costs, DFS has imposed these sweeping regulations that go well beyond the authority permitted to it,” she said.

One of the major parts of the new DFS rules, enacted in the fall, was a ban on paying for client entertainment and meals. Denerstein spent much of her testimony arguing against this provision, which she framed as a ban on marketing rather than a way to prohibit kickbacks. She pointed to DFS’ own lack of action on kickbacks to imply that this was a very rare occurrence in the industry.

“DFS has never taken an enforcement action in all of these years about this allegedly horrible conduct that’s been going on for decades,” she said.

The suit ended up causing a split within the title insurance industry when it was filed, as some closers felt upset that it did not address the ban on gratuities for them and formed a separate trade association to represent their interests. However, Denerstein addressed this issue in her testimony as well, warning that the regulations prohibiting fees for them would have “extremely severe consequences.”

Andrew Amer of the New York state Attorney General’s office testified on behalf of DFS. He argued that the agency did have the authority to impose its new rules and that they would help foster more competition in the title insurance industry among companies who do not have much money to spend on entertaining their clients.

“It is an anticompetitive practice,” he said. “It is disadvantaging small insurers who can’t afford to spend the lavish sums to wine and dine, to rent out Citi Field.”

He focused mainly on the entertainment aspects of the new regulations as well, framing the ban on them as an effort to make sure clients selected their title insurance companies based solely on quality.

“Taking the real estate professional to a gentlemen’s club or otherwise wining and dining him is not the type of practice that the department has determined is appropriate,” he said, “and it’s unlawful, frankly.”

Rakower did not issue an immediate ruling but appeared more sympathetic to the title insurance industry’s arguments than the state’s. She did not question Denerstein during her arguments but repeatedly and aggressively questioned Amer during his, trying to get more clarifications on what the state viewed as the differences between marketing and inducements.

“The regulation does not ban all marketing. It simply bans marketing that is unlawful inducements,” Amer said. “They can make glossy advertisements.”

“Maybe not too glossy, though, right?” Rakower responded.

Rakower also granted a request from the title insurance companies to issue a stay on the 5 percent rate cut that DFS had mandated for the industry until she had ruled on the legality of the new regulations. Amer and the state objected to this request.

Denerstein framed the new regulations as more of a matter for the legislature to handle, which could end up happening eventually.

In January, the state Senate passed a bill easing up on the DFS rules, but this has not yet made it out of the Assembly. Assembly member Kevin Cahill, who chairs the insurance committee, said the Assembly may consider its own legislation to change the regulations, but this would not happen until the next session.

“DFS is usurping the role of the legislature,” Denerstein said. “They are picking winners and losers.”