Bulletin: VA2016003

Dear Associates:

The Virginia State Corporation Commission, Bureau of Insurance (the “BOI”) has amended Virginia Administrative Code, 14 VAC 5-395-10 et seq. effective July 1, 2016, which are the regulations that implement Va. Code §55-525.16 and following. These code sections are Virginia’s Real Estate Settlement Act (“RESA”) and RESA governs title settlement agents’ activities in conducting closings involving Virginia property.

Brief summary of the changes to 14 VAC 5-395-10 and following:

• The scope of the regulations now applies RESA to “any real property”, not just 1-4 family residential property, per Va. Code §§55-525.18(A) & (B). 
• The definition of “agent” and “insurance agent” has been narrowed by having the definition refer to “title insurance”, and eliminated any reference to annuities. 
• A new definition of “business entity” has been set out, which excludes “professional corporation" and “professional limited liability company”. This is because neither a professional corporation nor a professional limited liability company is eligible to hold a title license, per Va Code §§ 13.1-543 and 13.1-1102. 
• A new definition of “designated license producer” has been created which narrows the scope and qualifications of such an individual. The new definition limits the scope of being “licensed” to possessing a “license to sell, solicit, or negotiate contracts of title insurance in the Commonwealth”, per 14 VAC 5-395-20. The new definition is also consistent with the statutory change to Va. Code §38.2-1820, also effective July 1, 2016, which narrows the qualifications of a designated licensed producer to an “officer, director or employee of the business entity”. [Emphasis added]. Before this, a business entity could have a licensed, independent contractor fulfill the requirement of a designated licensed producer. That is no longer allowed. 
• A new definition of employee has been created, which affects the definition of “designated licensed producer”. The mere issuance of a W-2 alone does not make a person an employee by itself, and the BOI will use more of the factors the IRS uses to make such a determination. 
• The definition of “escrow, closing or settlement service” has been changed to include a reference to the new federal Closing Disclosure. The definition of a settlement agent per Va. Code §55-515.16 is: “Settlement agent” means a person, other than a party to the real estate transaction, who provides escrow, closing, or settlement services in connection with a transaction related to real estate in the Commonwealth and who is listed as the settlement agent on the settlement statement (or Closing Disclosure) for such transaction. Any person, other than a party to the transaction, who conducts the settlement conference and receives or handles money, shall be deemed a “settlement agent” subject to the applicable requirements of Chapter 27.3 and this chapter.” All three elements of being a settlement agent, providing escrow or closing services AND handling money, and being listed on the Closing Disclosure must be present for a person or entity to be considered a settlement agent. A notary however, cannot take funds unless they are a registered settlement agent. 
• Information required by the BOI within 30 days of registration as a title settlement agent has been expanded, per 14 VAC 5-0595-30. This expanded information includes other business or branch locations, employee and independent contractors' lists. Websites and affiliated entities. In other words, much of the information collected on the RESA analysis schedules will needed to be provided to the BOI within 30 days of registration, long before the initial RESA analysis is done. 
• Insurance and bonding requirements have been clarified, per 14 VAC 5-395-40. The BOI will allow a deductible to an errors & omissions policy as long as payment of a claim is not delayed. Further, a fidelity bond must cover “persons employed by the settlement agent”. Title companies are exempt from those requirements, meaning those underwriters who provide the title insurance to the local title agency. 
• Auditing standards and procedures have been clarified. Per 14 VAC 5-395-50 (A, B & C). The BOI states that auditing standards shall comply with AICPA Professional Standards, Volume 1, as of June 1, 2015, Special Considerations-Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement”. Underwriters are exempt from these requirements. 
• The title settlement agent’s duty of handling funds in a fiduciary manner has been clarified to include a yearly escheating requirement and close-out audit procedure, per 14 VAC 5-395-50 (D) & (E). Va. Code §55-525.20 requires settlement agents to exercise reasonable care and comply with all requirements relating to financial responsibility. The BOI has instituted a yearly escheating requirement of funds for which the owner is unlocatable, consistent with Va. Code §55-210.10.2. Further, the BOI requires a close-out audit within 180 days of the settlement agent ceasing to conduct settlements. Underwriters are exempt from these requirements. 
• Settlement agents now have expanded reporting requirements to aid the BOI in monitoring and maintaining the industry, per 14 VAC 5-595-70. Va. Code §38.2-1826 already requires that a settlement agent report to the BOI within 30 days of any felony conviction, plus any “final disposition” of action taken against the settlement agent “in another jurisdiction or by another governmental agency in this Commonwealth”. The new regulations now require a report within 30 days to the BOI of: bankruptcy, reorganization, or receivership; if a governmental authority takes formal administrative, regulatory or enforcement action vs. the settlement agent; if the agent surrenders its license in another jurisdiction, or if the agent is denied a license in another jurisdiction; if the agent ceases business; or if the settlement agent, or its members, partners, directors, officers, principals, employees, or independent contractors, is indicted or convicted of a felony, including seizure or forfeiture of funds. A ten (10) day reporting requirement is necessary when a person’s title insurance license is surrendered, terminated, suspended, or revoked or has lapsed by operation of law, or its licensed and registered business is closed. The 10 day report to the BOI shall include a point of contact, location of the agent’s records, and any other information the BOI may require. Current information must be maintained with the BOI until all escrow funds have been disbursed and all title policies are issued and reported. These requirements do not apply to title companies (underwriters). Lastly, when a settlement agent goes out of business, it must provide a sixty (60) day notice of its intent to cease conducting settlements and the anticipated date of business termination. 
• Settlement agent has additional operating requirements: per 14 VAC 5-395-75. A settlement agent may not “pad” fees and when a settlement agent employs an independent contractor to conduct a settlement, the settlement agent must ensure the contractor is properly insured. Moreover, a settlement agent may be held liable for the acts of the contractor when the contractor acts within the scope of conducting settlements. 

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