81 FRB 805 (August 1993)
The First National Company
Order Approving a Notice to Engage in Real Estate Title Abstracting
The First National Company, Storm Lake, Iowa ("Applicant"), a bank holding company within the meaning of the Bank Holding Company Act ("BHC Act"), has given notice under section 4(c)(8) of the BHC Act (12 U.S.C. § 1843(c)(8)) and section 225.23 of the Board's Regulation Y (12 C.F.R. 225.23), of its intention to acquire Buena Vista Abstracting, Storm Lake, Iowa ("Company"), and thereby engage in real estate title abstracting in Buena Vista County, Iowa./1/
Notice of the proposal, affording interested persons an opportunity to submit comments, has been published 60 Federal Register 28,151 (1995)). The time for filing comments has expired, and the Board has considered the notice and all comments received in light of the factors set forth in section 4(c)(8) of the BHC Act.
Applicant, with total consolidated assets of approximately $178 million, controls one subsidiary bank in Iowa./2/ Applicant also engages directly and through its subsidiaries in certain nonbanking activities.
Real estate title abstracting, as proposed by Applicant, is limited to reporting factual information concerning the interests or ownership of selected real property. An abstracter obtains this information by performing a "title search" of records maintained at a local public records office to determine the ownership history of the property, including any liens, encumbrances, mortgages, or future interests affecting the property. The abstracter then prepares a written report, also known as an "abstract of title," that recites the results of the title search./3/ Because Iowa law does not permit the sale of title insurance, real estate lenders in Iowa obtain the opinion of an attorney certifying that title to a particular parcel of real property is free of defects. The abstract of title provides the factual information necessary for the attorney to determine whether a lender would have an unencumbered security interest in the property to be mortgaged.
Applicant proposes to provide real estate title abstracting services to affiliated and unaffiliated lenders in Buena Vista County. Company would perform the proposed activities in connection with real estate loans made by affiliates or unaffiliated companies, and, in certain cases, when no financing is provided, such as in connection with infra-family transfers of real estate and property distributed as part of estate planning.
In connection with the proposed activities, Applicant would not provide any insurance against title defects, guarantee any title, or provide any certification with respect to a title. Applicant would be liable for damages caused by negligence in performing a title search but would not be responsible for any defects in the title./4/ The equivalent of title insurance in Iowa is provided by the attorney who certifies that the title is free from defects.
In order to approve a proposal under section 4(c)(8) of the BHC Act, the Board is required to determine that the proposed activity is "so closely related to banking or managing or controlling banks as to be a proper incident thereto."/5/ The Board has not previously determined that providing real estate title abstracting is closely related to banking under section 4(c)(8) of the BHC Act and permissible for bank holding companies.
Closely Related to Banking Analysis
Under the National Courier test, the Board may find that an activity is closely related to banking for purposes of section 4(c)(8) if it concludes that banks generally:
The Board believes that the proposed real estate title abstracting activities are integrally related to the provision of loans secured by real estate. A bank must be aware of any encumbrances on property that serves as collateral for a loan made by the bank. Iowa banks typically rely on an attorney's opinion, based on information in an abstract of title, to determine that the bank has a secured position in real estate serving as collateral. The abstract of title provides information necessary to determine the adequacy of the real estate collateral for the loan and is an integral part of secured real estate lending in Iowa. Thus, the bank has a particular need for the information in the abstract of title. Accordingly, the Board believes that the proposed activities are integrally related to the provision of secured real estate lending and, therefore, are closely related to banking.
The Office of the Comptroller of the Currency ("OCC") has authorized national banks to conduct this activity./7/ The OCC has concluded that the performance of a title search and the preparation of an abstract of title are necessary parts of the real estate lending process, and that it would be convenient and useful under the applicable standards in the National Bank Act for national banks to be able to perform these tasks themselves./8/
The proposed activities are not equivalent to providing title insurance-an activity that is not generally permissible under section 4(c)(8) of the BHC Act./9/ Title insurance generally includes providing an indemnification against losses resulting from a title defect discovered after the conveyance of property. Title insurance typically protects a purchaser or lender against claims not identified by a title search or claims not specifically exempted by the title insurance policy. Applicant does not propose to certify or guarantee title and would not be liable to the purchaser or the lender for any title defects.
Accordingly, and based on all the facts of record, the Board concludes that the proposed activities are closely related to banking under the National Courier standard.
Proper Incident to Banking Analysis
In determining whether an activity is a proper incident to banking, the Board must consider whether the activity "can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices."/10/ Applicant indicates that its data processing expertise would lead to faster and more accurate preparation of abstracts of title at a lower cost. Moreover, there is no evidence in the record to indicate that the proposed activity would lead to any undue concentration of resources, unsound banking practices, or other adverse effects. Company would remain one of two companies offering real estate title abstracting in Buena Vista County.
For these reasons, the Board believes that Applicant's provision of real estate title abstracting, as described above, is not likely to result in significantly adverse effects that would outweigh the public benefits. The financial and managerial resources of Applicant and Company also are consistent with approval.
Based on the foregoing and all the facts of record, the Board has determined that the notice should be, and hereby is, approved. Approval of this proposal is specifically conditioned on compliance by Applicant with the commitments made in connection with this notice. The Board's determination also is subject to all the terms and conditions set forth in Regulation Y, including those in sections 225.7 and 225.23(b) of Regulation Y (12 C.F.R. 225.7 and 225.23(b)), and to the Board's authority to require such modification or termination of the activities of a bank holding company or any of its subsidiaries as the Board finds necessary to ensure compliance with, and to prevent evasion of, the provisions of the BHC Act and the Board's regulations and orders issued thereunder. For purposes of this transaction, these commitments and conditions shall be deemed to be conditions imposed in writing by the Board in connection with its findings and decision, and, as such, may be enforced in proceedings under applicable law.
These activities shall not be commenced later than three months after the effective date of this order, unless such period is extended for good cause by the Board or by the Federal Reserve Bank of Chicago, pursuant to delegated authority.
By order of the Board of Governors, effective June 30, 1995.
Voting for this action: Chairman Greenspan, Vice Chairman Blinder, and Governors Phillips and Yellen. Absent and not voting: Governors Kelley and Lindsey.
JENNIFER J. JOHNSON
1. Applicant would merge Company into its wholly owned subsidiary, The First Leasing Company, Storm Lake, Iowa.
2. Asset data are as of March 31, 1995.
3. An abstract of title is a comprehensive summary of all consecutive grants, conveyances, wills, records, and judicial processing affecting title to a specific parcel of real estate, together with a statement of all recorded liens and encumbrances affecting the property and their present status. John W. Reilly, The Language of Real Estate (Real Estate Education Company) (1989).
4. Title abstracters may insure against liability for negligence by purchasing an errors and omission policy.
5. 12 U.S.C. § 1843(c)(8).
6. See National Courier Association v. Board of Governors, 516 F.2d 1229, 1237 (D.C. Cie. 1975) ("National Courier"). In addition, the Board may consider any other basis that may demonstrate that the proposed activity has a reasonable or close connection or relationship to banking or managing and controlling, banks. See Board Statement Regarding Regulation Y, 49 Federal Register 794, 805 (1984); Securities Association v. Board of Governors, 468 U.S. 206, 210-211 n. 5 (1984).
7. OCC Interpretative Letter No. 450, September 22, 1988, reprinted in [19881989 Transfer Binder] Fed. Banking L. Rep. (CCH) 1 85,674.
8. National banks are not permitted to sell title insurance. See American Land Title Association v. Clarke, 968 F.2d 150 (2d cir. 1992), cert. denied, 113 S.Ct. 2959 (1993).
9. Section 4(c)(8) of the BHC Act provides that insurance agency, brokerage and underwriting activities are not "closely related to banking" and, thus, are not permissible activities for bank holding companies, unless the activities are included within one of seven specific exemptions (A through G) in section 4(c)(8). 12 U.S.C. § 1843(c)(8)(A)-(G).
10. 12 U.S.C. § 1843(c)(8).