With transactional volume descending due to market conditions, it’s an excellent time to enter the title insurance industry for many reasons. Cash is king, especially now, so the launching of the title company always begins with sufficient capitalization. However, entrepreneurs with lots of cash must also learn how to efficiently start a title company before making an entrance into this niche cottage industry. To start a title company, chosen personnel must be super organized, provide exemplary customer service, detail-oriented, and be knowledgeable about the industry. Title Technology is now so advanced that entrepreneurs have many choices of tech stacks to work with.
Here are the critical steps in starting a title company.
Step 1: Understanding the States Licensing and Business Requirements
The insurance licensing requirements for starting a title company vary by state, but it’s relatively easy to determine what they are. Applicants need to visit the department of insurance website for their target states. The National Association of Commissioners or NAIC surveyed each state’s regulators and collected information on each state’s laws related to licensing, title data, and other title matters. Therefore, the NAIC is a good resource concerning title agency licensing.
The requirements for starting a title company generally include being personally financially stable, E and O insurance, a crime bond, relevant education, and becoming individually licensed, some of which we cover later. This is what is known as “producer” licensing. After becoming a title producer, the agency must become licensed in a second step. The individual producer becomes the designated licensed responsible producer for the agency.
However, in many states, licensed attorneys play some part in the real estate transactional process. These are known as “attorney states,” where law, rule, and custom dictate attorney involvement in certain parts of the process.
Step 2: Education and Testing
Each state may require that its residents take a pre-licensing course and examination. The subjects covered on the licensing exam will include real estate transactions, title exception procedures for clearing a title, title insurance principles, general insurance concepts, and insurance regulation.
Those interested can find a list of the educational entities that have classes that have been approved for their states at the department of financial services. If the applicants are attorneys, this requirement may be waived for them.
Step 3: Bonds and Insurance
Title companies must carry a fidelity bond and, in some cases, a surety bond. The surety bond assures clients that the company can fulfill its obligations. It also informs the clients that the company will return the money paid to it if something happens and it is forced to go out of business. A fidelity bond is to cover the risk of theft of client funds by employees.
In most states, business owners will carry an Errors and Omissions policy. This is also known as “professional liability insurance,” It must cover the business for at least $250,000. If a client files a claim against the company for negligence, the Errors and Omissions insurance policy will pay the legal expenses.
Step 4: Choice of Entity and Formation of Same
An entrepreneur faced with a tax and business consideration of the choice of entity should consult with an attorney or CPA or both on this matter, choosing either an LLC or straight C corporation.
Contemporaneously with the formation of the business entities, one will also need to apply for an Employer Identification Number or EIN with the Internal Revenue Service. Instead of a Social Security Number, a business owner will use an EIN. The EIN will make it possible for them to set up bank accounts for their companies and pay their taxes.
Note that many states have requirements for the name that business owners can give their businesses called “naming conventions.” To protect the brand, one may purchase a trademark. After everything is finished, remember to register the name of the title agency with the Secretary of State.
Step 5: Underwriter Selection
Operations cannot commence until an underwriting agreement is in place between the agency and the underwriter. Underwriters are all different in certain respects. Some are larger than others in terms of financial stability and market capitalization. An underwriter also has a “personality.” Some are tech-focused, whereas others may be focused on old-fashioned customer service. The choice of an underwriter is paramount, so consulting with a title professional who knows the ins and outs of all underwriters is very important in the long term to ensure a good “fit.”