OGC Opinion No. 08-04-17
The Office of General Counsel issued the following opinion on April 9, 2008 representing the position of the New York State Insurance Department.
RE: Mortgage tax guarantee
Question Presented:
May a title agency advertise and recommend to mortgagors a product that guarantees that a mortgagor who refinances her home will not be subject to mortgage tax on the full loan balance?
Conclusion:
No. A title agency may not advertise the mortgage tax product because it is not a kind of insurance that is authorized in this state. Furthermore, the nature of the guarantee is inherently suspect, since both the lender and the title agent would likely know, before the loan closes, whether or not a mortgagor is subject to the full mortgage tax under the New York Tax Law.
Facts:
The inquirer reports that it represents a title agency that would like to advertise and recommend a mortgage tax product to potential refinance customers in New York, which the agency calls a “mortgage tax warranty.” Specifically, the product would guarantee that a homeowner who refinances her home loan, but who is not eligible for a consolidation, modification, or extension of that loan, would only pay mortgage tax on any additional mortgage amount borrowed from a lender. The inquirer provides the following example:
[A]ssume a consumer has an existing $100,000 mortgage and wishes to refinance the loan into a $150,000 mortgage with a new lender (hereinafter “second lender”). Typically, in this scenario, if the existing mortgagee of record agrees to assign the original mortgage to the second lender, the consumer is required to pay a portion of the mortgage tax only on the new incremental amount of the refinance loan (i.e., $50,000). If the existing mortgagee refuses to assign the original mortgage, the second lender will proceed to refinance the loan, and the consumer is responsible for a portion of the mortgage tax on the entire $150,000 loan. To ensure consumers do not pay the higher mortgage tax amount in refinance transactions, a third-party warranty company has agreed to offer the Title Agency’s customers a mortgage tax warranty product.
If the Title Agency’s customers elect to purchase the mortgage tax warranty, the third-party company will guarantee that the refinance transaction will close within a specified period of time and the consumer will pay mortgage taxes only on, for example, the new $50,000 amount of the refinance loan.
The inquirer further state that consumers would learn about the product from the new lender, and that the new lender would recommend a title agency and the agency’s ability to offer the product vis-à-vis the third party “warranty” company. If the consumer elects to purchase the warranty, she would pay a one-time nonrefundable service charge to the third-party warranty company. This fee would be due at the time the warranty is purchased, and not at the loan closing.
Analysis:
In lieu of a traditional mortgage refinance, where an old mortgage is cancelled, and a new one assumed, a New York Consolidation, Extension, and Modification Agreement (“CEMA”) allows a lender and a borrower to combine any and all notes and mortgages that a borrower may have, including a new note and mortgage, into one consolidated loan obligation, and only pay mortgage tax on the new loan obligation. A CEMA takes advantage of New York Tax Law § 255 (McKinney 2008), which permits supplemental mortgages, and provides:
1. (a)(i) If subsequent to the recording of a mortgage on which all taxes, if any, accrued under this article have been paid, a supplemental instrument or mortgage is recorded for the purpose of correcting or perfecting any recorded mortgage, or pursuant to some provision or covenant therein, or an additional mortgage is recorded imposing the lien thereof upon property not originally covered by or not described in such recorded primary mortgage for the purpose of securing the principal indebtedness which is or under any contingency may be secured by such recorded primary mortgage, such additional instrument or mortgage shall not be subject to taxation under this article, except as otherwise provided in paragraph (b) of this subdivision, unless it creates or secures a new or further indebtedness or obligation other than the principal indebtedness or obligation secured by or which under any contingency may be secured by the recorded primary mortgage, in which case, a tax is imposed as provided by section two hundred and fifty-three of this article on such new or further indebtedness or obligation.
Therefore, according to Tax Law § 255, an additional mortgage that is recorded pursuant to some provision or covenant (e.g., the CEMA) is not subject to taxation unless it creates or secures a new or further indebtedness or obligation.
The inquirer’s client, a title agent, would like to advertise a “mortgage tax warranty,” which guarantees that a borrower would pay mortgage tax on any new or further indebtedness only, even if the borrower would, for whatever reason (including the existing lender’s refusal to consolidate the loan), fail to qualify for the CEMA.
As an initial matter, although the inquirer refers to its proposal as a “warranty,” the product is, in fact, a guaranty. A warranty relates in some way to the nature or efficiency of a particular product sold, and does not cover a hazard having nothing whatsoever to do with the make or quality of such product. A guaranty, by contrast, is an undertaking that the amount contracted to be paid will be paid, or that the services guaranteed will be performed. A guaranty relates directly to the substance and purpose of the transaction. Ollendorff Watch Co. v. Pink, 279 N.Y. 32 (1938).
As set forth in Insurance Law § 1101(b)(1)(B), making or proposing to make—as either a warrantor, guarantor, or surety—any contract of warranty, guaranty, or suretyship as a vocation and not merely incidental to any legitimate business or activity of the warrantor, guarantor, or surety constitutes the doing of an insurance business. The third-party “warranty” company here, by offering the “mortgage tax warranty,” is clearly engaging in the activity as a vocation, and is therefore “doing an insurance business” within the meaning of Insurance Law § 1101(b). Insurance Law § 1102 prohibits the doing of an insurance business in this state without a duly-issued license.1
Furthermore, Insurance Law § 2117 prohibits a person from acting for or aiding an unlicensed or unauthorized insurer. Insurance Law § 2117(a) states:
(a) No person, firm, association or corporation shall in this state act as agent for any insurer or health maintenance organization which is not licensed or authorized to do an insurance or health maintenance organization business in this state, in the doing of any insurance or health maintenance organization business in this state or in soliciting, negotiating or effectuating any insurance, health maintenance organization or annuity contract or shall in this state act as insurance broker in soliciting, negotiating or in any way effectuating any insurance, health maintenance organization or annuity contract of, or in placing risks with, any such insurer or health maintenance organization, or shall in this state in any way or manner aid any such insurer or health maintenance organization in effecting any insurance, health maintenance organization or annuity contract.
Therefore, to the extent that the title agent is aiding the company offering the mortgage tax product in effectuating any insurance in New York, the title agent would run afoul of Insurance Law § 2117.
Moreover, while agents of title insurers are not required to be licensed under Article 21 of the Insurance Law,2 in the scenario the inquirer presents, the title agent would not be acting as a title agent; rather, it would be acting as an insurance agent or broker by soliciting, negotiating, or selling an insurance contract on behalf of an insured. See Insurance Law §§ 2101(a) and (c). Therefore, the inquirer’s client would also stand in violation of Insurance Law § 2102 if it were offering the mortgage tax product to borrowers, because Insurance Law § 2102 prohibits a person, firm, association, or corporation from acting as an insurance producer3 in this state without having authority to do so by virtue of a license issued and in force in accordance with the Insurance Law.
Finally, the nature of the transaction proposed here is inherently suspect, since both the new lender and the title agent would likely know, at the time the new lender approves the loan but before the loan closes, whether or not the mortgagor is eligible to consolidate, modify, or extend an existing mortgage. Put another way: both the title agent and the lender would likely know, before the loan closes, whether or not the mortgagor is subject to the full mortgage tax under the New York Tax Law. Therefore, the title agent, lender, and third-party warranty company could potentially offer only the mortgage tax product to mortgagors that are eligible for mortgages subject to Tax Law § 255, and thereby ensure that the third-party warranty company would never pay a claim.
For further information you may contact Senior Attorney Sapna Maloor at the New York City Office.
1 For purposes of this inquiry, the Office of General Counsel need not address what kind of insurance, if any, the guaranty would constitute under Insurance Law § 1113, which is the section that defines the permissible kinds of insurance that may be written in this State.
2 Although not directly relevant to this inquiry, the Department has put forth Senate Bill 3565, which would subject title agents to Article 21 of the Insurance Law.
3 “Insurance producer” means an insurance agent, insurance broker, reinsurance intermediary, excess line broker, or any other person required to be licensed under the laws of this state to sell, solicit, or negotiate insurance. See Insurance Law § 2101(k).