The following informal opinion was issued by the Office of General Counsel on June 22, 2001, representing the position of the New York State Insurance Department.
Re: Rebate to Lender or its Attorney of Title Premium Paid by Borrower
QUESTIONS PRESENTED:
1. Does the Insurance Law prohibit a lender or its attorney from requiring a borrower to obtain a title policy from a specific title company, as a condition for securing a mortgage commitment?
2. Does the Insurance Law prohibit a lender or its attorney from receiving a rebate of the premium paid by the referred borrower on a title policy?
Conclusions:
1. Yes. N.Y. Ins. Law § 2502(a)(2) prohibits a lender or its attorney from requiring that a borrower obtain a title insurance from a specific title insurer, agent or broker, as a condition for securing a mortgage commitment.
2. Yes. N.Y. Ins. Law § 6409(d) (McKinney 2000) prohibits the direct or indirect payment of any consideration of valuable thing as an inducement for or compensation for any title insurance business.
Facts:
The inquirer represented a buyer/borrower at closing. The buyer/borrower received a FHA insured loan and mortgage commitment letter from ABC Funding. Paragraph 12 of the commitment letter states: "As a condition of this mortgage commitment, the attorney for ABC Funding, will order and obtain a lenders policy of title insurance and a final policy of title insurance to be paid for by Borrower(s) at closing." Not seeing that sentence in the commitment letter, the inquirer obtained a title policy from another title company. Subsequently, the lenders attorney advised the inquirer that he would secure the title policy from a title company of his choice. At closing, the inquirer was informed that the lenders attorney orders the title policy and receives a 60% rebate of the premium paid. The buyer is required to sign a Consent/Disclosure form in order to obtain the loan.
Analysis:
N.Y. Ins. Law § 2502(a)(2)(McKinney 2001) prohibits mortgage lenders from requiring that borrowers in a real estate transaction obtain title insurance from a specific title insurer, agent or broker as a condition precedent to securing a mortgage commitment.
N.Y. Ins. Law § 2502(a)(2)(McKinney 2001) provides:
(2) Banks, trust companies, saving banks, savings and loan associations, and national banks shall not extend credit, lease or sell property of any kind, or furnish any services, or fix or vary the consideration for any of the foregoing, on the condition or requirement that the customer obtain insurance from the bank, trust company, savings bank, savings and loan association, or national bank, its affiliate or subsidiary, or a particular insurer, agent or broker, provided, however, that this prohibition shall not prevent any bank, trust company or national bank from engaging in any activity described in this subdivision that would not violate Section 106 of the Bank Holding Company Act Amendments of 1970, as interpreted by the Board of Governors of the Federal Reserve System. This prohibition shall not prevent a bank, trust company, savings bank, savings and loan association, or national bank from informing a customer that insurance is required in order to obtain a loan or credit, that loan or credit approval is contingent upon the customers procurement of acceptable insurance, or that insurance is available from the bank, trust company, savings bank, savings and loan association, or national bank; provided, however, that the bank, trust company, savings bank, savings and loan association, or national bank shall also inform the customer in writing that his or her choice of insurance provider shall not affect the bank, trust company, savings bank, savings and loan association, or national banks credit decision or credit terms in any way. Such disclosure shall be given prior to or at the time that a bank, trust company, savings bank, savings and loan association, national bank or person selling insurance on the premises thereof solicits the purchase of any insurance from a customer who has applied for a loan or extension of credit. (emphasis added).
The inquirer also asked whether the lender or its attorney may accept a 60% rebate on the premium paid by a borrower/buyer from the title company.
N.Y. Ins. Law § 6409(d) (McKinney 2000) states:
(d) No title insurance corporation or any other person acting for or on behalf of it, shall make any rebate of any portion of the fee, premium or charge made, or pay or give to any applicant for insurance, or to any person, firm, or corporation acting as agent, representative, attorney, or employee of the owner, lessee, mortgagee or the prospective owner, lessee, or mortgagee of the real property or any interest therein, either directly or indirectly, any commission, any part of its fees or charges, or any other consideration or valuable thing, as an inducement for, or as compensation for, any title insurance business. Any person or entity who accepts or receives such a commission or rebate shall be subject to a penalty equal to the greater of one thousand dollars or five times the amount thereof.
Note that Section 6409(d) does not prohibit legitimate payments to duly appointed agents who perform substantial service on behalf of a title insurance company or to an attorney who renders the usual and customary services like supervision of a closing, marking up the title policy and providing the curatives to the title insurer. If the lenders attorney merely obtains the title insurance, any consideration or valuable thing given to the lender or its attorney is not for services rendered but is an inducement or compensation for the title insurance business he refers to the title company. Such compensation is an improper referral fee which is specifically prohibited by Section 6409(d).
This analysis is limited to an interpretation of the Insurance Law. However, please note that N.Y. Banking Law § 14-g(8) (McKinney 2001) has the same prohibition. In addition, sections of the federal Real Estate Settlement Procedures Act (RESPA), as amended, 12 U.S.C.A. §§ 2601-2617 (West 1989 & Supp. 2000), may be relevant to the activities described.
The above opinion is informal and not binding on any court. For further information you may contact Attorney D. Monica Marsh at the New York City Office.