The Office of General Counsel issued the following informal opinion on November 13, 2002, representing the position of the New York State Insurance Department.
Re: Mortgage Banks Proposal to Pay Commissions to its Employees for Making Referrals to a Title Abstract Company with which it has Entered into an Affiliated Business Arrangement
Question Presented:
Pursuant to N. Y. Ins. Law § 6409(d) (McKinney 2000), may a mortgage bank/broker ("Company A") that has entered into an affiliated business arrangement1 with a title abstract company ("Company B") pay commissions to its employees for referring title insurance business to Company B?
Conclusion:
A mortgage bank/broker ("Company A") that has entered into an affiliated business arrangement with a title abstract company ("Company B") is prohibited by N.Y. Ins. Law § 6409(d) (McKinney 2000) from paying commissions to its employees for referring title insurance business to Company B. In addition, any compensation that flows from Company B to Company A must be based on Company As ownership interest in Company B, and there must be significant and multiple sources of title insurance business available to Company B.
Facts:
The inquirer states that Company A, a New York licensed mortgage bank/broker that is a limited liability company, has a 60% ownership interest in a title abstract company, Company B, which is also a limited liability company and acts as an agent for a title insurance company. Both Companies A and B have entered into an affiliated business arrangement pursuant to the federal Real Estate Settlement Procedures Act (RESPA). Another title abstract company owns the remaining 40% ownership interest in Company B. The inquirer states that as a 60% owner, Company A will receive a 60% share of the profits or losses of Company B. The inquirer seeks confirmation that under N.Y. Ins. Law § 6409(d) (McKinney 2000), Company A may also pay commissions to its employees who are loan originators and account executives, for referring title insurance business to Company B.
Analysis:
N.Y. Ins. Law § 6409(d) (McKinney 2000) provides:
(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.
Section 6409(d) prohibits a title insurance corporation or any person acting for or on behalf of such title insurance corporation, from paying commissions, directly or indirectly, as an inducement or compensation for any title insurance business. Thus, a title insurer or agent is prohibited from paying compensation that is conditioned upon the referral of title insurance business to such title insurer or agent. Such compensation would constitute a rebate, which is prohibited by N. Y. Ins. Law § 6409(d) (McKinney 2000).
As a preliminary matter, the Department has previously held that an owner or part owner of a title insurer or agent would not be prohibited from receiving compensation from such title insurer or agent, so long as such compensation is based on the owner or part owners ownership interest. In addition, such owner or part owner cannot be the sole source of business for the title insurer or agent. There must be significant and multiple sources of title insurance business available to the title insurer or agent.
As a result, compensation paid by Company B to Company A must be based on Company As 60% ownership interest in Company B, not on the amount of title insurance business it refers to Company B. In addition, it is unclear whether or not Company A will be the sole source of title business available to Company B. Assuming that there will be multiple sources of title business available to Company B and Company Bs compensation to Company A will be based on Company As 60% ownership interest in Company B, not on the referrals it makes to Company B, there is no violation of Section 6409(d).
With regard to the question of whether Company A, a mortgage bank/broker and 60% owner of Company B, may pay commissions to its employees for referring title insurance business to Company B: the issue is whether, pursuant to Section 6409(d), Company A falls into the category of a title insurance corporation or a person acting for or on behalf of a title insurance corporation, thereby prohibiting Company A from paying commissions as an inducement or compensation for referring title insurance to Company B. As a 60% owner of the title agent, Company A acts, albeit indirectly, for or on behalf of the title insurance corporation that its title agent represents by providing incentives to its employees to place title insurance business with Company B, its title agent. Accordingly, pursuant to Section 6409(d), Company A is prohibited from paying commissions to its employees for referring title insurance business to Company B.
This analysis is limited to an interpretation of the Insurance Law.
For further information you may contact Senior Attorney D. Monica Marsh at the New York City Office.
1 Affiliated business arrangements are allowed under the federal Real Estate Settlement Procedures Act (RESPA). These constitute arrangements in which a person who is in a position to refer business incident to a real estate settlement service involving a federally related mortgage loan, has either an affiliate, direct or beneficial ownership interest of more than 1% in a provider of settlement services.