The Office of General Counsel issued the following informal opinion on May 2, 2002, representing the position of the New York State Insurance Department.

Re: Proposed Title Insurance Business Arrangement

Question Presented:

Does the proposed business arrangement outlined below violate New York Insurance Law?

Conclusion:

Yes. N.Y. Ins. Law § 6409(d) (McKinney 2000) prohibits a title insurance corporation or any person acting on its behalf from making payments, directly or indirectly, 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, if such payments would constitute "an inducement for, or as compensation for, any title insurance business." Thus, business arrangements where, as here, a part owner of a title agent who is also an agent or representative of the owner or the prospective owner of the property to be insured, receives compensation, in terms of profits, which will be based on a percentage of the premiums, endorsements and closing fees that emanate from the referrals such part owner has made to the title agent, violate the Insurance Law.

However, a part owner of a title agent would not be prohibited from receiving compensation from the title agent where there are significant and multiple sources of business available to the title agent. Whatever compensation the part owner receives, however, must be based on its ownership interest, not on the referrals it makes to the title agent.

Facts:

The inquirer states that Company "A" is an authorized agent of a licensed title insurer and proposes to form a business relationship with Company "B", which will become an agent of Company "A". The members of Company "B" will consist of Company "A" (with fifty-one percent (51%) ownership interest therein) and either Company "C" or an individual person (with forty-nine percent (49%) ownership interest therein).

The inquirer further states that Company "C" or its member will be a licensed mortgage broker in New York. Company "C" will refer title business to Company "B", which will assist or independently perform the following: title searches and examinations, making determinations of insurability, issuing title commitments, clearing underwriting objections, attending and performing closings, and issuing a policy of title insurance on behalf of insurer. Company "C" will obtain its customers through advertising and the referrals in question will include its prior customers. The inquirer states that most, but not all, of Company "B’s" title business will come from Company "C".

Company "C" will receive compensation in one of the following ways: (1) a fixed percentage of net title premium and endorsements, and a flat amount of closing fees if Company "B" performs the closing, (2) a fixed percentage of net title premium and endorsements, and a flat percentage of the net closing fees, or (3) for the sale of commercial property only, a fixed percentage of net title premium and endorsements up to a specific amount of title insurance, a higher fixed percentage of net title premium and endorsements within a range of title insurance, and yet a higher percentage of net title premium and endorsements over a certain amount of title insurance. Company "A" will receive any remaining monies.

The inquirer states that no annual dividends are paid to Company "A" or "C" in proportion to their actual membership interest, nor will the distribution of annual dividends be based upon the amount of business referred to Company "B" by Company "C".

Analysis:

N.Y. Ins. Law § 6409(d) (McKinney 2000) provides:

N.Y. Ins. Law § 6409(d) (McKinney 2000) prohibits a title insurance corporation or anyone acting on its behalf to give rebates for the referral of title insurance business to such insurer or agent. Specifically, Section 6409(d) prohibits the rebating of any portion of the fee, premium or charge made, or payment 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." An owner or part owner, who belongs to one of the categories above, is prohibited by Section 6409(d) from receiving compensation, in terms of profits, that will be based on a portion of the fees, premiums and charges that emanate from the referrals such owner has made to the title agent or insurer.

In this scenario, Company "C will be a part owner of Company "B", a title agent. It will have 49% ownership interest in such title agent, and will also operate as a mortgage broker. In its capacity as a mortgage broker, Company "C" will act as an agent or representative for its clients who are usually the owners or prospective owners of the real property to be insured. As a mortgage broker, Company "C" will seek to procure mortgage loans on behalf of such owners and potential owners. Accordingly, Company "C" comes within the categories addressed by Section 6409(d).

Although Company "C" will be the chief referral source for Company "B", the inquirer has stated that Company "B" will obtain title insurance business from other sources. It is the Department’s position that, where an owner or part owner of a title agent is the sole source of business for such title agent and belongs to one of the prohibited class of persons in Section 6409(d), whatever compensation such owner or part owner receives, in terms of profits, constitutes a rebate on the title insurance business that it referred to the title agent. The profits of the title agent must be obtained from significant and multiple sources of business to enable such owner or part owner to share in the overall profits of the title agent. In addition, such compensation must be based on the owner or part owner’s ownership interest in the title agent.

Here, we have Company "C" which will operate as a mortgage broker and will solicit, negotiate and process mortgage loans on behalf of owners or potential owners of real property. Once it procures loans for such clients, Company "C" will refer such clients to Company "B" for title insurance. As a result of such referrals to Company "B", Company "C" will receive, among other things, a fixed net amount of title premiums, endorsement and closing cost fees from Company "B". As agent or representative of owners and part owners of the properties to be insured, Company "C’s" compensation arrangement would constitute a rebate of the fees and charges made by such clients. This type of rebate is specifically prohibited by Section 6409(d) of the Insurance Law.

However, Company "C" would not be prohibited from receiving compensation from Company "B", where there are significant and multiple sources of business for Company "B" and where such compensation is based on Company "C’s" 49% ownership interest, not on the referrals it makes. As a final matter, N.Y. Banking Law § 595-a(4) (Interim Pocket Part 2001-2002) prohibits a mortgage banker or mortgage broker from requiring a borrower to purchase title insurance from a specific title insurance company, agency or agent as a condition for securing a mortgage loan.

For further information you may contact Senior Attorney D. Monica Marsh at the New York City Office.