OGC Opinion No. 01-10-02

The Office of General Counsel provided the following informal viewpoint on October 2, 2001, representing the position of the New york city State Insurance Department.

Re: Conflict Between N.Y. Insurance Law § 2502(a)( 2) (McKinney 2000) and the federal Real Estate Settlement Procedures Act of 1974 (RESPA)

Questions Presented:

May a mortgage lending institution or its lawyer need a borrower to buy title insurance from a particular title company, representative or agency, as a condition for securing a mortgage dedication?

If the federal Real Estate Settlement Procedures Act of 1974 ("RESPA"), as modified, 12 U.S.C. § § 2601-2617 (West 2001) allows the above activity, is state law preempted?

Conclusions:

No. N. Y. Ins. Law § 2502(a)( 2) (McKinney 2000) prohibits banks, trust business, savings banks, cost savings and loan associations and national banks from needing a debtor to obtain title insurance coverage, from a particular title representative or insurer as a condition to, amongst other things, protecting a mortgage commitment. While N. Y. Ins. Law § 2502(a)( 2) (McKinney 2000) does not specifically address other mortgage lenders or their attorneys, N.Y. Banking Law § 595-a( 4) (2001) prohibits a mortgage lender or a mortgage broker from needing a customer to acquire title insurance coverage from a specific title company, company or representative as a condition for protecting a mortgage commitment.

Real Estate Settlement Procedures Act of 1974, 12 U.S.C.A. § 2616 (West 2001) offers that a determination may not be made that a state law is irregular where such law provides more defense to customers. N. Y. Ins. Law § 2502(a)( 2) (McKinney 2000), along with N. Y. Banking Law § 595-a( 4) (2001 ), provide greater defense to New york city consumers by allowing those consumers to obtain title insurance from companies of their option.

Facts:

The inquirer seeks explanation of the Department's viewpoint dated June 22, 2001 as to whether N.Y. Ins. Law § 2502(a)( 2) (McKinney 2000) prohibits a lender from requiring a customer to obtain title insurance coverage from a specific title company as a condition for protecting a mortgage dedication. In addition, the inquirer concerns whether RESPA preempts N.Y. Ins. Law § 2502(a)( 2) (McKinney 2000).

Analysis:

N. Y. Ins. Law § 2502(a)( 2) (McKinney 2000) supplies:

( 2) Banks, trust companies, savings banks, cost savings and loan associations, and national banks will not extend credit, lease or offer residential or commercial property of any kind, or furnish any services, or repair or vary the factor to consider for any of the foregoing, on the condition or requirement that the customer acquire insurance from the bank, trust business, cost savings bank, cost savings and loan association, or national bank, its affiliate or subsidiary, or a particular insurance provider, agent or broker, offered, however, that this restriction will not prevent any bank, trust company or nationwide bank from engaging in any activity described in this subdivision that would not breach Section 106 of the Bank Holding Company Act Amendments of 1970, as analyzed by the Board of Governors of the Federal Reserve System. This prohibition shall not prevent a bank, trust company, savings bank, cost savings and loan association, or nationwide bank from informing a consumer that insurance is needed in order to acquire a loan or credit, that loan or credit approval is contingent upon the client's procurement of appropriate insurance, or that insurance coverage is offered from the bank, trust company, cost savings bank, savings and loan association, or national bank; supplied, nevertheless, that the bank, trust business, cost savings bank, cost savings and loan association, or national bank shall also inform the client in composing that his or her choice of insurance provider will not impact the bank, trust company, cost savings bank, savings and loan association, or national bank's credit decision or credit terms in any method. Such disclosure will be offered prior to or at the time that a bank, trust company, cost savings bank, cost savings and loan association, national bank or person selling insurance coverage on the facilities thereof gets the purchase of any insurance coverage from a client who has actually applied for a loan or extension of credit.

We continue to hold that pursuant to the above section, banks, trust business, savings banks, savings and loan associations, nationwide banks may not need a customer to obtain insurance from a specific insurance company, representative or broker, as a condition to getting a loan. While the inquirer is right that N. Y. Ins. Law § 2502(a)( 2) (McKinney 2000) does not specifically attend to other mortgage lending institutions or their attorneys, on August 29, 2001, Governor George Pataki signed into law Chapter 212 of the Laws of 2001, which added new neighborhood (4) to N. Y. Banking Law § 595-a (2001) to restrict mortgage brokers, mortgage lenders and exempt organizations from requiring that customers utilize a specific title insurer, title insurance coverage firm or title insurance agent as a condition for protecting a mortgage commitment. That modification, entitled "Restrictions On Tying" states in appropriate part:

( 4 )(A) No mortgage banker, mortgage broker or exempt organization shall, as a condition for the approval of a mortgage loan, need the usage of a specific title insurance provider, title insurance firm or title insurance representative or, for any other kind of insurance coverage, require making use of a specific insurance company, agent or broker.

(B) A bank, trust company, savings bank, savings and loan association or national bank which operates in compliance with the provisions of neighborhood 8 of area fourteen-g of this chapter and paragraph two of neighborhood (A) of area two thousand five hundred 2 of the insurance law will be deemed to be in compliance with this subdivision.

The federal Real Estate Settlement Procedures Act § 2607(c)( 4) (West 2001) states, in appropriate part:

(c) Nothing in this area will be construed as prohibiting ... (4) associated business arrangements so long as (A) a disclosure is made from the presence of such a plan to the individual being referred and, in connection with such recommendation, such individual is provided a composed price quote of the charge or range of charges normally made by the service provider to which the individual is referred ... (B) such individual is not required to utilize any specific provider of settlement services ... For functions of the preceding sentence, the following will not be thought about an infraction of clause (4 )(B): (i) any plan that needs a buyer, debtor, or seller to pay for the services of an attorney, credit reporting firm, or real estate appraiser chosen by the lender to represent the loan provider's interest in a property deal, or (ii) any arrangement where a lawyer or law company represents a customer in a property transaction and problems or sets up for the issuance of a policy of title insurance in the transaction straight as agent or through a separate corporate title insurance firm that may be developed by that lawyer or law office and ran as an accessory to his or its law practice.

While RESPA uses the broad term "lender" and seems to allow lending institutions and their attorneys to need that a customer obtain title insurance coverage from a particular title insurance coverage provider, our company believe there is no preemption problem in between the above state laws and RESPA because these state laws provide greater defense to customers. Specifically, Section 2616 of the Real Estate Settlement Procedures Act of 1974 (West 2001) provides, in appropriate part, that:

This chapter does not annul, modify or affect, or exempt any individual based on the arrangements of this chapter from abiding by, the laws of any State with regard to settlement practices, except to the level that those laws are inconsistent with any arrangement of this chapter, and then only to the degree of the inconsistency. The Secretary is licensed to identify whether such inconsistencies exist. The Secretary may not determine that any State law is irregular with any arrangement of this chapter if the Secretary figures out that such law provides greater security to the consumer. (focus included).

Accordingly, the Department continues to maintain the position that a loan provider may not, as a condition to protecting a mortgage dedication, require that a debtor acquire title insurance coverage from a particular title insurance company, representative or company.

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