OGC Opinion No. 01-10-02

The Office of General Counsel released the following informal opinion 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 require a borrower to buy title insurance coverage from a particular title company, representative or agency, as a condition for protecting a mortgage dedication?

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

Conclusions:

No. N. Y. Ins. Law § 2502(a)( 2) (McKinney 2000) prohibits banks, trust companies, savings banks, savings and loan associations and national banks from needing a debtor to acquire title insurance coverage, from a particular title agent or insurance provider as a condition to, to name a few things, protecting a mortgage commitment. While N. Y. Ins. Law § 2502(a)( 2) (McKinney 2000) does not specifically deal with other mortgage lenders or their lawyers, N.Y. Banking Law § 595-a( 4) (2001) restricts a mortgage lender or a mortgage broker from requiring a debtor to buy title insurance coverage from a specific title company, firm or representative as a condition for securing a mortgage dedication.

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 inconsistent where such law gives more defense to customers. N. Y. Ins. Law § 2502(a)( 2) (McKinney 2000), in addition to N. Y. Banking Law § 595-a( 4) (2001 ), give greater security to New york city consumers by permitting those customers to get title insurance coverage from suppliers 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) forbids a lending institution from needing a debtor 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) offers:

( 2) Banks, trust business, savings banks, savings and loan associations, and nationwide banks shall not extend credit, lease or sell 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 client get insurance from the bank, trust company, cost savings bank, savings and loan association, or nationwide bank, its affiliate or subsidiary, or a specific insurance company, agent or broker, provided, nevertheless, that this restriction shall not avoid any bank, trust company or nationwide 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 restriction shall not avoid a bank, trust company, savings bank, savings and loan association, or nationwide bank from informing a customer that insurance is needed in order to acquire a loan or credit, that loan or credit approval rests upon the consumer's procurement of acceptable insurance coverage, or that insurance is offered from the bank, trust company, cost savings bank, cost savings and loan association, or nationwide bank; provided, nevertheless, that the bank, trust company, cost savings bank, savings and loan association, or national bank will also notify the customer in composing that his or her option of insurance coverage service provider will not affect the bank, trust business, savings bank, savings and loan association, or nationwide bank's credit choice or credit terms in any method. Such disclosure will be provided prior to or at the time that a bank, trust business, savings bank, savings and loan association, national bank or individual selling insurance coverage on the facilities thereof obtains the purchase of any insurance coverage from a customer who has actually made an application for a loan or extension of credit.

We continue to hold that pursuant to the above section, banks, trust business, cost savings banks, cost savings and loan associations, national banks might not require a debtor to get insurance coverage from a particular insurance company, representative or broker, as a condition to receiving a loan. While the inquirer is proper that N. Y. Ins. Law § 2502(a)( 2) (McKinney 2000) does not specifically address 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 brand-new neighborhood (4) to N. Y. Banking Law § 595-a (2001) to forbid mortgage brokers, mortgage lenders and exempt companies from needing that customers utilize a particular title insurance provider, title insurance company or title insurance coverage representative as a condition for protecting a mortgage dedication. That amendment, entitled "Restrictions On Tying" states in pertinent part:

( 4 )(A) No mortgage lender, mortgage broker or exempt company shall, as a condition for the approval of a mortgage loan, require the use of a particular title insurer, title insurance coverage agency or title insurance coverage agent or, for any other type of insurance, need making use of a specific insurer, agent or broker.

(B) A bank, trust business, cost savings bank, savings and loan association or national bank which operates in compliance with the arrangements of subdivision eight of section fourteen-g of this chapter and paragraph 2 of neighborhood (A) of section two thousand 5 hundred 2 of the insurance law shall be considered to be in compliance with this subdivision.

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

(c) Nothing in this section shall be construed as restricting ... (4) associated service arrangements so long as (A) a disclosure is made from the existence of such an arrangement to the person being referred and, in connection with such referral, such individual is provided a written quote of the charge or variety of charges normally made by the provider to which the individual is referred ... (B) such person is not needed to utilize any specific service provider of settlement services ... For functions of the preceding sentence, the following shall not be thought about an infraction of clause (4 )(B): (i) any arrangement that requires a purchaser, customer, or seller to spend for the services of an attorney, credit reporting company, or property appraiser picked by the lender to represent the lender's interest in a realty transaction, or (ii) any plan where an attorney or law practice represents a customer in a realty transaction and problems or schedules the issuance of a policy of title insurance in the deal directly as representative or through a separate business title insurance company that might 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 appears to allow loan providers and their attorneys to require that a borrower acquire title insurance from a particular title insurance provider, our company believe there is no preemption concern in between the above state laws and RESPA since these state laws provide higher security to consumers. Specifically, Section 2616 of the Real Estate Settlement Procedures Act of 1974 (West 2001) provides, in pertinent part, that:

This chapter does not annul, change or impact, or exempt anybody based on the arrangements of this chapter from complying with, the laws of any State with regard to settlement practices, other than to the degree that those laws are irregular with any provision of this chapter, and then only to the level of the inconsistency. The Secretary is authorized to figure out whether such inconsistencies exist. The Secretary might not determine that any State law is inconsistent with any arrangement of this chapter if the Secretary identifies that such law gives greater protection to the customer. (emphasis added).

Accordingly, the Department continues to keep the position that a lender may not, as a condition to protecting a mortgage dedication, require that a debtor get title insurance from a particular title insurance provider, representative or agency.

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