Department Of Financial Services

OGC Opinion No. 01-10-02

The Office of General Counsel issued 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 attorney need a customer to purchase title insurance coverage from a specific title business, agent or company, as a condition for protecting a mortgage commitment?

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) forbids banks, trust business, cost savings banks, savings and loan associations and nationwide banks from needing a customer to acquire title insurance, from a specific title agent or insurer as a condition to, among other things, protecting a mortgage dedication. While N. Y. Ins. Law § 2502(a)( 2) (McKinney 2000) does not specifically attend to other mortgage loan providers or their attorneys, N.Y. Banking Law § 595-a( 4) (2001) forbids a mortgage lender or a mortgage broker from requiring a debtor to buy title insurance coverage from a particular title business, agency or agent as a condition for securing a mortgage dedication.

Real Estate Settlement Procedures Act of 1974, 12 U.S.C.A. § 2616 (West 2001) provides that a determination may not be made that a state law is irregular where such law provides more protection to customers. N. Y. Ins. Law § 2502(a)( 2) (McKinney 2000), as well as N. Y. Banking Law § 595-a( 4) (2001 ), give higher defense to New York customers by permitting those customers to get title insurance coverage from service providers of their choice.

Facts:

The inquirer looks for clarification of the Department's opinion dated June 22, 2001 regarding whether N.Y. Ins. Law § 2502(a)( 2) (McKinney 2000) restricts a loan provider from needing a debtor to acquire title insurance coverage from a particular title company as a condition for securing a mortgage dedication. In addition, the inquirer questions 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, cost savings banks, 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 fix or differ the factor to consider for any of the foregoing, on the condition or requirement that the customer obtain insurance from the bank, trust business, cost savings bank, cost savings and loan association, or nationwide bank, its affiliate or subsidiary, or a specific insurer, representative or broker, supplied, however, that this restriction shall not prevent any bank, trust business or nationwide bank from participating in any activity explained in this subdivision that would not break 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 will not prevent a bank, trust company, savings bank, cost savings and loan association, or national bank from informing a consumer that insurance is required in order to obtain a loan or credit, that loan or credit approval rests upon the client's procurement of appropriate insurance coverage, or that insurance coverage is offered from the bank, trust company, cost savings bank, cost savings and loan association, or national bank; supplied, nevertheless, that the bank, trust company, savings bank, savings and loan association, or national bank shall also notify the customer in writing that his/her choice of insurance coverage provider shall not affect the bank, trust company, savings bank, savings and loan association, or nationwide bank's credit decision or credit terms in any way. Such disclosure will be given prior to or at the time that a bank, trust company, savings bank, cost savings and loan association, nationwide bank or individual selling insurance on the facilities thereof obtains the purchase of any insurance from a consumer who has actually requested a loan or extension of credit.

We continue to hold that pursuant to the above area, banks, trust business, savings banks, cost savings and loan associations, national banks may not require a customer to obtain insurance from a particular insurance company, representative or broker, as a condition to receiving a loan. While the inquirer is appropriate that N. Y. Ins. Law § 2502(a)( 2) (McKinney 2000) does not particularly deal with 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 included brand-new neighborhood (4) to N. Y. Banking Law § 595-a (2001) to forbid mortgage brokers, mortgage bankers and exempt companies from requiring that borrowers utilize a specific title insurance business, title insurance coverage agency or title insurance agent as a condition for securing a mortgage dedication. That change, entitled "Restrictions On Tying" states in pertinent part:

( 4 )(A) No mortgage banker, mortgage broker or exempt organization shall, as a condition for the approval of a mortgage loan, require using a particular title insurer, title insurance coverage company or title insurance coverage representative or, for any other kind of insurance coverage, need the usage of a particular insurance company, representative or broker.

(B) A bank, trust business, savings bank, cost savings and loan association or nationwide bank which operates in compliance with the provisions of subdivision 8 of area fourteen-g of this chapter and paragraph 2 of neighborhood (A) of section two thousand 5 hundred 2 of the insurance coverage law will be considered to be in compliance with this neighborhood.

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

(c) Nothing in this section will be interpreted as forbiding ... (4) associated organization 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 offered a written price quote of the charge or variety of charges normally made by the service provider to which the individual is referred ... (B) such individual is not needed to use any particular service provider of settlement services ... For functions of the preceding sentence, the following shall not be thought about an offense of provision (4 )(B): (i) any plan that needs a purchaser, debtor, or seller to pay for the services of a lawyer, credit reporting agency, or real estate appraiser selected by the loan provider to represent the lending institution's interest in a genuine estate deal, or (ii) any arrangement where a lawyer or law office represents a customer in a property deal and problems or schedules the issuance of a policy of title insurance coverage in the deal directly as agent or through a separate corporate title insurance coverage agency that may be developed by that attorney or law practice and ran as an adjunct to his or its law practice.

While RESPA uses the broad term "lending institution" and seems to permit lending institutions and their lawyers to require that a borrower get title insurance from a specific title insurance supplier, we think there is no preemption issue between the above state laws and RESPA because these state laws provide greater security to consumers. Specifically, Section 2616 of the Real Estate Settlement Procedures Act of 1974 (West 2001) provides, in relevant part, that:

This chapter does not annul, modify or affect, or exempt anyone subject to the provisions of this chapter from adhering to, the laws of any State with regard to settlement practices, other than to the level that those laws are inconsistent with any provision of this chapter, and after that just to the degree of the disparity. The Secretary is licensed to identify whether such inconsistencies exist. The Secretary might not identify that any State law is irregular with any provision of this chapter if the Secretary identifies that such law provides higher defense to the consumer. (emphasis included).

Accordingly, the Department continues to preserve the position that a lending institution may not, as a condition to protecting a mortgage dedication, require that a borrower get title insurance from a specific title insurance company, representative or company.