OGC Opinion No. 01-10-02

The Office of General Counsel released the following casual 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 lender or its attorney need a debtor to purchase title insurance coverage from a specific title business, agent or company, 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) forbids banks, trust companies, savings banks, cost savings and loan associations and nationwide banks from needing a debtor to obtain title insurance coverage, from a specific title representative or insurance provider as a condition to, to name a few things, protecting a mortgage dedication. While N. Y. Ins. Law § 2502(a)( 2) (McKinney 2000) does not specifically resolve other mortgage lending institutions or their lawyers, N.Y. Banking Law § 595-a( 4) (2001) prohibits a mortgage banker or a mortgage broker from needing a customer to purchase title insurance from a particular title business, 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) supplies 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), in addition to N. Y. Banking Law § 595-a( 4) (2001 ), offer greater protection to New york city consumers by permitting those consumers to obtain title insurance coverage from service providers of their choice.

Facts:

The inquirer looks for information of the Department's opinion dated June 22, 2001 as to whether N.Y. Ins. Law § 2502(a)( 2) (McKinney 2000) restricts a lending institution from requiring a customer to acquire title insurance 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) supplies:

( 2) Banks, trust companies, savings banks, savings and loan associations, and nationwide banks will not extend credit, lease or offer residential or commercial property of any kind, or provide any services, or fix or differ the factor to consider for any of the foregoing, on the condition or requirement that the client get insurance coverage from the bank, trust business, cost savings bank, savings and loan association, or national bank, its affiliate or subsidiary, or a specific insurer, representative or broker, supplied, nevertheless, that this prohibition shall not avoid any bank, trust business or national bank from taking part in any activity explained in this subdivision that would not breach Section 106 of the Bank Holding Company Act Amendments of 1970, as interpreted 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 national bank from informing a customer that insurance coverage is needed in order to acquire a loan or credit, that loan or credit approval rests upon the client's procurement of acceptable insurance, or that insurance coverage is available from the bank, trust business, savings bank, savings and loan association, or nationwide bank; supplied, however, that the bank, trust company, cost savings bank, savings and loan association, or national bank shall also inform the customer in composing that his/her choice of insurance coverage provider shall not affect the bank, trust business, cost savings bank, savings and loan association, or national 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, cost savings bank, cost savings and loan association, nationwide bank or person selling insurance on the facilities thereof obtains the purchase of any insurance coverage from a customer who has obtained a loan or extension of credit.

We continue to hold that pursuant to the above area, banks, trust business, savings banks, savings and loan associations, nationwide banks may not need a customer to acquire insurance coverage from a particular insurance provider, 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 resolve other mortgage lending institutions or their lawyers, on August 29, 2001, Governor George Pataki signed into law Chapter 212 of the Laws of 2001, which included new neighborhood (4) to N. Y. Banking Law § 595-a (2001) to prohibit mortgage brokers, mortgage lenders and exempt organizations from requiring that customers utilize a particular title insurance provider, title insurance coverage firm or title insurance coverage representative as a condition for protecting a mortgage dedication. That amendment, entitled "Restrictions On Tying" states in relevant part:

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

(B) A bank, trust company, cost savings bank, cost savings and loan association or national bank which runs in compliance with the provisions of subdivision 8 of section fourteen-g of this chapter and paragraph two of neighborhood (A) of area two thousand 5 hundred 2 of the insurance 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 pertinent part:

(c) Nothing in this section shall be interpreted as prohibiting ... (4) affiliated organization plans so long as (A) a disclosure is made of the existence of such an arrangement to the person being referred and, in connection with such recommendation, such person is supplied a composed price quote of the charge or variety of charges usually made by the company to which the person is referred ... (B) such person is not needed to use any specific company of settlement services ... For purposes of the preceding sentence, the following will not be thought about a violation of clause (4 )(B): (i) any arrangement that requires a buyer, customer, or seller to pay for the services of a lawyer, credit reporting agency, or realty appraiser selected by the lending institution to represent the lender's interest in a realty deal, or (ii) any plan where an attorney or law office represents a customer in a property transaction and concerns or sets up for the issuance of a policy of title insurance in the deal directly as agent or through a separate business title insurance agency that might be established by that lawyer or law practice and ran as an adjunct to his or its law practice.

While RESPA utilizes the broad term "lending institution" and appears to permit lenders and their lawyers to need that a customer acquire title insurance coverage from a particular title insurance coverage provider, we think there is no preemption concern between the above state laws and RESPA due to the fact that these state laws provide higher 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, alter or affect, or exempt anyone subject to the provisions of this chapter from abiding by, 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 just to the extent of the inconsistency. The Secretary is authorized to figure out whether such inconsistencies exist. The Secretary may not identify that any State law is irregular with any provision of this chapter if the Secretary determines that such law offers higher protection to the customer. (emphasis added).

Accordingly, the Department continues to maintain the position that a lending institution might not, as a condition to securing a mortgage dedication, require that a debtor obtain title insurance coverage from a specific title insurance company, representative or agency.

For more info you might get in touch with Attorney D. Monica Marsh at the New York City City Office.