New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel issued the following informal opinion on January 31, 2002, representing the position of the New York State Insurance Department.

RE: Use of Title Insurer Mandated by Lender

Question Presented:

May a mortgage lender or its attorney require a borrower to purchase title insurance from a specific title company, agent or agency, that is unaffiliated with the lender, as a condition for securing a mortgage commitment?

Conclusion:

No, New York Law prohibits a lender from requiring the use of a particular title insurer. No federal statute preempts this rule.

Facts:

The inquirer is an attorney representing a borrower in a residential mortgage transaction. The inquirer’s client has been informed by the lender that the title insurance policy, which is a prerequisite to obtaining the loan, will be procured by the lender (but paid for, ultimately, by the borrower) from a specific title insurance company. The inquirer questioned the lender about this matter, but they maintain that the practice is not prohibited under federal law, stating that Section 106 of the Bank Holding Company Act Amendments of 1970, 12 U.S.C.A. § 1972 (West 2000), only prohibits tying arrangements that require a borrower to obtain services or goods from the lender (or an affiliate) as a condition to obtaining the loan.

Analysis:

The New York Insurance Law prohibits banks, trust companies, savings banks, savings and loan associations, and national banks from requiring a borrower to obtain insurance from a particular insurer, agent or broker, as a condition to receiving a loan. The law also provides, however, that it will not prevent any entity covered by the statute from engaging in any activity that does not violate section 106 of the Bank Holding Company Act Amendments of 1970, 12 U.S.C.A. § 1972 (West 2001). In the inquirer’s situation, the lender maintains that because § 1972 only prohibits tying transactions where the additional property or service is purchased from the lender itself or an affiliate thereof, that the requirement mandating the purchase of title insurance from a specific, unaffiliated insurer is allowable. An examination of the applicable statutes, however, indicates otherwise.

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

(2) Banks, trust companies, savings banks, savings and loan associations, and national banks shall not extend credit, lease or sell property of any kind, or furnish any services, or fix or vary the consideration for any of the foregoing, on the condition or requirement that the customer obtain insurance from the bank, trust company, savings bank, savings and loan association, or national bank, its affiliate or subsidiary, or a particular insurer, agent or broker, provided, however, that this prohibition shall not prevent any bank, trust company or national 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 prohibition shall not prevent a bank, trust company, savings bank, savings and loan association, or national bank from informing a customer that insurance is required in order to obtain a loan or credit, that loan or credit approval is contingent upon the customer’s procurement of acceptable insurance, or that insurance is available from the bank, trust company, savings bank, savings and loan association, or national bank; provided, however, that the bank, trust company, savings bank, savings and loan association, or national bank shall also inform the customer in writing that his or her choice of insurance provider shall not affect the bank, trust company, savings bank, savings and loan association, or national bank’s credit decision or credit terms in any way. Such disclosure shall be given prior to or at the time that a bank, trust company, savings bank, savings and loan association, national bank or person selling insurance on the premises thereof solicits the purchase of any insurance from a customer who has applied for a loan or extension of credit.

In addition, the recently enacted Chapter 212 of the Laws of 2001, which added new subdivision (4) to N.Y. Banking Law § 595-a (McKinney 2001), prohibits mortgage brokers, mortgage bankers and exempt organizations from requiring that borrowers use a particular title insurance company, title insurance agency or title insurance agent as a condition for securing a mortgage commitment. That amendment, entitled "Restrictions On Tying" states in relevant part:

(4)(A) No mortgage banker, mortgage broker or exempt organization shall, as a condition for the approval of a mortgage loan, require the use of a particular title insurance company, title insurance agency or title insurance agent or, for any other type of insurance, require the use of a particular insurer, 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 subdivision eight of section fourteen-g of this chapter and paragraph two of subdivision (A) of section two thousand five hundred two of the insurance law shall be deemed to be in compliance with this subdivision.

Thus, as evidenced by the above-cited provisions of New York law, absent any express permission under federal law to the contrary, a lender may not require that a borrower obtain title insurance from a particular title insurer.

Section 106 of the Bank Holding Company Amendments of 1970, codified at 12 U.S.C.A. 1972 (West 2001), and cited in N.Y. Ins. Law § 2502(a)(2), provides, in pertinent part, as follows:

A bank shall not in any manner extend credit, lease or sell property of any kind, or furnish any service, or fix or vary the consideration for any of the foregoing, on the condition or requirement –

(A) that the customer shall obtain some additional credit, property, or service from such bank other than a loan, discount, deposit, or trust service;

(B) that the customer shall obtain some additional credit, property, or service from a bank holding company of such bank, or from any other subsidiary of such bank holding company;

(C) that the customer provide some additional credit, property, or service to such bank, other than those related to and usually provided in connection with a loan, discount, deposit, or trust service;

(D) that the customer provide some additional credit, property, or service to a bank holding company of such bank, or to any other subsidiary of such bank holding company; or

(E) that the customer shall not obtain some other credit, property, or service from a competitor of such bank, a bank holding company of such bank, or any subsidiary of such bank holding company, other than a condition or requirement that such bank shall reasonably impose in a credit transaction to assure the soundness of the credit.

Thus, under 12 U.S.C.A. § 1972 (West 2000), a bank is prohibited from requiring a borrower to obtain an insurance policy from the bank itself or an affiliate thereof. The statute does not expressly address a bank requiring a borrower to obtain title insurance from a specific, nonaffiliated insurer. It is this absence of a prohibition upon which the lender in the inquirer’s scenario is relying. However, the lender’s view is incorrect. First, that statute only addresses situations where the transaction of business is between the bank (or affiliate thereof) and the borrower. In the instant case, there is an unrelated third party (the title insurer). This added element distinguishes the situation from one covered by the provisions of Section 106 of the Bank Holding Company Act Amendments of 1970.

Second, the legislative intent behind the changes to N.Y. Ins. Law § 2502(a)(2) (McKinney 2000) does not support the lender’s position. The inclusion of the reference to Section 106 of Bank Holding Company Act Amendments of 1970 in N.Y. Ins. Law § 2502 (a)(2) was made by L. 2000, ch. 418 as one of several provisions intended to update the New York Insurance Law following the enactment of the Gramm Leach Bliley Act (P.L. 106-102) (the "Act"). Specifically, these conforming changes were intended to reconcile New York law with the "Safe Harbor" provisions of the Act. 1 See Superintendent’s letter recommending approval dated July 17, 2000. The interpretation of the added language contained in § 2502(a)(2) advanced by the lender in the transaction herein is overbroad. Essentially, the lender’s position would preclude the state from enforcing § 2502(a)(2) at all.

Accordingly, the Department maintains the position that a lender may not, as a condition to securing a mortgage commitment, require that a borrower obtain title insurance from a specific title insurer, agent or agency.

For further information, you may contact Supervising Attorney Michael Campanelli at the New York City office.


1 The “Safe Harbors” are contained in Sections 104(d)(2)(B) of the Act and list certain state laws that are preserved notwithstanding the enactment of the Act.   Section 104(d)(2)(B)(viii) allows state laws which contain:

 “Restrictions prohibiting the extension of credit … on the condition or requirement that the customer obtain insurance from a depository institution or an affiliate of a depostory institution, or a particular insurer,agent or broker, other than a prohibition that would prevent any such depository instituition or affiliate --

(l)     from engaging in any activity described in this clause 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......