The Office of General Counsel issued the following opinion on December 27, 2004, representing the position of the New York State Insurance Department.

Re: Joint Venture/Title Agent: Mortgage Bank/Co-Owner's Proposal to Charge Customers/Applicants for Insurance Reduced Attorney Fees

Question Presented:

Is it a violation of N.Y. Ins. Law § 6409(d) (McKinney 2000) for a mortgage bank, as co-owner of a Joint Venture/Title Agent, to charge its customers/applicants for insurance a reduced attorney fee if they use its Joint Venture/Title Agent to purchase title insurance, while other customers who fail to use the Joint Venture/Title Agent are charged the regular/higher attorney fee?

Conclusion:

Yes. It is a violation of N.Y. Ins. Law § 6409(d) (McKinney 2000) for a mortgage bank, as co-owner of a Joint Venture/Title Agent, to charge its customers/applicants for insurance a reduced attorney fee if they use its Joint Venture/Title Agent to purchase title insurance, while other customers who fail to use the Joint Venture/Title Agent are charged the regular/higher attorney fee.

Facts:

The inquirer’s firm represents a New York Title Agent that intends to form a Joint Venture that will conduct business in New York, as a Title Agent, with a New York Licensed Mortgage Bank. The inquirer states that the Joint Venture will have two owners: the mortgage bank and the title agent. The co-owners of the Joint Venture/Title Agent will receive compensation, in terms of profits, based upon their ownership interest in the company, not on the amount of business they refer to the Joint Venture/Title Agent. The inquirer states that there will be no agreement regarding the amount of business each owner will generate and that there will be multiple sources of business, other than referrals from the co-owners.

The inquirer states that the employees of the Joint Venture/Title Agent will perform the review procedures that are normally performed by the Mortgage Bank’s outside counsel. Such employees will prepare and review the title insurance commitment and ancillary documents including the title report. The inquirer believes that the amount of time required to review such documents will be reduced because of the duplicative efforts by the employees of the Joint Venture/Title Agent in preparing and reviewing the title reports. In addition, the inquirer states that the time will be reduced because of the automated and controlled process used to produce the title reports. Lastly, the inquirer states that the standardized reporting format used by the Joint Venture/Title Agent will also reduce the review time by the Mortgage Bank's counsel. As a result, the inquirer states that the amount charged by the outside counsel will be less when the title report is prepared by the Joint Venture/Title Agent.

In addition, the inquirer points out that applicable law permits a Mortgage Bank to "pass through certain charges to the borrower." Thus, the borrower will receive the benefit of the lower fee, none of which will be retained by the Mortgage Bank/co-owner or the Joint Venture/Title Agent.

Analysis:

In compliance with the Insurance Law, the inquirer advised us that the co-owners of the Joint Venture/Title Agent will only receive compensation, in terms of profits, based upon their ownership interest in the company, not on the amount of business they refer to the Joint Venture/Title Agent. In addition, there will be no agreement regarding the amount of business each owner will generate and there will be multiple sources of business, other than referrals from the co-owners. Please note that the Department requires the above conditions in arrangements such as the one proposed.

N.Y. Ins. Law § 6409(d) (McKinney 2000) provides:

(d) No title insurance corporation or any other person acting for or on behalf of it, shall make any rebate of any portion of the fee, premium or charge made, or pay or give to any applicant for insurance, or to any person, firm, or corporation acting as agent, representative, attorney, or employee of the owner, lessee, mortgagee or the prospective owner, lessee, or mortgagee of the real property or any interest therein, either directly or indirectly, any commission, any part of its fees or charges, or any other consideration or valuable thing, as an inducement for, or as compensation for, any title insurance business. Any person or entity who accepts or receives such a commission or rebate shall be subject to a penalty equal to the greater of one thousand dollars or five times the amount thereof.

The question presented is whether the reduced fee that the Mortgage Bank/co-owner intends to charge customers/applicants for insurance who use its Joint Venture/Title Agent, constitutes a violation of subdivision (d) of Section 6409 of the Insurance Law. Section 6409(d) prohibits a title insurance corporation or any other person acting for or on behalf of such title insurance corporation from, among other thing, rebating any portion of its fee or charge made, or giving to any applicant for insurance, either directly or indirectly, any part of its fees or charges, or any other consideration or valuable thing, as an inducement for, or as compensation for, any title insurance business.

Before we can answer the question presented we must address the issue of whether, pursuant to Section 6409(d), the Mortgage Bank/co-owner falls into the category of a title insurance corporation or one acting for or on behalf of a title insurance corporation, thereby prohibiting it from paying or giving, among other things, any consideration or valuable thing as an inducement or compensation for title insurance business. The Department has, in a November 13, 2002 opinion,1 concluded that a mortgage bank, as co-owner of a title agency acts, albeit indirectly, for or on behalf of a title insurance company that its title agency represents, by having its customers/applicants for insurance place title insurance business with its Joint Venture/Title Agent. Accordingly, the Mortgage Bank/co-owner here falls within the purview of Section 6409(d). Thus, it may not pay or give any of the prohibited compensation or consideration to any of persons listed in Section 6409(d).

The inquirer states that the Mortgage Bank/co-owner intends to reduce the attorney's fees for customers/applicants for insurance who use its Joint Venture/Title Agent to procure title insurance. In furtherance of this goal, the inquirer states that the Joint Venture/Title Agent's employees will perform review procedures that are normally performed by the Mortgage Bank's outside counsel. The inquirer states that, among other things, this will result in a reduction in the Mortgage Bank’s outside counsel's review time. Thus, the inquirer claims that the amount charged by the outside counsel will be less when the title report and other documents are prepared by the Joint Venture/Title Agent. Therefore, customers/applicants for insurance who use the Joint Venture/Title Agent to purchase title insurance will be charged the reduced attorney fee for such services. However, customers/applicants for insurance of the Mortgage Bank/co-owner who fail to use the Joint Venture/Title Agent will be charged the regular/higher attorney fee.

This reduction in fee to customers/applicants for insurance who use the Joint Venture/Title Agent constitutes, at the very least, the giving of "other consideration or valuable thing, as an inducement for, or as compensation for" the purchase, by such applicants, of title insurance business from the Joint Venture/Title Agent.

This analysis is limited to an interpretation of the Insurance Law.

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

1 Gen. Couns. Op. 02-11-32, (Nov. 13, 2002).