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

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on July 1, 2005, representing the position of the New York State Insurance Department.

Re: Compensation Paid to Mortgage Lender’s Employees for Referring Title Business to Lender’s Affiliated Title Insurance Company

Questions Presented:

1. Does N.Y. Ins. Law § 6409(d) (McKinney 2000) prohibit a mortgage lender, which has an affiliated relationship with a title insurance company, from compensating its employees for referrals made to such affiliated title insurance company?

2. If so, does the federal Real Estate Settlement Procedures Act ("RESPA)", as amended, 12 U.S.C.A. §§ 2601-2617 (West 2001 & Supp. 2003) preempt N.Y. Ins. Law § 6409(d)?

Conclusions:

1. N.Y. Ins. Law § 6409(d) (McKinney 2000) prohibits a mortgage lender, which has an affiliated relationship with a title insurance company, from compensating its employees for referrals made to such affiliated title insurance company.

2. RESPA does not preempt N.Y. Ins. Law § 6409(d).

Facts:

The inquirer states that her firm represents mortgage lenders, title companies and other settlement service providers. The inquirer asks us to reconsider previously issued opinions of the Department and, specifically, one dated November 13, 2002, which concluded, among other things, that "[a] mortgage bank/broker that has entered into an affiliated business arrangement with a title abstract company is prohibited by N.Y. Ins. Law § 6409(d) (McKinney 2000) from paying commissions to its employees for referring title insurance business to the title abstract company."

To that end, the inquirer requests approval by the Department of a proposal wherein a mortgage lender that is affiliated with a title insurance company, would like to compensate its employees for referring title insurance business to such affiliated title insurance company. The inquirer states that customers will be given written disclosures of the affiliated relationship between the lender and the title insurance company and will have unfettered right to select any title insurance company they desire. The inquirer states that the title insurance company will pay no money or other thing of value to the lender or the lender’s employees for any promotion of the title insurance company. The inquirer also contends that nothing in the arrangement would cause the lender to act for or on behalf of the title insurance company. The inquirer states that promotion of the affiliated title insurance company’s services will be for the benefit of the lender and its customers.

To support her opinion that the proposed compensation would not violate Section 6409(d), the inquirer noted, among other things, the legislative history surrounding Section 6409. In addition, the inquirer discussed the federal Real Estate Settlement Procedures Act ("RESPA"). In terms of the legislative history of Section 6409(d), the inquirer claims that the compensation agreement in question does not fall within the prohibitions laid out in Section 6409(d) because the purpose of the statute was to eliminate commissions paid to attorneys and real estate brokers by title insurance companies for the placement of title insurance business. The inquirer argues that the proposed arrangement does not involve a commission or rebate for the referral of title business.

In terms of RESPA, the inquirer states that it contains an exemption, to the general ban on referral fees, which permits an employer to pay its own employees for referrals. As such, the inquirer claims that Section 6409(d) should be read, in a manner consistent with RESPA, to exclude from the prohibition in Section 6409(d) payments made by a lender to its own employees who make referrals to the title insurance company. The inquirer also argues that to the extent that we are unable to read Section 6409(d) in a manner consistent with RESPA, that RESPA preempts that section.

Analysis:

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.

Section 6409(d) prohibits a title insurance corporation or any other person acting for or on behalf of it from directly or indirectly paying or giving 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, a rebate or 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. Section 6409(d) does not only prohibit rebates. It prohibits many payment arrangements to various persons and entities involved in the real estate transaction. Some of those persons that are prohibited include any person, firm, or corporation acting as agent, representative, attorney, or employee of, among others, mortgagee (lender) of the real property or any one having interest therein.

Specifically, under the inquirer’s proposal, a lender, who is in an affiliated arrangement with a title insurance company, will pay its employees a commission for referring title business to such title insurance company. The inquirer argues, among other things, that the lender will not be acting for or on behalf of the title insurance company. However, the position of the Department is that a corporation or person who is affiliated with, owns or co-owns a title insurance company or title agent, is deemed to be acting for or on behalf of a title insurance corporation when it steers or refers its customers to such title insurance company. Therefore, pursuant to Section 6409(d), such person or corporation is prohibited from giving, among other things, any consideration or valuable thing to any of the prohibited classes of people listed in Section 6409(d), as an inducement to, or compensation for any title insurance business. Payments to employees of a mortgagee/lender, for referrals, fall squarely within Section 6409(d) as compensation made for title insurance business.

The inquirer argues further that based on its legislative history, the sole purpose of Section 6409(d) was to eliminate commissions paid to attorneys and real estate brokers by title insurance companies. While we agree that was a concern at the time, the prohibition in the statute is much broader than that. In fact, as stated above, Section 6409(d) encompasses many compensation arrangements, not just those that involve attorneys and real estate brokers. It prohibits certain payments by title insurance companies, and those acting for or on behalf of such insurance company, to applicants for insurance, but it also prohibits payments to any person, firm, or corporation acting as agent, representative, attorney, or employee of, among others, mortgagee/lender of the real property or any one having interest therein. If the amendment was intended to be as narrow as the inquirer asserts, there would be no reason for the broad language therein.

Further, the legislative history supports the Department’s interpretation. The language in the statute (Section 440(2)) prior to the most recent amendment provided as follows:

(2) A title insurance corporation may pay a commission to a licensed real estate broker or to an attorney and counselor at law for procuring business for such corporation.

We believe that if, according to the inquirer’s argument, the aim of the amendment was to simply eliminate commissions to attorneys and real estate brokers, that the drafters could have simply done that, without more. Instead, the language in the amended statute was expanded significantly, as seen above in Section 6409(d), to mandate a flat bar on the receipt of, among other things, payments, consideration and commissions by those directly or indirectly involved in the real estate transaction. Such explanation can be found in a June 6, 1975 Memorandum to the Governor, John P. Gemma of the Department which noted, among other things, that:

"Section 440(2) would be amended to prohibit the receipt by anyone of any commission or rebate, as an inducement or compensation for the placement of title insurance business…. The bill would effect a flat bar on the receipt of rebates for placement of title business by anyone directly or indirectly involved in the real estate transaction." (emphasis added).

The inquirer also states that Section 6409(d) was promulgated to mirror RESPA. However, as mentioned above, the prohibitions in Section 6409(d) are very broad and apply to many persons and entities that are involved in the real estate transaction. In addition, unlike RESPA which has a regulation and illustrations which appears to provide certain exceptions to the referral prohibition1   therein, Section 6409(d) does not contain any such exemptions to the prohibition therein. As mentioned in the Memorandum to the Governor above, the statute aims at a "flat bar" on the receipt of compensation for the placement of title business by anyone directly or indirectly involved in the real estate transaction. This is confirmed in the 1975 Legislative Proposal No. 4 that was sent to the Governor by the Insurance Department and which was enacted as Chapter 255 of the Laws of 1975 without change from the Department’s proposal. Specifically, in the provision regarding Statements in support of bill, the Department wrote, in pertinent part:

Barring commissions - An elimination of these commissions will reduce title insurance costs to consumers and avoid such anomalous results such as a mortgagor’s paying the full premium on a title policy protecting the mortgagee, with the commission going to persons in continuing business relationships with the mortgagee. The prohibition is broader than that contained in the federal law (12 U.S.C. §§ 2601 et. seq….) (emphasis added).

The inquirer also argues that RESPA’s Regulation, found at 24 CFR Part 3500, contains an exception, found in 24 CFR § 3500.14(g)(1)(vii), to the referral prohibition contained in 12 U.S.C.A. § 2607(a) (West 2001 & Supp. 2003), which provides, as follows:

(a) Business referrals. No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

On its face, Section 2607(a) above prohibits the payment of fees, kickbacks or other things of value for referrals, regardless of who makes such referrals. However, Section 3500.14(g)(1)(vii) to which the inquirer refers provides, in pertinent part, as follows:

(g) Fees, salaries, compensation, or other payments.

Section 8 of RESPA permits:

(vii) An employer’s payment to its own employees for any referral activities.

The inquirer reads Section 3500.14(g)(1)(vii) to permit a lender, as in the proposed arrangement, to compensate its employees for making referrals to its affiliated title insurance company. As a result, the inquirer argues that our statute is inconsistent with RESPA, and is thus preempted thereby. The inquirer also argues that the arrangement in question provides greater benefit to consumers, thus, RESPA preempts Section 6409(d).

In terms of preemption, 12 U.S.C.A. § 2616 (West 2001), in relevant part, as follows:

This chapter does not annul, alter or affect, or exempt any person subject to the provisions of this chapter from complying with, the laws of any State with respect to settlement practices, except to the extent that those laws are inconsistent with any provision of this chapter, and then only to the extent of the inconsistency. The Secretary is authorized to determine whether such inconsistencies exist. The Secretary may not determine that any State law is inconsistent with any provision of this chapter if the Secretary determines that such law gives greater protection to the consumer….

Further, 24 CFR § 3500.13(2) (West 2001) provides as follows:

(2) In determining whether provisions of State law or regulations concerning affiliated business arrangements are inconsistent with RESPA or this part, the Secretary may not construe those provisions that impose more stringent limitations on affiliated business arrangements as inconsistent with RESPA so long as they give more protection to consumers and/or competition. (emphasis added).

We do not believe that Section 6409(d) is inconsistent with RESPA. However, even if, as the inquirer states, RESPA allows the specific type of arrangement in question, and Section 6409(d) is deemed inconsistent, we believe that our statute gives greater protection to consumers and competition and thus, may not be deemed preempted, as required by Section 3500.13(2) above. Among other things, Section 6409(d) prohibits discrimination among applicants for insurance/consumers and allows them the freedom to choose their own title insurance company or title agent.

Accordingly, the Department continues to maintain the position that a mortgage lender that has entered into an affiliated business arrangement with a title insurance company is prohibited by N.Y. Ins. Law § 6409(d) (McKinney 2000) from compensating its employees for referring title insurance business to its affiliated title insurance company.

For more information please contact Associate Attorney D. Monica Marsh at the New York City Office.


1  See 12 U.S.C.A. § 2607(a) (West 2001 & Supp. 2003).