February 1, 2002
Mr. [ ]
Re: Title Insurance Option
Dear [ ]:
Your letter to Kenneth Bielemeier, Assistant Deputy Superintendent of the New York State Banking Department (the “Department”) regarding the “Title Insurance Option” form (the “Option”) that your company, [ ] (the “Lender”), a licensed mortgage banker, proposes to use has been referred to me for response.
The Lender developed the Option following the August 2001 enactment of Section 595-a(4) of the Banking Law. That provision prohibits mortgage brokers, mortgage bankers and exempt organizations from requiring a borrower to use a particular title insurance company, title insurance agency or title insurance agent as a condition for the approval of a mortgage loan. A copy of the Option was enclosed with your letter. Prior to enactment, the Lender required borrowers to obtain the Lender’s policy of title insurance from a title agent selected by the Lender.
Typically, the sale of a mortgage loan into the secondary market is conditioned upon delivery of the final title policy to the purchaser within 45 days of purchase and, if this condition is not met, the seller is obligated to repurchase the mortgage loan. After the Lender was forced to repurchase several mortgage loans as a result of the title agent selected by the borrower failing to timely deliver the final title policy free from exceptions, the Lender instituted the policy conditioning approval of the mortgage loan on the use of a title agent selected by the Lender. It is noted that since the Lender is a relatively small entity, the repurchase of a mortgage loan results in a significant economic impact.
Following the initial submission of your letter, you made a series of revisions to the Option as a result of several telephone conversations with Department employees, including myself, regarding its content. The latest version of the Option was submitted on December 6, 2001.
The Option provides written notice to the borrower that he has two (2) choices regarding the Lender’s policy of title insurance. The cost of the title insurance is the same for either choice. The first choice authorizes the Lender’s attorney to obtain the Lender’s policy of title insurance from one (1) of five (5) listed companies as selected by the Lender. The Lender provides this service at no additional cost to the borrower and does not receive any compensation from the company selected. Further, you indicate that the Lender has no ownership interest in any title insurance agency and does not receive any form of compensation from any title insurance agent or title insurance company in connection with any mortgage loan it funds.
In the second choice, the borrower elects to obtain the Lender’s policy of title insurance directly from a provider. When the borrower makes this selection, the Lender requires the title agent to guarantee that it will deliver the final policy of title insurance, absent any exceptions marked off at closing, to the Lender’s attorney within 45 days of closing. Further, the Lender states that the issuing title company will be held liable for any damages incurred as a result of a failure to do so. Within five days (5) of this selection by the borrower, the title agent must execute the Option acknowledging that it understands these conditions. With this choice, the borrower also agrees to allow the Lender to obtain the Lender’s policy of title insurance should the title agent fail to provide this acknowledgement within five (5) days.
Voluntary selection by the borrower to have the Lender obtain the title insurance from one (1) of the five (5) companies listed in the first choice does not violate the provisions of Banking Law §595-a(4). Therefore, it must be determined whether the terms and conditions of the second choice offered under the Option directly or indirectly limits the ability of the borrower to choose the title insurer that will provide the Lender’s policy of insurance in violation of Banking Law §595-a(4).
Under the second choice, the borrower is not subject to any liability for failure to deliver the Lender’s final title policy within prescribed time period. Further, by agreeing to the terms and conditions set forth in the second choice, the title agent and/or title insurance provider does not waive any due process rights, affirmative defenses or other substantive rights and remedies to an action commenced by the Lender. Therefore, this portion of the second choice is permissible.
However, the Lender may not limit the borrower to one opportunity to select the provider of the Lender’s policy of title insurance. Permitting the Lender to select the title agent if the title agent chosen by the borrower fails to provide the Lender with the acknowledgement within five (5) days constitutes an impermissible limitation on the borrower’s choice in violation of Banking Law §595-a(4) because it denies the borrower the freedom to choose any title insurance provider for the Lender’s policy of title. Accordingly, that condition must be removed from the Option. An acceptable alternative under such circumstances would be to allow the borrower a second opportunity to select the provider of the Lender’s policy of title insurance under the same provisions and, if the borrower is again unsuccessful, then allow the borrower to select one (1) of the five (5) companies listed in the Option’s first choice.
I trust this is responsive to your inquiry.
Very truly yours,
Alvin A. Narin
cc: Barbara A. Kluger, Esq.