NYSBL 234(1) and 235(d)
September 16, 2004
RE: Legal fees and title insurance agency company
Dear [ ]:
Your August 9, 2004 letter to the New York State Banking Department (the "Department"), on behalf of [ ] (the "Bank"), has been forwarded to me for response. In your letter you ask: (i) whether it is permissible for the Bank to charge mortgage customers for legal fees at closing, even though the attorney performing the services, is an employee of the Bank; and (ii) whether the Bank, by creating a separate entity, could be an agent for one or more real estate title companies.
Although there are no provisions in either the Banking Law or the General Regulations of the Banking Board that pertain specifically to whether a bank may charge a legal fee, the Department's position is that it would be permissible for the Bank to pass on to mortgage customers expenses incurred, in having an attorney/employee review and draft mortgage documents. Note that this method of passing on charges incurred by employing an attorney is no different from passing on the charges of any other employee of the Bank. We also advise that the Bank should ensure that it complies with §495 of the Judiciary Law relating to charging for legal services.
Regarding your second question concerning the Bank establishing a title insurance agency, generally this activity is permissible for savings banks. Under the Department's interpretations of savings banks' "incidental" powers, title insurance agency activities may be conducted directly by a savings bank, and therefore, could also be conducted through an "operating subsidiary" (see Banking Law Section 234(1)). An "operating subsidiary," for the purpose of Banking Laws, is considered a separate incorporated entity of a bank that can only be engaged in activities permissible for the bank itself. Further, Banking Law Section 235-d and Part 85 of the Banking Board's General Regulations authorize the investment by savings banks in "service corporations," which include insurance agencies. Therefore, the Bank can operate a title insurance agency as a subsidiary under Banking Law Section 234(1), or under Banking Law Section 235-d and Part 85 of the Banking Board's General Regulations. However, please note that the Bank should provide information to the Department, pursuant to Part 85, about the proposed investment in the title insurance agency.
We note that the Banking Law provisions you cited in your letter -- Sections 96 and 595(a)(4) -- are inapplicable to your question. Section 96 deals with the powers of commercial banks. Section 595 deals with licensed mortgage brokers.
Further, note that the Banking Law contains provisions designed to prevent a bank from abusing its power over borrowers by requiring them to acquire insurance from a particular source. In accordance with §247(2)(b) of the Banking Law no officer or trustee of a savings bank shall:
"[d]irect or require a borrower on a mortgage to negotiate any policy of insurance on the mortgaged property through any particular insurance broker or brokers, or attempt to divert to any particular insurance broker or brokers the business of borrowers from the savings bank, or refuse to accept any such insurance policy because it was not negotiated through a particular insurance broker or brokers."
Because of these statutory limitations, care must be exercised to forestall the potential for abuse.
I trust the foregoing is responsive to your questions.
Very truly yours,
Harry C. Goberdhan