OGC Op. No. 04-10-29
The Office of General Counsel issued the following opinion on October 24, 2004, representing the position of the New York State Insurance Department.
Re: Reduction in Settlement Costs to Customer/Purchaser that Uses Sellers Affiliated Title Agent/Insurer to Obtain Title Insurance
May a seller of real estate, who is affiliated with a title agent or title insurer, reduce settlement costs for customers/purchasers who utilize such title agent or title insurer to obtain title insurance?
Pursuant to N.Y. Ins. Law § 6409(d) (McKinney 2000), such reduction in costs to a customer/purchaser who utilizes a title agent or title insurer that is owned by, or affiliated with a seller constitutes the giving, directly or indirectly, of consideration or valuable thing as an inducement for, or as compensation for such title insurance business.
The inquirer has encountered a practice that he believes is violative of the Insurance Law. The practice involves ABC Inc., dba EFG Housing, a seller of real estate. EFG Housing has a provision in its Purchase Agreement that allows for a financial incentive to customers/purchasers who utilize ABC Settlement Services to, among other things, obtain title insurance. While it is unclear from the submission, whether ABC Settlement Services is a title agent or title abstract company, what is clear, however, is that it obtains title insurance for customers of EFG Housing. Provision 10(b) of the aforementioned Purchase Agreement states, in pertinent part, as follows:
(b) Should purchaser select ABC Mortgage Finance, Inc. for mortgage financing, ABC Settlement Services, Inc. for the issuance of title insurance Seller [EFG Housing] shall pay the Closing Costs or other incentive listed below, at Settlement.
(iii) $ 10,800 to be applied towards or [sic] included morning room .
(c) In the event the Purchaser elects to use a mortgage lender other than ABC Mortgage Finance, Inc., and/or a settlement agent other than ABC Settlement Services, Inc., Sellers cash incentives and/or closing cost contributions listed in paragraph 10(b) above shall be reduced by $8,800 and will not include a morning room. The Purchase Price as defined in Paragraph 2 shall be increased from $235,565 to $244,365 .
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 ABC Inc., dba EFG Housing, a seller of real estate, may offer a monetary inducement to customers/purchasers who utilize ABC Settlement services to obtain, among other things, title insurance. Based on the information submitted to the Department and, specifically, a letter from ABCs General Counsel,1 EFG Housing is an affiliate2 of ABC Settlement Services, the company that is responsible for providing or obtaining title insurance for EFG Housings customers, as applicants for insurance. Section 6409(d) prohibits a title insurance corporation or any other person acting for or on behalf of it from directly or indirectly offering any applicant for insurance any rebate of any portion of the fee or charge or give any consideration or valuable thing as an inducement for, or as compensation for any title insurance business.
It is the position of the Department that a person or corporation that is affiliated with a title agent or title abstract company acts for or on behalf of the title insurance corporation that its title agent or title abstract company represents.3 Therefore, such person or corporation is prohibited from providing to an applicant for insurance any consideration or valuable thing as an inducement to, or compensation for any title insurance business. Consequently, by offering a financial incentive (reduction in settlement cost) to its customers, as applicants for insurance, who obtain title insurance from ABC Settlement Services, EFG Housing is giving a consideration or valuable thing as an inducement for, or as compensation for the applicants title insurance business, in violation of Section 6409(d).
Please note that the Office of General Counsel has contacted ABCs Vice President and General Counsel directly, regarding EFG Housings practice. The General Counsel has since informed the Department that EFG Housing will discontinue such practice effective immediately. In addition, this matter will be referred to our Consumer Services Bureau for further investigation.
This analysis is limited to an interpretation of the Insurance Law and the specific facts outlined above.
For further information you may contact Associate Attorney D. Monica Marsh at the New York City Office.
1 See August 9, 2004 letter from ABCs General Counsel, which concedes that ABC Settlement Services is an affiliate of EFG Housing. The letter provides in pertinent part that: "Ms. _____, like other customers, is given certain financial incentives (not penalties) to choose to work with certain affiliated entities of EFG Housing." (emphasis added).
2Affiliated business arrangements are allowed under the federal Real Estate Settlement Procedures Act (RESPA). These constitute arrangements in which a person who is in a position to refer business incident to a real estate settlement service involving a federally related mortgage loan, has either an affiliate, direct or beneficial ownership interest of more than 1% in a provider of settlement services.
3See OGC Op. dated November 13, 2002, authored by this writer and entitled: "Mortgage Banks Proposal to Pay Commissions to its Employees for Making Referrals to a Title Abstract Company with which it has Entered into an Affiliated Business Arrangement.