Lawyers know to choose their words carefully. Why? Because one word can make all the difference, especially when it comes time for a borrower to select a title insurance provider.
Recently, we asked a number of commercial real estate professionals whether a lender has a right to require that a borrower use a particular title insurance company in a mortgage loan transaction. The resounding answer from those polled was, "of course."
Logically speaking, that makes sense. After all, lenders are taking a risk by extending credit, and thus, they should be able to approve the title insurer that will be insuring its collateral.
But not so fast. Approving is not the same as selecting.
Accordingly, if a lender requires or overly encourages a mortgage applicant to use a specific title insurance agent or agency, the lender is violating statutory prohibitions on "tying" under New York Banking and Insurance laws.
New York Banking Law Section 595-a(4) and New York Insurance Law Section 2502(a) explicitly preclude mortgage bankers, mortgage brokers and all other persons, firms or corporations engaged in the business of financing the purchase of real or personal property, lending money on the security thereof, or servicing a mortgage thereon, from requiring a borrower to purchase title insurance from a specific title company, agency or agent as a condition for the financing.
These provisions combine to restrict a lender from selectingthe title insurance company or agent. However, that's not to say that lenders can't require that insurance be obtained or that the insurance be in a form acceptable to the bank. The following two provisions provide a lender the right to approve the title insurance company or agent.
The first is New York Insurance Law §2502(a)(2), which provides, in pertinent part:
"…This prohibition shall not prevent a state chartered banking institution or federally chartered banking institution from informing a customer that insurance is required in order to obtain a loan or credit, that loan or credit approval is contingent upon the customer's procurement of acceptable insurance, or that insurance is available from such institution; provided, however, that the state chartered banking institution or the federally chartered banking institution shall also inform the customer in writing that his or her choice of insurance provider shall not affect the institution's credit decision or credit terms in any way. Such disclosure shall be given prior to or at the time that any such institution or person selling insurance on the premises thereof solicits the purchase of any insurance from a customer who has applied for a loan or extension of credit."
Further, New York Insurance Law §2502(b) provides:
"This section shall not prevent the exercise of any right to approve or disapprove of the insurance company selected to underwrite the insurance, except that in exercising such right, whether pursuant to this section or any other law, such person, firm or corporation and its trustees, directors, officers, agents and employees shall not: (1) discriminate against an insurance company which issues a policy of insurance that is non-assessable as to any designated mortgagee or any secured creditor designated as a loss payee because of the insurer's type of organization, or (2) refuse to accept an insurance policy because it was not negotiated through a particular insurance company, agent or broker."
Thus, those two provisions combine to allow a lender to approve the title insurance company or agent.
What does this mean for lenders?
Lenders should reexamine their standard form of term sheets and commitment letters to ensure compliance with the relevant New York Banking and Insurance Laws mentioned above. Moreover, lenders would benefit from having a preapproved list of acceptable title insurers to share with potential borrowers to avoid any claims of improper "tying."