Bulletin: NY000245

On January 20, 2005, the Office of the General Counsel of the New York State Insurance Department issued its latest opinion on the interpretation of Insurance Law section 6409(d), New York 's “anti kickback” statute. This section prohibits a title company from splitting any portion of its fees or charges with an applicant for title insurance in exchange for, or as an inducement to, the placement of an application. Additionally, the statute prohibits payment of any consideration or valuable thing in exchange for business.

The situation addressed by the Department in this instance is relatively familiar. It is not uncommon for certain contracts of sale for real estate, typically newly constructed residential units, to impose a fee on the purchaser when the purchaser obtains title insurance from a company

other than the one designated by the seller.[1] It is this situation on which the Department was asked to opine.

It is well established that the Real Estate Settlement Procedures Act (RESPA) prohibits a seller from requiring a purchaser to use a particular title insurer where the purchase is financed by a “federally related mortgage” as that term is defined by the statute. Further, in an opinion dated October 24, 2004, the Department stated that a seller, who is affiliated with a title insurer, may not reduce closing costs for purchasers who utilize the services of such insurer. In this instance however, there is no element of affiliation between seller and title insurer required to create the violation.

Ironically, while the statute was presumably intended to punish the attorney, mortgage banker/broker or real estate broker, among others, who would accept cash or other consideration in exchange for referrals, in this case, it is the prospective purchaser who may get caught in the crosshairs. The second sentence of section 6409(d) makes the recipient of the consideration liable for a penalty in the amount of the greater of $1000 or five times the amount of the kickback. As a result, a purchaser looking to avoid the imposition of the additional fee by using the suggested title insurer potentially ends up making himself subject to a penalty, which, in most cases, would be far in excess of the threatened additional fee.

Be that as it may, clearly it is the opinion of the Department that under the facts recited in the attached letter, that the seller in this instance acts “for or on behalf of” the title insurance company and as result, a violation of section 6409(d) has taken place. Therefore, all issuing offices are required to take appropriate action to avoid this scenario and further, when made aware of circumstances where it exists, to take all necessary steps to ensure that they no longer knowingly participate in such arrangements.