Due to the increased number of foreclosure, there are a lot more banks selling foreclosed property. Many of these entities require their own addendum to the purchase agreement, sometimes ten to twenty pages long. One provision almost all include is something along the lines of, "Seller shall select the closing agent," sometimes even, "Buyer shall pay for all title insurance from the title company selected by Seller." Apparently, these banks, and the attorneys who prepare these addenda are not familiar with RESPA Section 9 (12 U.S.C. § 2608). It states:
(a) No seller of property that will be purchased with the assistance of a federally related mortgage loan shall require directly or indirectly, as a condition to selling the property, that title insurance covering the property be purchased by the buyer from any particular title company.
(b) Any seller who violates the provisions of subsection (a) of this section shall be liable to the buyer in an amount equal to three times all charges made for such title insurance. 12 U.S.C. § 2608.
Even where the seller specifies the closing agent, leaving the selection of title insurer ostensibly up to the buyer, there is a Section 9 violation. The key word in the statute is "indirectly." Here’s the train of thought:
1. The purchase agreement specifies that the seller shall designate the providers of title and escrow/closing services. (This may be interpreted as a direct requirement that the buyers utilize the title company selected by seller.)
2. The buyers’ lender will require a mortgagee’s policy of title insurance.
3. This lender will also require an insured closing protection letter (CPL).
4. In order for the CPL to be effective, the same company must issue both the CPL and the mortgagee’s title policy.
5. Since the seller is specifying the closing agent, the seller is requiring, at least indirectly, that the buyers purchase the mortgagee’s policy from a particular title insurance company.
Therefore, this requirement violates Section 9 of RESPA. Additionally, these title companies are often from out of town, and the fees are, to put it politely, exorbitant. Often, they will utilize the out of town title company, which then will hire a local title company to act on its behalf. This, of course, smacks of illegal kickbacks. But that’s a different article.
Some bank’s attorneys then try to make the argument that if the purchase agreement specifies that the buyer is getting a conventional loan, not a federally related mortgage loan (FRML), then Section 9 does not apply. While I would not be surprised for someone who is not an attorney to make such a mistake, it is a bit disappointing when someone "in the business" is not aware of the definition of FRML, and does not take the simple effort to learn the definition. Specifically, FRML is defined as:
[A]ny loan (other than temporary financing such as a construction loan) which—
(A) is secured by a first or subordinate lien on residential real property (including individual units of condominiums and cooperatives) designed principally for the occupancy of from one to four families, including any such secured loan, the proceeds of which are used to prepay or pay off an existing loan secured by the same property; and
(B) (i) is made in whole or in part by any lender the deposits or accounts of which are insured by any agency of the Federal Government, or is made in whole or in part by any lender which is regulated by any agency of the Federal Government, or
(ii) is made in whole or in part, or insured, guaranteed, supplemented, or assisted in any way, by the Secretary or any other officer or agency of the Federal Government or under or in connection with a housing or urban development program administered by the Secretary or a housing or related program administered by any other such officer or agency; or
(iii) is intended to be sold by the originating lender to the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, or a financial institution from which it is to be purchased by the Federal Home Loan Mortgage Corporation; or
(iv) is made in whole or in part by any "creditor", as defined in section 1602 (f) of title 15, who makes or invests in residential real estate loans aggregating more than $1,000,000 per year, except that for the purpose of this chapter, the term "creditor" does not include any agency or instrumentality of any State. 12 U.S.C. § 2602.
By golly, that’s fairly well every mortgage loan given in this country today. If the loan is to be secured by residential property, the accounts of the lender are insured by a Federal agency (FDIC), and the lender sells its loans to FNMA, then it is a FRML. Therefore, even though a loan is a conventional loan and not an FHA or VA loan, it falls within the RESPA definition of FRML and is both a conventional loan and a FRML. In addition, even assuming paragraphs (i), (ii), and (iii) do not apply, there are very few lenders of any substance which do not fall under the definition contained in paragraph (iv). Four quarter million dollar loans and RESPA applies. And before you ask, creditor under section 1602 (f) of title 15 is defined as:
(f) The term "creditor" refers only to a person who both
(1) regularly extends, whether in connection with loans, sales of property or services, or otherwise, consumer credit which is payable by agreement in more than four installments or for which the payment of a finance charge is or may be required, and
(2) is the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement. 15 U.S.C. § 1602.
So, the moral of the story: If you are a seller and you require the buyer to use your favorite title company or closing agent, you are probably violating Section 9 of RESPA.
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21 comments:
Is there something that is missing from this post? What about in situations in many areas (ex: Southern California) where the buyer is not paying for the owner's policy of title insurance?
Wouldn't the seller then have the ability to negotiate whatever title company that they desire?
If the buyer is not paying for the owner's policy then the seller may choose.
To Anonymous:
The seller may choose the title company for the owner's policy, but what I am talking about here is when a lender's policy is also required. The policies do not have to be purchased from the same company. Just because the seller selected Title Company A for the owner's policy does not mean the buyer has to purchase the lender's policy from that same company. Granted, there is usually a fairly steep discount when they are both policies are purchased from the same company. But sometimes, all the jick-jack fees the seller's selected (and usually in-house) closing agent/title company charges ends up being more than the discount the buyer would receive by using the seller's title company for his lender's policy.
My question is REO and Title Company related. With the boom or REO I am finding that the banks are requiring the property go to a title company. The title companies are partnering with banks and forcing agents hands on where the title policy is bought. Seems that banks are getting reduced prices on escrow and title. The buyer is getting stuck with higher title insurance prices. How can this be happening everywhere and no one catching it ?
Househunter:
I would have to say they are getting away with it because either they don't hire an attorney at all, or they don't hire an attorney that has the intestinal fortitude to stand up to these bullies. Section 9 specifically prohibits the seller from requiring the buyer to purchase title insurance from any particular agent or company.
I'm having the same problem anonymous is having. I understand your reply to anonymous. Where I am it is negotiable as to who pays for the title insurance but the problem we are having is that when we have negotiated for the seller's to pay for title insurance then their agent is saying that it is the seller's choice because we have negotiated for the seller to pay for all title insurance. Because the seller is paying does this give them the right to choose the title company under RESPA?
Kim:
RESPA only prohibits the seller from requiring the buyer to purchase title insurance from any particular company. Unless you specify in the contract, I would say the seller can purchase his or her owner's policy anywere they want. But this does not obligate the buyer to purchase their lender's policy (if required) from that same agent.
I understand that the seller can purchase their policy from where ever and buyer can purchase their's where ever. But in the case that it is lined out in the contract that seller is paying for ALL title policies can the seller then dictate the company to use becuase they are paying for all title policies?
Kim:
Nothing in Section 9 would prohibit this. I would say if the buyer wants the seller to pay for all of the title insurance AND specify which title company is used, the buyer would simply need to specify this in the purchase agreement.
I'm a Realtor and just closed a transaction in MN with this situation. It was a Bank Owned property being sold by an Asset Mgr. that tried to force my buyer to use their Title. Buyer refused and wanted to use their own title and pay their own fees. Seller refused and said buyer could only use their own Title if they paid all of the seller's fees (an additional $1800). We knew it was a RESPSA violation and refused to close on those terms. Buyer even had language in the contract they added to allow for them to choose their own title and seller signed it. However, seller's out of state Title co would not recognize it. Buyer decided to wait them out. After transaction didn't close on time (by one day and all parties realized they were not getting paid), the seller's Title was finally directed by the Asset Mgr. to remove their "additional fees" from the HUD and sign it so we could close. Buyer's knew they had a valid contract. Prior to closing the Seller's broker said "Asset Mgr. has deep pockets and lots of attorneys, so they will fight you". They knew it was a RESPSA violation, but they figured the buyer's will just cave. Don't let them get away with this. Protect you clients!
How is buyer hurt? Costs are less if ALTA and Owners go through the same company.
To September 09, 2008 Anonymous poster: I assume you mean the lender's and owner's policies. To be succinct regarding your assertion that "costs are less"--the hell they are. Most of these out of town title companies charge absolutely outrageous fees--closing fees double, triple, or more of what most local title companies charge, "processing" fees, exhorbitant later date fees (which most local companies include in their title insurance fees), $75 wire fees, $100 overnight fees. Do you want to know why? Because they can, and they know 99.9% of buyers will not say a word. And dealing with an unknown title agency is, well, scary these days. Even if the costs were cheaper, it is the BUYER'S choice BY LAW. And what good does it do the buyers if they save a couple of bucks, but the company, with which thye have had no other contact, and do not even know where they are located, goes out of business before they get their owner's policy. Not to mention the excitement which would ensue if they went out of business before the seller received their proceeds.
I have a question- I work for a NY bank with a major international prescence- I am a loan officer in the Mortgage Dept-Recently we "partnered" with a settlement , appraisal, title company whereby all refinance transactions must go through this company, despite their terrible service and botched closings for our clients-Furthermore, management is demanding 100% cooperation and no exceptions for using this company for all refinances-for a 2 month period , they were actually offering loan officers a 5 bps perk on each loan put through this company but then suddenly piut an end to the promotion-when all the loan officers revolted against this mandatory rule, the bank told us that the client could "opt" out by signing a disclosure stating they would choose their own title company-however, we were all told in multiple emails-no exceptions. What part of this is illegal?
To Anonymous in NY: I am not familiar with NY law. In Illinois, our consumer fraud act prohibits lenders from requiring that borrowers use a particular title company. The decision belongs entirely to the borrower. I cannot believe they were paying loan officers a referral fee. That is a blatant RESPA Section 8 violation.
It is illegal for any seller, REO company or otherwise, to mandate that the buyer has to use its preferred title agency to obtain a lender's policy. This is illegal both under state and federal laws. There are ways to stop this practice, but HUD and the National Association of Insurance Commissioners have been asleep at the wheel. The following is a roadmap for you and your state regulators to stop this practice.
Section 9 of RESPA
Any direct or indirect method of limiting the buyer’s selection of a title agency or title company violates Section 9 of RESPA. The Real Estate Settlement Procedures Act applies to all residential transactions involving a consumer purpose mortgage loan. Section 9 of RESPA (12 U.S.C. §2608) provides:
"(a) No seller of property that will be purchased with the assistance of a federally related mortgage loan shall require directly or indirectly, as a condition to selling the property, that title insurance covering the property be purchased by the buyer from any particular title company.
(b) Any seller who violates the provisions of subsection (a) of this section shall be liable to the buyer in an amount equal to three times all charges made for such title insurance."
HUD wrote several informal opinions to explain that all direct and indirect methods of requiring the buyer to use the seller’s selected title agent are illegal. For example, a seller who give the buyer a choice of using one of three title agencies, and who charged a higher fee if another agency was used, violated Section 9 of RESPA (opinion by Grant Mitchell, 10/1/1987). A seller who designated a closing attorney who required the use of a particular title company violated Section 9 of RESPA (opinion by Grant Mitchell, 7/18/1989). A clause in a purchase agreement that has the effect of forcing the buyer to obtain and pay for a lender’s title policy from a specific title company or title agency is illegal. The seller and the seller’s real estate broker are liable to the buyer for three times the cost of the title insurance policy each time that a seller or the seller’s real estate broker includes such a clause in the purchase agreement.
In a recent case, Hopkins v. Horizon Management Services, 515 F. Supp. 2d 649 (DSC 2007), an addendum to the purchase agreement stated:
"3. Title/Closing Agent. Seller shall select the title and closing agent. The Seller shall pay the title examination fee and the premium for the owner’s title insurance policy. Buyer shall pay their customary closing fee to the closing/title agent. If Buyer obtains a mortgage loan in connection with this purchase, the Buyer will pay any premium of a mortgagee title policy. The Buyer is entitled to legal representation at the closing and may elect to have such representation at the Buyer’s expense. All closing transactions will be held at the Title/Closing Agent selected by the Seller. It is Sellers intent to deliver owner’s title insurance policy in lieu of an abstract in the customary abstract states. The Buyer hereby accepts title insurance in lieu of an abstract if applicable. In the event there is a requirement for the abstract to be updated, the associated expense will be a Buyer expense on the HUD 1 Settlement Statement."
The District Court held that this clause only mandated that the Seller select the title agency and title company to provide the owner’s title policy, and the closing agent to close the transaction. Since the seller paid for the owner’s policy, and RESPA does not restrict the seller from choosing the closing agent, there was no RESPA violation. The purchase agreement did not state that the seller would choose the title agency to provide the lender’s policy, and the buyer received a state disclosure that the buyer could purchase the lender’s title policy from an agency of her choice. The buyer never made a choice, and did not object when the seller’s closing agent selected the title insurer. The Court of Appeals affirmed the District Court decision because Hopkins never provided any evidence that she requested any title agency or company to provide title insurance. Hence, there was no evidence of a RESPA violation.
It is incumbent on buyers to stand up for their right to choose a title agency and title company if the buyer will pay for the policy. It is your job, as a title agent, to tell consumers that they have a choice, and that exercising this choice might save them a lot of money. In the Hopkins case, the seller only paid $75 for the owners’ title policy, and the buyers paid $270 for the lender’s title policy plus a $300 closing fee. If the buyers’ attorney had been a better negotiator, or if the buyers shopped around for a title agency, the buyers may have saved some money.
Section 8 of RESPA
Section 9 of RESPA is not the only landmine facing the seller’s title agent. If the seller’s selected title agency is providing any uncompensated benefits to the seller, the seller may also be liable to the buyer for three times the sum of the title insurance premium, the closing fee, and all miscellaneous fees that the title agency may charge to the buyer. This liability arises when an agreement or understanding between the seller and the title agency (or between the seller’s real estate broker and the title agency) for referrals is inferred through a pattern and practice of referrals to this title agency, and some benefit is exchanged for these referrals. Section 8(a) of RESPA, (12 U.S.C. §2607(a)) provides:
"No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person."
Any referral made by the seller’s title agency to the seller or to the seller’s agent, any reduction in fees given to the seller by the title agency, or any beneficial service provided to the seller by the title agency than is not fully compensated (e.g. when title commitments or searches are provided without payment) is a “thing of value” that is presumed to be an illegal kickback for the seller’s referral of business to its title agency. The payment and receipt of any thing of value in return for the referral of title agency business is punishable by civil fines and incarceration for up to a year in prison.
Furthermore, if the title agency and the seller are affiliated, the requirement that the buyer use the services of the seller’s affiliated title agency taints the dividends paid to the seller by the title agency. Section 15 of Regulation X permits an owner of a settlement service business to make referrals to an affiliated business and earn dividends based on the percentage of ownership of the affiliate, provided that the persons referred to the affiliate receive an Affiliated Business Arrangement Disclosure, and (with certain exceptions) the persons referred to the affiliated business are not required to use the services of the affiliate. If the seller does not provide this disclosure or the borrower is required to the use an affiliated title agency, then all dividends received by the seller are illegal kickbacks for the referral of business.
Aiding and Abetting a Crime
RESPA provides that a crime is committed when something of value is exchanged for a referral. Illegal kickbacks usually involve only two parties (the seller and its title agency). However, the seller’s real estate broker also plays a role that is instrumental in the transaction by providing the purchase agreement or addendum that permits the seller to dictate that the buyer will use the seller’s selected title agency. Aiding and abetting a crime is illegal under Federal law. 18 USC 2 states:
"(a) Whoever commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.
(b) Whoever willfully causes an act to be done which if directly performed by him or another would be an offense against the United States, is punishable as a principal."
Hence, anyone who furthers a violation of Section 8 may be subject to criminal sanctions. Since the typical transaction requires the cooperation of a number of parties (real estate brokers, builders, notaries, title agents, etc.) there are a significant number or targets for law enforcement authorities to pursue.
Federal law prohibiting aiding and abetting a criminal enterprise is used by federal prosecutors to stop illegal business activities by attacking vendors that are essential for these enterprises to operate. A good example is the action taken last year by federal prosecutors against online services that sold advertising space to offshore gambling enterprises. Microsoft, Google and Yahoo settled a claim that they aided and abetted illegal online gambling by posting advertising for the online casinos. The settlement will cost these online publishing services a total of $31.5 million. Federal law enforcement authorities could use this law to attack real estate brokers, builders, and others that did not pay or receive a kickback, in order to stop transactions that involve illegal kickbacks paid to other parties.
Civil Liability to Competitors for RESPA Violations
RESPA does not directly protect your title agency when illegal kickbacks interfere with your ability to compete on a level playing field. However, state causes of action exist to recover losses caused by RESPA violations. In Stewart Title Guaranty Company v. American Abstract & Title Company, 363 Ark. 530, 215 S.W.3d 596 (2005), the Arkansas Supreme Court affirmed a jury verdict of $500,000 in compensatory damages and $500,000 in punitive damages when American Abstract & Title Company’s illegal kickbacks induced over a million dollars in business to move from Stewart Title Guaranty Company to American Abstract. The Arkansas Supreme Court held that a contractual relationship was not necessary to establish illegal interference with business relationships that would support an award of compensatory and punitive damages.
In Stewart Title Guaranty Company v. American Abstract & Title Company, the illegal kickbacks were accomplished through sham affiliated business arrangements. However, such an arrangement is not necessary to prove illegal interference through RESPA violations. The basic elements which establish prima facie tortuous interference with a business relationship are the existence of a valid business relation (not necessarily evidenced by an enforceable contract) or expectancy; knowledge of the relationship or expectancy on the part of the interferer; an intentional interference using illegal, unethical or fraudulent conduct to induce or cause a breach or termination of the relationship or expectancy; and resultant damage to the party whose relationship or expectancy has been disrupted. Your title agency had a valid business relationship with various property buyers. If sellers required your customers to abandon their relationship with your title agency in order to purchase properties, tehy interfered wtih your business relationship. The sellers knew or had reason to believe that this practice would result in the loss of business by competing title agencies. Your title agency lost money when it purchased title information from title plants, or hired title examiners to research real property records, before producing the cancelled title commitments. Testimony of your customers and copies of their purchase agreements will prove the tortuous interference.
Potential Liability under the Insurance Code
RESPA does not apply to all transactions. For example, cash sales, sales to legal entities, and sales to investors buying rental homes are not protected by RESPA. However, your state’s insurance code probably prohibits conditioning the sale of property on the purchase of insurance from a particular title agency or title company. It is illegal to refuse to sell property as a means to force the buyer to purchase insurance through a particular agent. MCL 500.1207(5) states:
"A person may not sell or attempt to sell insurance by means of intimidation or threats, whether express or implied. Except as provided in section 2077(4) a person may not induce the purchase of insurance through a particular agent or from a particular insurer by means of a promise to sell goods, to lend money, to provide services, or by a threat to refuse to sell goods, to refuse to lend money, or to refuse to provide services."
State law prohibitions against tying the sale of property to the purchase of insurance from a particular agent or company are fairly common. Similar restrictions are found, for example, in Ala. Code 27-12-15; Miss. Code 83-5-35(h); Wisc. Stat. Sections 134.11 and 628.34(5); and Texas Insurance Code 556.051 et. seq. If the attorneys for Hopkins (see the decision cited above) reviewed South Carolina’s Insurance Code, they would have found SC Code Section 38-57-110(1). Coercion of business by sellers or lenders prohibited:
“(1) No lender, vendor, or person engaged in selling real or personal property or the financing thereof or the lending of money on the security thereof, and no trustee, agent, officer, or other employee of any such person, may require, as a condition precedent, concurrent, or subsequent to the sale or financing the purchase of such property or to lending money upon the security of a mortgage thereon or as a condition precedent, concurrent, or subsequent for the renewal or extension of the loan or mortgage, that the purchaser or borrower negotiate a policy of insurance or renewal thereof covering the property through a particular insurer or agent.”
Sellers and real estate agents who condition the sale of property on the purchase of title insurance from a particular title agent or company, whether in a commercial transaction or in a consumer transaction, subject themselves to substantial fines.
Where to Go From Here
There are several avenues available to stop sellers from freezing your title agency out of the REO sale market. First, try to negotiate a resolution of the issues raised above by reaching an agreement with the seller that requires the seller to allow property buyers to choose a title agency to provide title insurance and escrow (closing) services. Direct negotiations are the least costly remedy for both parties and, potentially, the quickest method of resolving these issues.
Second, you may file a complaint with the state Insurance Commissioner and with the US Department of Housing and Urban Development (HUD) (a) asking the Insurance Commissioner and HUD to prohibit the practices complained of, (b) seeking restitution for buyers as authorized under RESPA, and (c) asking the Insurance Commissioner to impose fines or terminate the offending title agency’s license. This remedy will require substantial time, and it will not result in the recover any of your losses due to cancelled title insurance orders.
Third, you may consult an attorney about initiating a lawsuit for interference with your business relationships due to the seller’s anti-competitive practices. While this remedy would, potentially, provide the greatest recovery for your losses, this remedy would also be the most costly for you to pursue. This lawsuit would also be very costly to defend.
Whatever you do, remember that your objective should be to level the playing field for everyone. As Mr. Spock said in Star Trek: The Wrath of Khan, “The needs of the many outweigh the needs of the few.”
Wow! Excellent information. Thank you Anonymous!
and refi's where there is no seller, only the lender?
To February 18 Anonymous: If you are in Illinois, the Illinois Consumer Fraud Act prohibits your lender from requiring you to use any particular title company. If you are in Illinois, and your lender needs a quick course in the Consumer Fraud Act, let me know.
I'm confused. This is all good information but how is it that the Seller can choose who will write the owners policy and not the lender policy. The RESPA rule says Title Insurance and does not make a difference as to Owners or Lenders policies. In Oklahoma the Real Estate Commission has come up with a state wide contract to use. That contract is written so that the Buyer pays the attorneys opinion and the Owners and Lenders Policy. When the property is an REO property, the same contract is used only it comes back from the Seller with this Addendum to the contract. This addendum has all the wording stated above about closing with the Sellers title company. However, it does not say anything about the title insurance. When confronted they dig in and say that the Buyer does not have the choice the contract says it will close with them and they signed it. So my questions is why can the Seller decide who writes the Owners policy and not the Lenders Policy. Second question: It is my understanding that any settlement statement used in a closing transaction that is structured like the HUD-1 would then fall under HUD guidelines -- even in a cash transaction. Once you fall under Hud guidelines you fall under RESPA. If this is true then even on a cash transation the above Section 9 Violations would still be in force. Is this false information. Third questions: If these REO contracted title companies are in violation of Section 9 and many of the REO sales are Fannie Mae and Freddie Mac repos, why are they allowing these violations and risking a class action lawsuit against them? I'm looking for any help here and thank anyone who can help.
- Please adivse- when the buyer offers to pay half of owners title policy in the contract- and the seller counters with ok we'll split title policy fee 50/50 but we want to chosse the title company- is this a violation since the seller is paying part of it?
I am a broker in Michigan who always orders buyer's side title from a different title company. The seller's side always barks. Too bad RESPA violators. If I can save my client $300 or more, I will. I love this post and all the comments. I currently have a short sale and the listing agent is demanding my client use his title company. He went as far as to write it in an Addendum. His title companies closing fee is $300more than the one we want to use. We will not be bullied. Thanks for the great article. -Rosie
Realtor for Michigan it's working for buyer Fannie Mae owned home addendum from Fannie Mae which supersedes purchase agreement stating if purchaser will agree with the title policy that the sellers title company has then they will pay both the owners and the mortgage if the buyer wants to choose then he will pay both policies got ready for closing today everyone knew that our title company was going to be issuing owners policy and mortgage policy the sellers title company and attorneys stated that per fannie Mae guidelines the owners policy must come from sellers title company this was 20 minutes prior to closing speaking to the listing broker stating my concerns that everybody was in agreement per that addendum of Fannie Mae he stated no by law the seller controls closing the seller pics owners policy I stated per addendum buyer pays buyer chooses so since our contract would've been Null and void if we didn't close today we had to go along with this. Afterreading your article here I am convinced time I was right do I have any recourse after the closing course part of that addendum also states that you agreed to everything when you sign the closing statement i'm thinking I may not have anything against fanny but I'm sure thinking I might have something against the title company's thank you for your help
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