Tuesday, March 13, 2007

Section 9 Violations and Foreclosures

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.