This month’s article is presented by:
Woody Falgout, Attorney at Law
1050 Canal Blvd, Thibodaux LA
It’s a familiar act of deception. Probably, all of us have had a residential loan closing effectively stolen from us by a title company owned by a bank, a tract builder or another institutional real estate player. Later, we learn from our clients, friends or family members that they “had to use that closing attorney.”
Of course, this act of institutional deception cuts right to the core of what we’re trying to accomplish as independent land title agents – giving the borrower/buyer independent representation.
So what do we do about it? One way of attempting to achieve justice is to make a complaint to HUD and/or CFPB. See below for the procedure. The grounds for the complaint depend on the facts. Here are two of the most common scenarios:
- A Title Company’s Affiliate Fails to Disclose the Affiliation.
An affiliate business arrangement (ABA) between a law firm/title company and a lender, realtor, seller or another institutional player is not per se a RESPA violation. But for the ABA to be valid under RESPA, the ABA must comply with 24 CFR 3500.15.
First and in essence, the affiliate making the referral to the lawyer/title company must disclose the relationship in writing. Further, the written disclosure has to be in strict compliance with 24 CFR 3500.15(a)1. Second, the affiliate making the referral cannot “require” its customer to “use” a particular attorney/title company. 24 CFR 3500.15(a)2. Third, the payment for the referral has to be a “return on an ownership interest or franchise relationship” with the affiliate, not a “kickback” or “referral fee” under a 24 CFR 3500.14. 24 CFR 3500.15(a)2.
- The Seller Requires the Purchaser to Use a Certain Title Insurance Company.
Even without an ABA, a seller – any seller – must comply with RESPA’s Section 9. Under Section 9, “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.” 12 USC 2608(a). “Any seller who violates the provisions of subsection (a) shall be liable to the buyer in an amount equal to three times all charges made for such title insurance.” 12 USC 2608(b)
Section 9 could also hurt a well-meaning closing attorney. Sometimes innocently, our client seller may insert a clause into a purchase agreement that says the closing must take place at our firm. While the clause may not mention the “title insurance” referred to in Section 9, it still implies that the title insurance must be purchased from the seller’s title company. A safer clause might be, “The parties agree that while Buyer acknowledges Buyer had the right to choose Buyer’s own closing attorney and title insurer, Buyer agrees that the closing will take place at XYZ, a Law Corporation.”
Please note that this clause does not apply to a case where the seller is purchasing the title insurance. But when is a seller actually paying for title insurance? It’s not always clear. This issue was recently raised by a LAILTA Board Member. The Board Member noted that a tract builder/seller that also owns a mortgage company and a title company inserted this clause into a purchase agreement, “Seller to pay up to $5,000 in Buyer’s closing costs & pre-paid items, provided closing takes place with (Seller’s) Title, LLC AND (Seller’s) Mortgage, LLC is used for financing.”
Arguably, this tract builder/seller’s clause is in violation of Section 9 because what is the $5,000 really paying for? It’s first and foremost an incentive to buy the house. Arguably, it’s also a $5,000 discount off the sales price and does not pay for any closing costs. If it’s paying for closing costs, which costs? Maybe it’s the homeowner’s insurance premium, origination fee, the appraisal and/or the escrowed real estate taxes. It is not clear that the $5,000 pays for the title insurance, and even if the $5,000 did expressly include “title insurance,” is that a true statement when the $5,000 discount is really an incentive to buy the house and use the title company and mortgage company to first, generate a sale, and second, maximize the common owner’s overall profit?
Making the Claim
Whatever the issue, one resolution is to make a RESPA or a CFPB claim. For CFPB claims – you can assist the actual consumer with making a complaint through the following online claim form, http://www.consumerfinance.gov/complaint/
To make a RESPA claim, one should consult http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/ramh/res/respamor and can write, email or call:
Director, Office of RESPA and Interstate Land Sales
U.S. Department of Housing and Urban Development
451 7th Street, SW
Washington, DC 20410
Phone: (202) 708-0502
If you read our mission at www.lailta.org, we should all consider taking action.