BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Q: I am a buyer's agent on a REO sale and the counter-offer from the REO lender/seller requires that we use a specific title company and that my buyer must pay for title and escrow fees. I thought this was illegal. Can they do this?
A: Whether any seller can require a buyer to use a particular title company depends on a number of factors and is governed by the Real Estate Settlement Procedures Act, or RESPA, which applies to 1-4 unit residences being purchased with a federally-related loan. RESPA is enforced by the federal Department of Housing and Urban Development, or HUD.
1. RESPA BASICS: Section 9 of RESPA states:
(a) No seller of property being purchased with the assistance of a federally-related loan shall require directly or indirectly, as a condition of 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) shall be liable to the buyer in an amount equal to three times the charges made for such title insurance.
Some examples of a “required use” include not only a specific requirement in a purchase agreement, but also require a buyer to pay an additional sum unless the buyer uses a particular title insurance company. “Required use” can be direct or indirect.
2. EXCLUSIONS: There are several exclusions to the general rule that a seller may not require a buyer to use a particular title company that do not, in HUD's opinion, violate this RESPA rule:
A. Seller pays for the title insurance.
B. A seller has negotiated (1) a master title policy, or (2) a master rate reduction, for title insurance, and as a result the buyer incurs lower costs for the title insurance.
For example, many residential subdivision developers will negotiate a master title policy with a title company and pass along savings on title insurance to a buyer while requiring that the buyer use the title company with whom the developer has negotiated the master policy. This then is not a RESPA violation so long as the developer/seller does not require or receive any reimbursement for its costs for title insurance directly or indirectly from the buyer.
Likewise, if an REO lender/seller has negotiated a fee with a title company for handling a bulk of REO sales at a reduced fee, which savings are passed on to the buyer, this then would arguably not be a RESPA violation.
3. ESCROWS: Remember also that this RESPA prohibition refers only to title insurance, not to escrow costs. So, a seller may require a seller to use a particular escrow company without creating an escrow violation. Many agents want to open “pre-escrows” for a property, perhaps based on their training with marketing gurus. This can raise interesting results:
A. Southern
B. Northern California: In those areas of California where title and escrow are together in one company, if a seller in the purchase agreement requires that a buyer use a particular escrow company, and further requires the buyer to pay the title insurance, then there could be an alleged RESPA violation because the use of that particular escrow service “directly or indirectly” dictates which title policy will be obtained.
4. PRACTICE TIPS:
All Agents:
A. If the property is a 5+ residential property, commercial property or raw land, then there is no limitation on who chooses the title company.
B. If the transaction is all cash, or a loan from a private source, or from any non-institutional lender with no federal relationships, then there is no limitation on who chooses the title insurance company.
Listing Agents:
C. If you are representing a subdivision developer/seller or an REO lender/seller, and that seller is requiring the buyer to use a particular title company and pay for the title insurance, check to see if the fee that will be charged to the buyer provides a savings to the buyer. If not, advise your seller that they should discuss this issue with their attorney.
D. In other situations with individual sellers, be careful not to “require” that a buyer use a particular title company as you might expose the seller to the obligation to either pay for the title insurance, or be subject to a penalty of three times the cost of the title insurance.
E. In the situations involving individual sellers, if the seller or listing agent opens a “pre-escrow” on the property, be careful not to “directly or indirectly require” that the buyer use a particular title company unless the seller is paying the title insurance.
F. To avoid this problem, if a listing agent would like to use a particular title or escrow/title company, rather than requiring the buyer to use that title company, the marketing materials could state that seller or listing broker “requests” that a particular title company be used and, if the buyer objects, let the buyer choose the title company.
Buyers' Agents:
G. If you are representing a buyer on a subdivision sale or REO sale, and your buyer is required to pay the title insurance and to use a particular title insurance company, check to see if the fee being charged for the title insurance is at a lower cost than that usually charged for this type of transaction. If not, then bring this matter to the attention of your buyer and the listing agent. You may be able to negotiate the title insurance fee partially or entirely in favor of your buyer. If not successful, recommend that your buyer discuss the matter with their attorney.
H. In all other transactions if a seller (possibly at the insistence of their listing agent) is requiring in the purchase agreement that your buyer use a particular title company (or in Northern California, an escrow/title company) and pay for the title insurance, then this would be a RESPA violation, and you should likewise bring this to the attention of your buyer and the listing agent, and possibly negotiate a favorable resolution for your buyer. If not successful, recommend that your buyer discuss the matter with their attorney.
I. For REO sales see Weekly Practice Tip: “Buyers Choice Law for Title and Escrow.” That law prohibits REO sellers from requiring a buyer to use a particular title and/or escrow company.
This Weekly Practice Tip is attorney-client privileged and for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.