REAL ESTATE TOPICS:  ESCROW & TITLE COMPANY SELECTION

When making an offer to purchase residential real estate, the buyer must select an escrow company to handle all of the escrow services, including taking reins over the earnest money and collecting and recording most of the paperwork associated with the transaction.  Also, the buyer will select the title company to perform the title search and issue title insurance.  These could be one in the same company or two different companies.  These elections are made on line 91 of the Arizona Association of REALTORS^® Residential Resale Real Estate Purchase Contract.

Very often, a buyer will have no idea how to go about finding or selecting these services and will rely on their real estate agent for recommendations.  Generally speaking, all of these companies provide essentially the same services at very comparable rates.  There are differences in prices but they are not huge differences.  Many real estate agents will try a number of different companies through their careers but often tend to select companies that offer competent, timely service at competitive rates and probably the most significant criteria are good communications with the escrow officer throughout the escrow period and a conveniently located office.

There are occasions when selling real estate agents will advertise or “list” a property for sale in the Multiple Listing Service (MLS) with a remark similar to the following:

         “please use Molly Magillicutti for escrow”  or, “must use Empire Title company”

What is their motive in doing so?  Well, it would be appropriate for the buyers’ agent to call the sellers’ agent and find out.  There could be a number of reasons for their preference.  Maybe the real estate agent is just trying to refer more business to their favorite escrow officer because they are really good and reasonably priced.  This would be perfectly legitimate.  Possibly, the seller has directed their agent to insist on a particular escrow/title company because they are going to get a price break as a result of multiple transactions.  Perhaps the subject property has been foreclosed upon and is now bank owned and the bank has already placed the property in escrow and has already paid for the title search and insurance.

With the exception of the last example, the buyer still has every right to insist on selecting the escrow and title companies themselves.  And, if there is going to be a mortgage subject to federal regulations – which is most often the case, there are some legal ramifications that most of the public, and some real estate agents, are unaware of.  Perhaps the simplest way to illuminate this subject is to defer to an article written by K. Michelle Lind, General Counsel for the Arizona Association of REALTORS^®, published online at www.aaronline.com/documents/title_comp.aspx in April of 2003 and reviewed in March 2006.  It is reprinted here:

Real Estate Settlement Procedures Act

The Real Estate Settlement Procedures Act of 1974, 12 U.S.C. 2601 et seq. ("RESPA") was enacted to insure that consumers are provided with sufficient information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges. Section 9 of RESPA (12 USC § 2608) 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.

A federally related mortgage loan covers virtually all financing secured by a lien on residential property. A federally related mortgage loan includes home purchase loans, refinances, lender approved assumptions, property improvement loans, equity lines of credit, and reverse mortgages.

"Required use" as used in RESPA means:

a situation in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service.

However, the offering of a package (or combination of settlement services) or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use. Any package or discount must be optional to the purchaser. The discount must be a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the settlement process. (Section 3500.2)

RESPA FAQs

Despite the fact that RESPA was enacted almost 30 years ago, the debate about who selects the title company still raises questions today.

Is it a RESPA violation if the seller requires the buyer to use a specific title company when the seller is paying for the buyer's title insurance?

The Department of Housing and Urban Development ("HUD") has indicated that it "will not enforce Section 9 of RESPA against a seller who selects the title insurance company if the seller is paying for the owner's title insurance policy, and does not require the buyer to use the title insurance company for the simultaneously issued lender's policy."

Is it a RESPA violation if the seller requires the buyer to use a specific title company and pays for the buyer's title insurance with funds from the buyer's closing costs?

Yes. HUD has indicated that it would take action under Section 9, "in situations where a seller required a buyer to pay the seller an amount towards closing costs and the seller used a portion of the buyer's paid closing costs for the owner's title insurance without providing the buyer with a choice of that title company."

What is the safest course for a seller who wants to require the use of a certain title insurance policy?

Based on HUD's position, it appears that the safest course for a seller who insists on using a particular title company is to pay for both the buyer's title insurance policy and the lender's title insurance policy. Further, the seller should not require the buyer to pay any closing cost that could be attributable to the cost of the title policies.

What are the penalties for a violation of Section 9 of RESPA?

Pursuant to 12 USC § 2608(b), any seller who violates Section 9 is liable to the buyer in an amount equal to three times all charges made for such title insurance. Additionally, the seller may face sanctions from HUD (Section 3500.19(c)) and the Arizona Department of Real Estate (A.R.S. § 32-2153(B)(10)).

Where can I obtain more information on RESPA?

Visit the HUD website at: www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm

Other issues to consider

In addition to RESPA's restrictions on the practice of the seller requiring the use of a particular title insurance company, there are other legal and practical considerations.

What is the effect of a seller's counter offer changing the title company to be used in a transaction?

If the buyer submits an offer and the seller responds with a counter offer requiring the use of a different title insurance company, that counter offer has the same legal effect as rejecting the buyer's offer. Therefore, by submitting a counter offer requesting a different title insurance company, the seller is risking the transaction in its entirety.

What is the listing agent's duty to the seller when drafting such a counter offer?

The listing agent has a fiduciary duty to the seller. Therefore, the listing agent should explain to the seller the possible adverse consequences of submitting a counter-offer requiring the use of a specific title insurance company.

Is it a breach of fiduciary duty for a listing agent to advise a seller to demand a certain title insurance company when it is not in the seller's best interests?

Yes. The listing agent has a fiduciary duty to act in the best interests of the seller. Therefore, the listing agent should insure that any such counter offer is for the benefit of the seller, rather than solely for the agent's purposes.

So, there you have it.  If either the seller or the sellers’ agent insists on selecting these service providers, there are consequences.

DISCLAIMER

John P. Hale is owner and Designated Broker of Touchstone Residential Realty, Inc., 2485 West Tom Watson Drive, Tucson, Arizona 85745.  He has been a residential real estate agent in the greater Tucson Metropolitan area since 2000.  In addition to being licensed as a Broker rather than a salesperson, John holds the following designations awarded by the National Association of REALTORS^®:  ABR – Accredited Buyer Representative, ASR – Accredited Seller Representative, CRS – Certified Residential Specialist, and GRI – Graduate Realtor Institute.  And, John is among the very few that have been named, MRE – Master of Real Estate by the Arizona Association of Real Estate.

Please note that this article was written by him to reflect the author’s opinion of good practice at the time of its’ writing for the general benefit of those considering sale or purchase of residential real estate, it is not intended as definitive legal advice and you should not act upon it as such without seeking independent legal counsel.  Frequent changes in the law and standards of practice may cause this information to become outdated and no longer applicable or even incorrect.