Seller Mandated Use of Title Company

Many have expressed concern regarding the steering of title companies by sellers of residential property. This includes many REO companies. See below the actual rule from RESPA Section 9.

RESPA: SECTION 9 - WHY WAS I REQUIRED TO BUY TITLE INSURANCE FROM A SPECIFIC TITLE COMPANY BY SELLER?

The Real Estate Settlement Procedures Act's (RESPA) Section 9 (12 U.S.C. §2608) and Regulation X (§ 3500.16) prohibits, either directly or indirectly, a seller from requiring a purchaser to buy title insurance from a specific title company in any transaction as a condition of the sale.
Section 9 of RESPA (12 U.S.C. §2608) states that:
1. 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.
2. 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.

The only way a Seller can mandate that purchaser use a particular title company is if the seller paid 100% of all title insurance and related title costs. HUD's RESPA Division has stated on numerous occasions that unless the seller pays 100% of the title related costs then the seller has violated RESPA. REO companies need to pay particular attention to Section 9 because required use practices by REO companies are on the HUD's radar right now.

Lately, many builders and REO sellers (banks) have been steering and mandating the use of their preferred title companies in their addendums. Unless they pay for it, it is a clear violation of RESPA.

Additionally, there are several local real estate purchase agreements that are in use in parts of the United States where the language in the purchase contract states that Seller picks the title company but purchaser pays for title costs. It should be clearly noted that you can not contract out of a RESPA Section 9 violation. Just because the purchase agreement is signed by the borrower doesn't prohibit the borrower from coming back and suing the seller for required use if the borrower is stuck with any of the title related fees.

Another clever technique that is in use is where the seller (quite often found in builder addendums) says they will pay for the owner's title insurance policy but that purchaser has to pay for the lender's title insurance policy and all other costs. This does not pass the smell test nor does it pass HUD's smell test. The practice while novel in its approach is still considered a Section 9 violation.

Many borrowers still do not understand that they are allowed by law to use any title insurance company they want to and if the seller dictates that they must use the sellers preferred title company, it is in violation unless seller is going to pay all costs for title insurance.

Finally, with the rapid approach of the new good faith estimate that has tolerance limits, sellers and real estate agents should be aware that the buyer is going to see the difference in title and escrow charges that the loan officer originally quotes and any variance in actual costs of the agent or seller directed title and escrow company. When forced to pay more, is the buyer going to be happy with your choice? I would encourage all agents to consider learning about the new good faith and HUD-1 Settlement statement coming out January 1, 2010. Education on how it is going to affect your transaction could mean the difference between a happy buyer and a disgruntled one.

I would be happy to schedule a meeting with agents to go over the new rules. Just call my office at (253) 536-5626 or email me.