Phillip L. Schulman, a former assistant general counsel of the inspector general at the U.S. Department of Housing and Urban Development, is a partner with K&L Gates in Washington, D.C. He can be reached at firstname.lastname@example.org.
RESPA Rules on Agents
A home sale cannot be conditioned on the use of a specific title insurance company. Violators can face stiff penalties.
March 14, 2013
It’s not unusual for a listing agent to have a favorite closing agent and want the buyer to close the transaction using that agent, along with the agent’s title insurance and settlement services. What many practitioners don’t realize, however, is that Section 9 of the Real Estate Settlement Procedures Act prohibits sellers from conditioning the home sale on the use of a specific title insurance company, and in fact violators can be subject to penalties, with the most -typical being a fine of up to three times the amount of the title insurance fee.
Here are three questions that can help you determine if you’re at risk of violating RESPA when it comes to the use of a closing agent.
1. What does “requiring” the buyer to use a particular title insurance company mean?
Section 1024.2 of RESPA says a “required use” exists when a person must use a particular provider of settlement services to have access to a distinct service or property, and the person will pay for (or pay a charge attributable in whole or in part to) the -settlement service.
However, it’s not considered a “required use” if the seller offers to pay the buyer’s title charges. So, if the seller agrees to pay for both the owner’s and lender’s title insurance policies, RESPA doesn’t consider the seller to be requiring the use of a particular title company. But if the seller insists, as a condition of sale, that the buyer pay for both the owner’s and the lender’s title insurance policies from a title company of the seller’s choice, then the seller would be in -violation of Section 9.
2. What if the seller requires that the transaction be closed by the seller’s preferred closing agent but allows the buyer to choose the title insurance company?
Section 9 prohibits the seller from requiring that title insurance be purchased from a particular company, but it doesn’t prohibit the seller from requiring the use of a particular closing agent (unless that closing agent is owned, in part, by the seller). Thus, a seller can require, as part of the sales contract, that an unaffiliated closing agent or lawyer be used to close the transaction.
3. Can the seller require that the owner’s title insurance policy, which the seller will pay for, be obtained from a particular company as long as the buyer, who is paying for the lender’s title policy, chooses the title company for the lender’s policy?
The short answer is yes. Buyers sometimes have complained that since the sellers have already had their title company perform the necessary title search and compiled the necessary documentation to issue an owner’s policy, if they go to an independent title company to obtain the lender’s policy, they’ll pay substantially more for that policy than if they use the sellers’ preferred title company. Buyers claim this economic incentive amounts to a “required use.” While the federal agencies have been silent on this point, several federal courts have opined that despite the economic disadvantage to the buyer of going to a title company other than the seller’s preferred provider, the buyer is free to go elsewhere, and therefore the seller’s actions do not violate Section 9 of RESPA.
The bottom line is, if sellers pay for both the owner’s and the lender’s title insurance policies, they can require the use of a preferred title company. If sellers pay for the owner’s policy, they may insist on choosing a preferred title provider, but buyers must be free to select their own title company on the lender’s policy (even if the cost of that lender’s policy is higher than the fees charged by the seller’s title company for the same policy). As for the settlement agent, Section 9 doesn’t prohibit sellers from requiring the use of a particular agent as long as the agent isn’t owned, in part, by the sellers. Make sure the language in the purchase contract makes clear that buyers, if they’re paying for the title policy, are free to select their own title insurance company.