Illinois Receiver Arthur van der Vant says that RESPA was put in place to protect the buying public but has not been consistently enforced.
According to Arthur van der Vant, Section 9 of RESPA has been enforced selectively by HUD since 1974. This fact has led to various problems, which HUD attempted several years ago with the new alleged RESPA reform. This, according to Arthur van der Vant, even though most states adopted the Federal Law in respect to real estate settlement procedures and title insurance and made it a State Law. However, van der Vant says that some states at the same time neglected to enforce those laws. If Section 9 (a buyer’s right to choose a title insurance provider) was strictly enforced, there would be no need for any RESPA reform, asserts Arthur van der Vant.
The buyer’s right to choose a title insurance provider has been upheld by various Courts of the United States, reports Arthur van der Vant. He notes that media and governmental agencies are attempting to blame the lending industry and the subprime lending practices for falling real estate values as a justification for the market changes. But, in the attempt to sort out all the issues van der Vant asks, “what about RESPA?” In fact, notes Arthur van der Vant, “where was the U.S. Department of Housing and Urban Development (HUD) all those years and how did it protect the American buying public?”
RESPA (Real Estate Settlement Procedures Act of 1974) was passed by Congress for consumer protection; Arthur van der Vant says this is specifically for the protection of the buying public. A Seller did not, and does not, need any protection because he or she already has vested interest in the real properties. Arthur van der Vant points out that there are in fact many laws in this country protecting private ownership interest (see Bieber v. Sovereign Bank (E.D. Pa., 1996, and Mercado v. Calumet Federal Sav. and Loan Ass’n, 763 F.2d 269 7th Cir.1985).
According to Arthur van der Vant, the argument that, because a Seller pays for the owner’s title insurance policy, a Seller should be able to choose the title insurance provider is invalid not only because it violates the purpose and spirit of the RESPA. According to Arthur van der Vant, it is also because it is the buyer who ultimately brings all the money to the closing table in the combination of a down payment and mortgage financing.
Choosing the title insurance provider is controlled solely by a recommendation, explains Arthur van der Vant. A client to whom a title insurance provider is recommended does not have to use such provider and could choose a different title insurance company. Additionally, the party making such a recommendation is required by law to give a client a written disclosure at the time of recommendation or prior to it, disclosing the business arrangement that exist between the title insurance provider and the person making the recommendation. They must also describe costs of such a service, says Arthur van der Vant. The State of Illinois requires the use of the DS-1 FORM (Controlled Business Arrangement Disclosure Form). Such a disclosure is also required under the federal law as well.
What is the quality of the Controlled Business Arrangement Disclosure itself? Arthur van der Vant points out that both State and Federal disclosure forms do not address the following question: Even though a recommendation might have been made (timely or not), how does one prove that the client chose the title insurance provider that was recommended? Did the client really rely on such recommendation? The Illinois DS-1 Form only discloses the Controlled Business Arrangement exists. The DS-1 Form does not require showing that the client actually made a choice and agreed to use the recommended title insurance provider. In all real estate transactions, an additional form should be used showing that a party to whom a disclosure was made actually chose and agreed with the recommendation before the title insurance services are rendered, concludes Arthur van der Vant.
Congress believed that by enacting Section 9 (Buyer’s right to choose tile insurance provider) of RESPA, says Arthur van der Vant, the costs to the American home buying public would not be unreasonably or unnecessarily inflated by abusive practices. According to van der Vant, this part of law clearly answers the question: “Who Selects the Title Insurance Company?” He notes that § 2608 says that “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.”
According to Arthur van der Vant, HUD also emphasizes that 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. In this context, HUD states that the listing agent, and/or seller’s attorney has a fiduciary duty to the seller and thus should explain to the seller the possible adverse consequences of submitting a counter-offer requiring the use of a specific title insurance company. (Arthur van der Vant cites Who Selects the Title Company? RESPA & Other Considerations By K. Michelle Lind April 2003 as reference).
Section 9 of RESPA is often violated not only by ignorant sellers or their eager real estate attorneys, but also developers and builders, explains Arthur van der Vant. One of the leading cases concerning violation of Section 9 is Weisberg v. Toll Bros., Inc., (617 F. Supp. 539). It was a first class actions brought under provisions of RESPA, where the complaint alleges that the defendants violated the Real Estate Settlement Procedures Act, 12 U.S.C. § 2601 et seq. (RESPA), by requiring the plaintiff class members to purchase title insurance from the title insurance companies selected by the defendant builders. The plaintiffs alleged that the defendants imposed this requirement as a condition of the sale of the defendants’ residential dwellings, in violation of 12 U.S.C. § 2608. In Weisberg the parties reached agreement, which provided that: the plaintiff class will receive a total of $265,000, payable by the defendants in two equal installments. Upon distribution, each class member will receive an award equivalent to approximately 105% of the amount actually paid for title insurance at the time of the closing. The amounts due the individual class members range from about $513 to about $1,390. In addition to the amount of the settlement, the defendants have agreed to modify their standard Agreement of Sale so as to comply with the provisions of RESPA with respect to the purchase of title insurance. According to Arthur van der Vant, it should be noted that the above settlement agreement was approved by the court even though class members suffered no actual damages as a result of the alleged violation of the statute (in court opinion, even if the class members had selected their own title insurance companies, they would have paid approximately the same premium for their title insurance as was charged by the title insurance companies selected by the defendants).
Weisberg v. Toll Bros., Inc. is not the only case clearly indicating that section 9 is directed at protecting the buyers, not the sellers. In similar case Rendler v. Gambone Bros. Dev. Co., (1999 U.S. Dist. LEXIS 5926), the court also approved the class action settlement agreement, where plaintiffs filed a class action complaint, alleging that defendants had unlawfully required the purchase of title insurance from a particular title insurance company in violation of RESPA. The settlement vindicated the declared public policies of RESPA to reduce real estate settlement costs and allow comparison shopping for settlement services (see 12 U.S.C. §§ 2601(a), 2604). Arthur van der Vant points out that as part of this settlement, but without admitting liability, defendants agreed to delete the buyer’s authorization contained in their form Agreement of Sale, to notify home buyers of their right under RESPA to choose their own title insurer, to allow purchasers who have not yet closed, to change title insurers if they so desire, and to modify their sales and title insurance policies and practices to conform to RESPA.
Recommending a title insurance provider is not a matter of law, but it’s a matter of insurance. A person does not have to be an attorney to sell insurance. Origination of title insurance is controlled solely by a recommendation and proper written disclosure at the time of recommendation, or prior to it, is strictly required by the State and/or Federal Law. Therefore, attorneys can be prevented from changing the title insurance provider in the sales contract based on the “Attorney’s Modification & Acceptance Clause,” if the parties thereto (buyer and seller) have already chosen a title insurance provider where a proper disclosure was given. The contract would have the same legal standing no-matter who the title insurance company was, as long as the title company would be properly licensed by the State. An eager attorney modifying the sales contract for his/her own advantage, so he/she can receive financial compensation for directing the title insurance could be charged with Self-Dealing, Tortious Interference with a Contract, and/or a Code of Ethics violation, since he/she is risking his/her client’s interest for his/her own gain, says Arthur van der Vant.
Arthur van der Vant encourages the reader to research this subject further and to familiarize him or herself with current RESPA regulations, as well as any future changes. More information can be found at the U.S. Department of Housing and Urban Development (HUD) website www.hud.gov. The data contained in this publication is provided by Arthur van der Vant for information purpose only. The accuracy of the data contained herein is deemed reliable, but is not guaranteed. The author and/or publisher do not engage in rendering legal, accounting, or any other professional advice, and suggests that the services of a professional in those fields should be sought. Any liability, loss, or risk, personal, or otherwise incurred as a result of using any of the information herein stated is not the responsibility of the author and/or publisher.
Arthur van der Vant is a receiver and assignee based in Cook County, Illinois. He is an expert in real estate and corporate turnaround management with over 10,000 projects to his credit. As a member of several professional organizations, including the Turnaround Management Association and the National Association of Bankruptcy Trustees, Arthur van der Vant is up to date on every aspect of his profession. He is one of only a handful of Certified Commercial Investment Members (CCIM), and has trained at the World Bank Headquarters in Washington DC. Currently, Arthur van der Vant practices at his firm, Illinois Receiver.
For more information or to contact Arthur van der Vant, please call 800-496-9107
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