Note: The deadline for the new implementation of CFBP has been changed from August 1st, 2015 to October 1st, 2015
Complying with the new status quo in CFPB regulations: the buyer’s right to choose the title company
If you’ve been in tune with the goings on in the real estate industry, you’d be well aware that, post October 1st, 2015, new CFPB (Consumer Finance Protection Bureau) regulations will come into effect which stipulate the compliance of certain rules that are part of the…Dodd-Frank Act. The new regulations encompass a seemingly daunting multitude of aspects that can overwhelm even the most seasoned realtor®. The need for these rules was recognized by the CFPB when the real estate financial closing disclosures that were previously being used ended up not being in the best interests of the consumer. This blog post focuses on one of these rules in particular: the enforcement of the buyers’ right to choose their own title company, as opposed to the previous practice of allowing the seller to do so.
According to Section 9 of Real Estate Settlement Procedures Act (established in 1974), a seller is prohibited from forcing a home buyer to choose a particular title insurance company during the course of a sale. In the event of violation of this provision, the buyer is entitled to sue the offending seller for an amount equal to three times the title insurance costs. This rule has been around for quite some time but, due to the lax enforcement of regulations corresponding to it, its awareness amongst realtors® has been virtually non-existent till now.
The responsibility for regulating RESPA has always lain with the HUD (the US Department of Housing and Urban Development). Regulatory oversite of RESPA was transferred to the CFPD in the month of July 2011. Before this transfer, however, regulatory oversite to determine if buyers actually had been intimated of their right to choose their own title company was left by HUD to the State’s authorities. Due to the non-enforcement of that regulation in the majority of the states, the modus operandi simply flowed in the direction of market dynamics. And, since sellers were the ones recognized as paying for the title policy in most states, protocol dictated that the sellers would exercise their choice in the selection of the title company as well. Consumers, not expecting to have to maintain a relationship with the title companies, simply jumped on the bandwagon and followed their listing agent’s recommendations.
You can view a completed sample form here: http://files.consumerfinance.gov/f/201311_cfpb_kbyo_loan-estimate.pdf
Now, you may ask: If sellers are the ones who actually pay for the title policy, isn’t it only fair that they be the ones who get to choose the title company? Well, the answer to this lies in the after-sales period. Once the sale is closed, the title insurance policy then belongs to the new owner – the seller no longer is connected to the property’s dealings. Let’s draw a parallel here: Would you, as a consumer, want a seller to choose your home warranty company, home inspector, or homeowner’s insurance company on your behalf? Certainly not! In the same vein, the seller’s argument for choosing the buyer’s title insurance company doesn’t hold much weight. This is why, although the CFPB and RESPA don’t care who pays for the title insurance policy, they do care that the buyer has been duly informed of their right to choose the company they want for this.
So, listing agents or buyer’s agents who push their preferred title companies in all of their closings – and simply write that title company’s name into the initial sales contract – will now be in violation of RESPA and must immediately backtrack on this practice, offering their clients a choice of companies instead. As a real estate professional, you need to take heed of and proactively implement these consumer-centric developments in order to ensure regulatory compliance as well as avoid undue future lawsuits arising over title issues. For this, it’s my job to educate my buyers and sellers in writing about the fact that they can shop around themselves for title insurance providers, prior to going under contract. Once they sign the form confirming they have read it, your responsibility is fulfilled.
Thus far, it was assumed that the effect of these consumer-centric changes would solely be on extending closing times. In reality, however, the implications of these developments are much more far-reaching and have the potential to shake up the real estate industry at large over the next several years.
As a melee of title companies and mortgage companies will be scurrying to conform to the newly laid out norms, it will become increasingly imperative for every real estate professional to also take out the time to engage in a quick conversation with their chosen lender and title company to determine their awareness of these regulations – their adeptness at properly implementing the rules in question will be crucial as it will directly influence the overall buying experience of their clients.