Insight RESPA Section 9 & Title Company Selection

Introduction:

With the complexities involved in a real estate transaction comes the cynical possibility for abuse on the unwitting consumer. Enter the Real Estate Settlement Procedures Act[1], or “RESPA”, passed by Congress in 1974. Over the years, RESPA has been amended and reworked in an effort to better protect consumers and curb potentially abusive practices within the industry. While many real estate professionals may be familiar with Section 8[2] of RESPA, which outlines the prohibition against kickbacks and unearned fees, Section 9[3] can sometimes fly dangerously under the radar. Section 9 regulates sellers and their selection of a title insurance company when selling property. There seems to be a common misconception, or generalization, that buyers always have the right to select a title insurance company. Many online articles even contain statements along the lines of “Section 9 prohibits the seller from requiring the buyer to use a particular title insurance company.” Section 9 is more nuanced than these blanket statements may lead you to believe. This article attempts to provide a better understanding of how Section 9 operates and an analysis of several scenarios where the seller, for various reasons, may wish to condition the sale of property on the use of a particular title insurance company.

RESPA Section 9 and Related Federal Regulations:

Section 9 of RESPA[4] 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.

(b) Any seller who violates the provisions of subsection (a) shall be liable to the buyer in an amount equal to three times all charges made for such title insurance.

Said simply, Section 9 prohibits a seller from forcing a buyer to purchase title insurance from a particular title insurance company as a condition of sale. However, Section 9 must be read carefully as there are several important components and nuances to the seemingly straightforward language.

First, the prohibition hinges, primarily, on whether or not the buyer is actually required to pay for the title insurance (owner and/or lender’s policy). Therefore, a seller may, in most situations, condition the sale of property on the use of a particular title insurance company if the seller purchases and pays for the entire cost of title insurance (owner’s and lender’s policies).[5]

Second, Section 9 prohibits a seller from both “directly or indirectly” conditioning the sale on buyer’s purchase of title insurance from a specific company. Sellers have tried to play the system by forcing the use of a particular title insurance company by claiming to pay for the insurance but then charging the buyer later in the transaction. “Directly or Indirectly” means transactions which result in the seller recovering the cost for the title insurance through some otherwise seemingly unrelated fee or charge risk violating Section 9. Keep in mind that although the buyer is essentially paying for everything as a result of purchasing the property, this alone is not generally recognized as enough to violate Section 9. As a rule of thumb, be cautious of transactions that appear to give with one hand and take away with the other.

Third, in order for Section 9 to apply, the use of a particular title insurance company must be a true condition of sale. For example, as long as the seller does not say to the buyer, “you, buyer, must purchase title insurance from Company A or I will not sell you the property” there is unlikely a violation of Section 9. The fact that the buyer may be rewarded by using seller’s preferred title company, or penalized for not using seller’s preferred title company should not, in and of itself, violate Section 9.[6] Several courts support this conclusion and have rejected certain arguments by buyers claiming “economic coercion.”

Ultimately, these situations can be fact specific requiring a case by case review. The following hypotheticals are designed to help illustrate the nuances of Section 9 and analyze several common scenarios an agent may encounter.

Hypothetical Scenarios:

• Real estate agent has a great working relationship with Company A and decides, with the seller, to condition the sale on the use of Company A (i.e., if buyer does not use Company A, then no deal). Violation of Section 9? It depends on who pays for the insurance. If seller pays for the insurance at no cost to the buyer – no violation. However, where the seller purports to pay for the insurance but then, for example, charges the buyer a fee for closing costs that includes the title insurance expense, seller risks violating Section 9.[7]
• Real estate agent likes to use Company A and decides, with the seller, to condition the sale on the use of Company A and make buyer pay for the title insurance (i.e. If buyer does not use Company A and also pay for their insurance, then no deal). Violation of Section 9? Yes.
• Seller will only pay for the owner’s title policy if buyer uses its preferred title company. Violation of Section 9? Not likely. Several courts have held that an economic incentive for a buyer to use a particular title insurance company does not amount to a violation of Section 9.[8]
• Title insurance process was started with Company A as part of a purchase contract but the deal falls through. The property is now back on the market. Seller advises buyer that the purchase price is $200.00 more if buyer does not use Company A. Violation of Section 9? Not likely. The fact that buyer would pay less if Company A is used may be an economic benefit but as long as the use of Title Company A is not a true “requirement” or “condition” of sale it should not violate Section 9.
• Buyer will receive a discount on the lender policy if they use Company A selected by the seller as a result of the availability of a simultaneous issue rate. Violation of Section 9? Unlikely. The fact that buyer may be financially penalized for not using seller’s preferred title company should not, alone, violate Section 9. Buyer still has the option of purchasing the property and use a title insurance company of their choice – albeit at an increased cost.
• If buyer uses seller’s preferred title insurance company, seller will pay for a home warranty. However, if buyer does not use seller’s preferred company, the concession is off of the table. Violation of Section 9? Unlikely. As noted above, a package deal or economic incentive, so long as it is optional to the buyer and not otherwise a condition of sale, should not violate Section 9.

Conclusion

RESPA scenarios are numerous and one can get fairly creative with what may and may not potentially violate Section 9. Be aware that both RESPA Section 8 and Section 9 exist and that they work in tandem. Watch for transactions where the seller a) insists the buyer use seller’s preferred title company, b) requires buyer to pay for the insurance, and c) conditions the sale on the use of that particular title company. If, on the other hand, seller pays for the entire cost of the title insurance policies, seller may require the use of a preferred title company. Also, an economic incentive for using seller’s preferred title company should not, in and of itself, violate Section 9. Lastly, if a seller is found to violate Section 9, they may be liable for three times the cost of the insurance. If you have any questions or concerns please call our Real Estate Group at 208.344.6000.

——————————————————————————————————

[1] 12 U.S.C. § 2601 et seq.

[2] 12 U.S.C. § 2607

[3] 12 U.S.C. § 2608

[4] See 12 C.F.R. 1024.2 defining, in part, “required use” as “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. “ Also, 12 C.F.R. 1024.16 (“No seller of property that will be purchased with the assistance of a federally related mortgage loan shall violate section 9 of RESPA (12 U.S.C. 2608). Section 1024.2 defines ‘‘required use’’ of a provider of a settlement service.”)

[5] This assumes that the seller is not in a controlled business relationship with the title insurance company in violation of RESPA Section 8 (12 U.S.C. § 2607(c)).

[6] See 12 C.F.R. 1024.2 which states, “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.”

[7] In 2011 the US Department of Housing and Urban Development (“HUD”) transferred authority to regulate RESPA to the Consumer Finance Protection Bureau (“CFPB”). Previous HUD opinions and guidance, while not binding on the CFPB, are generally regarded as instructive. And see Hochberg, RESPA: Title Insurance and Seller Pay, 74 Title News 11 (May/June 1995).

[8] See Hopkins v. Horizon Mgmt. Servs. Inc., 302 F. App’x 137 (4^th Cir. 2008); Pass v. Capital City Real Estate LLC, 842 F. Supp. 2d 36 (D.D.C. 2012).