Articles of Interest
California Mulls Bill Impacting REO Title Orders
May 13, 2009 - The Title Report
Attempting to address concerns that lenders and asset managers are directing title insurance orders involving foreclosed properties, the California Assembly Committee on Judiciary held a hearing May 5 to consider AB 957, which would enact the Buyer's Choice Act and prohibit a lender or other party that acquires title to, and seeks to sell, a foreclosed residential property, from requiring a buyer to purchase title insurance or escrow services from a particular company chosen by the seller.
According to assembly member Cathleen Galgiani, D-Stockton, the bills sponsor, the practice of requiring buyers to use the seller's service providers also has the adverse consequence of excluding smaller, local businesses from the title insurance and escrow market.
Specifically, the bill:
- Provides that a seller, as defined, shall not directly or indirectly, as a condition of selling residential real property to a buyer, require the buyer to purchase title insurance or escrow services in connection with the sale of that property from a company chosen by the seller.
- Provides that, in addition to any penalty provided under specified federal law, a violation of this bill shall be treated as a violation of the terms of the seller?s license or charter by the appropriate regulatory agency.
- Provides that no transaction subject to the provisions of this bill shall be invalidated solely because of the failure of any person to comply with any provision of this bill. Specifies, however, that a seller who violates the provisions of this bill shall be liable to the buyer in an amount equal to three times all charges made for such title insurance or escrow services.
- Defines "seller" for purposes of this bill to mean a mortgagee, beneficiary under deed of trust or other person who acquired title to residential real property at a foreclosure sale, including a trustee, agency, officer, or other employee of any such mortgagee, beneficiary or other person.
Similarities to RESPA
In its report, the Assembly Committee on Judiciary noted that the bill is very similar to the Real Estate Settlement Procedures Act (RESPA) because RESPA already prohibits a seller from requiring the buyer to purchase services from a particular company as a condition of the sale, regardless of whether or not the property was required by foreclosure. The bill does differ from federal law by applying to escrow agents as well as title insurers. It also only applies to properties acquired as a result of foreclosure and would apply to both federally-backed and non-federally-backed loans.
"It should be stressed that this bill, as proposed to be amended, follows RESPA by only prohibiting a seller from requiring the buyer to purchase title insurance or escrow services from a company chosen by the seller," the report stated. "However, if the seller and buyer agree that the seller, rather than the buyer, were to pay for the title insurance or escrow services, then the seller could choose a company or companies of his or her choice."
Associations speak out
Three companies argued in support of the bill. The Escrow Institute of California (EIC), stated that it supports the bill because it would "address a very serious issue that has developed within the Real Estate Owned (REO) foreclosure resale marketplace over the past couple years." It stated that the bill would "give buyers the choice to negotiate with and ultimately select their preferred settlement service providers, and prohibit sellers from denying this basic right as provided under state and federal laws."
Property ID, a natural hazard disclosure company in California, stated that it "believes that AB 957 will restore to buyers their traditional right to select the title insurance companies, escrow services and other settlement services of their choice." The Judiciary Committee also noted that several other independent escrow and realty companies support the bill for similar reasons.
The California Escrow Association (CEA) took a different approach, adopting a "support in concept" position, but generally urged an "aye" vote. The association supports the ability of principals in a real estate transaction to choose escrow and title service provides. On the other hand CEA also said it recognizes "that lenders handling REO property have a legitimate interest in selling properties efficiently and economically, with qualified and competent venders of all types." The report noted that CEA hopes that ?the respective interests are evaluated and addressed as the bill moves along.
There is also some opposition to the bill. The California Association of Realtors (CAR) agrees that lenders should not steer buyers toward favored service providers. It pointed out, however, that existing federal law already prohibits mandating that a buyer use a particular service provider if the buyer is footing the bill. CAR also insists that both parties to a transaction should be able to freely negotiate as to what service providers will be used, and which side will pay for it.
Phil Greer, of Greer and Associates, said he opposes the bill because he believes it will have the unintended consequence of actually increasing settlement costs for buyers of foreclosed properties. He claims that if this bill passes, the banks will simply stop paying for the services.
Whether lenders and asset managers are violating the law or not, a large percentage of agents believe the work is being directed to certain title companies. According to a poll of 178 industry professionals conducted by The Title Report, 90 percent say the market is locked up despite being a clear RESPA violation. Only 7 percent said they are getting their fair share of REO and foreclosure work, while 3 percent weren't sure the practice was taking place.
Title agencies, meanwhile, that actively marketed for lenders' REO work and networked at symposiums with asset managers a decade ago, claim agents trying to snag this business are crying sour grapes.
Amendments
The committee also considered Galgiani's amendments to the bill, attempting to address many of the opponents concerns. The report said that one amendment removes a provision of the bill that purported to prohibit a seller from disapproving of a buyer's choice without showing "good cause." The report stated that Galgiani has removed a vague and difficult term to define, as well as made the bill more closely conform to RESPA.
"Moreover, by adopting language similar to RESPA, the bill makes clear the author's intent that the buyer and seller can still negotiate who will pay for the services, and if the seller agrees to pay for the services, then the seller can chose the service provider."
The committee also noted that Galgiani agreed to strike a provision from the bill that would have made a seller who violated the provisions of the bill liable to the seller for an amount equal to six percent of the properties sales price.
The committee passed the bill 10 to 0.
