Who Selects the Title Company?
Who has the right to select the title company? This is a perennial controversy which can raise emotions and create controversy early in the transaction especially when selling residential property .
Most residential buyers and sellers have no strong ties to a particular title company or closing officer; many brokers and agents do and want to direct business to their favorite closer or title company.
In most transactions, there are three parties in a position to direct the closing to a particular title company; the lender, the seller and the buyer. The Real Estate Settlement & Procedures Act (“RESPA”) controls who can and cannot direct the closing.
This article will address three questions. First, can a lender direct a closing to a particular title company? Second, can the seller direct where the transaction will close? Third, can a homebuilder give financial incentives to a buyer to cause the buyer to close at a particular title company?
can a lender direct a closing to a particular title company? RESPA permits the lender to require closing at a particular title company. The reason is that the lender has a vested interest in making sure the closing is conducted according to its standards and its instructions. It is therefore permissible for a lender to cultivate a relationship with a particular title company and require closing with that company.
However, lenders, at least in our locale, rarely use this right. Since many, if not most, real estate brokers and agents have a strong preference for where a transaction closes, and since those same brokers and agents often refer mortgage business to lenders, lenders usually do not want to antagonize one or more of the parties by requiring the use of a particular title company.
can the seller direct where the transaction will close? The answer to this question is less clear. The accepted practice is for the buyer submitting an offer to purchase, or, more likely, the agent working with the buyer, selects a title company and includes the selection in the offer to purchase. If the seller, or the agent representing the seller, has a strong opinion about where the transaction closes, the seller will counter the offer and change the proposed title company.
The conventional wisdom is that because the seller is paying for the owner’s title policy (as is usually the case), the seller should have the right to select the title company. After all, Section 9 of RESPA which controls this issue, only requires that the buyer not be required to purchase title insurance from a particular company. If the seller is paying for or purchasing the policy then, arguably, there is no violation. However, the answer is not as clear as it appears.
In some states title insurance costs are negotiated for each transaction. In Texas, rates are set by the State Board of insurance. Section 9 was intended primarily to prevent large homebuilders, in those states which allow negotiated rates, from negotiating a reduced title premium for construction and development loans (which the builder typically pays) in return for directing all title business for the sales of completed houses to the title company. The title company could then recoup their reduced fee on the construction or development loan transaction by charging a higher premium when the house was sold to a consumer.
Since Texas sets rates and no negotiation is allowed, there is little reason to apply RESPA Section 9 to Texas transactions. However, HUD has not been willing to state unequivocally that Section 9 does not apply to regulated title premium states such as Texas.
The fact that the seller usually pays for the owner’s title premium does not completely dispose of the problem. The buyer is normally required to purchase a mortgagee’s title policy and may also be required to purchase title endorsements required by a lender. If mortgagee’s coverage is provided by the company issuing the owner’s title policy, the cost is only $100.00. If the buyer purchases a mortgagee’s title policy from a company other than the one issuing the owner’s title policy, he must pay the full premium which will be several hundred to several thousand dollars depending on the price of the property. Is the buyer then effectively “required” by economic necessity to use the title company selected by the seller?
There is also the problem arising from the fact that in a typical closing the only party writing a check is the buyer. Can the buyer argue that even though the seller is paying for the title insurance, that the cost was factored into the sales price which means that the buyer is actually paying for the owner’s title policy premium? If the seller did not have to pay the owner’s title policy premium, would he have been willing to deduct that cost from the sales price of the property? We do not have definitive answers to these questions.
The conservative position, especially when you have a buyer who is adamant about which title company will be used, is to allow the buyer to select the title company. If the seller insists upon directing the transaction to a particular title company, it would be prudent to agree to pay the premiums for both the owner’s and mortgagee’s title policies.
Can a homebuilder give financial incentives to a buyer to cause the buyer to close at a particular title company? Large homebuilders who own an interest in a title company routinely offer financial incentives to buyers to use the title company they choose.
Recent rules promulgated by HUD would have prevented this practice. However, the public comments to the proposed rules caused HUD to reconsider. These rule changes have been withdrawn and it remains permissible for homebuilders to entice a buyer to select a title company by granting financial incentives to the buyer. However, this issue is not completely settled and HUD is continuing to review whether this practice will be allowed in the future.