Is the Borrower’s Right to Choose a Closing Agent in Peril?

Growing a residential real estate practice as a title or settlement agent is not easy.  Every day, as you represent a buyer/borrower in the purchase/refinance of a home, you remain hopeful that your client, as well as the realtor and/or lender also involved in that transaction, will be impressed enough with your services to recommend your office to others.  It’s a constant push to develop new relationships that will yield business.  Over time, as you continue to provide high-quality, professional services, you strive to ensure that potential client referrals will increase and fuel the growth of your residential real estate title or settlement practice.

However, for your practice to thrive, you must be able to convert those potential client referrals into actual client relationships.  All too often, those potential clients, all with a positive impression of your office, are lured away by your competitors.  They may want to retain your services, but perhaps because of pressures exerted from a legal (or even illegal) Affiliated Business Arrangement (AfBA), or a seller’s or lender’s self-motivated recommendations, the transaction often closes elsewhere.  All your hard work developing positive business relationships with potential clients goes unrewarded.

In the frustration arising from lost closings, most residential real estate settlement practitioners point to one shining “rule,” the “borrower’s right to choose his or her settlement service provider.”  This rule often is cited as the borrower’s trump card—the unchallengeable right of the borrower to pick whomever he or she desires to handle the borrower’s side of the transaction.  For years, when this trump card was played, realtors, lenders, and owners of AfBA firms generally abandoned further attempts to secure this portion of the transaction.  However, as the real estate marketplace changes, the “buyer’s right to choose” is coming under attack.  In the balance of this blog, I will take a closer look at the historical basis for this rule and provide some advice regarding how residential real estate settlement practitioners can take steps to preserve it.

Does the buyer really have a “right” to choose?

In reviewing RESPA and other federal laws related to real estate closing practices, you may find it interesting that the concept of the borrower’s “right” to pick the closing agency does not arise from any expressly stated statute.  In fact, when you look closely at the RESPA statutory authority, this practice can only be inferred as a result of statutory prohibitions imposed on the seller.  The applicable RESPA statutory provision is:

12 U.S.C. Section 2608 Title companies; liability of seller

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

So, there is no federal statutory authority that expressly grants a buyer/borrower the right to choose, only a statutory provision that denies the seller a right to choose.  It should be noted that this seller prohibition is limited to transactions governed by RESPA (1-4 family residential transactions).  Therefore, if the transaction is a commercial transaction, or any other real estate transaction type not covered by RESPA, the buyer/borrower has no federal statutory authority to reference in this regard.

Assuming we limit the balance of our discussion to handling 1-4 family residential transactions, we now know that the seller can’t pick the buyer/borrower’s closing agent, but what about a realtor or lender who owns an interest in an AfBA?  The RESPA statutory provision that discusses restrictions imposed on permissible activities of AfBAs states:

12 U.S.C. Section 2607 Prohibition against kickbacks and unearned fees

…(c) Fees, salaries, compensation, or other payments

Nothing in this section shall be construed as prohibiting…(4) affiliated business arrangements so long as …(B) such person is not required to use any particular provider of settlement services…

Upon further analysis, I find regulations surrounding AfBAs contain the following prohibition:

12 CFR 1024.15 Affiliated business arrangements

…(2) No person [involved in an AfBA] making a referral has required (as defined in § 1024.2, “required use”) any person to use any particular provider of settlement services or business incident thereto…

Once again, up to this point, I have found no federal statute or regulation that contains any affirmative right of the buyer to choose, just prohibitions on others to impose their choices.  But, on a positive note, it is clear that neither the seller, nor anyone holding an interest in an AfBA, is allowed to choose the party to handle the buyer/borrower’s portion of the transaction.

Under the recent TILA-RESPA Integrated Disclosure (TRID) Rule amendments to RESPA, we find the first evidence of what could be deemed a conditional “right” of the buyer/borrower.  Establishing rights of consumers in securing financial services is the primary focus of the Consumer Financial Protection Bureau (CFPB).  In the CFPB press release issued in conjunction with the 2012-13 Bulletin, the CFPB director makes the following statement:

“Consumers are at a real disadvantage because they do not get to choose the service providers they deal with—the financial institution does,” said CFPB Director Richard Cordray.  “Consumers must not be hurt by unfair, deceptive, or abusive practices of service providers.  Banks and nonbanks must manage these relationships carefully and can be held accountable if they break the law.”

In support of the right of the buyer/borrower to choose a settlement authority, the TRID amendments to RESPA, and its regulations that went into effect last year, contained specific provisions regarding a consumer’s right to shop for service providers, such as closing agents.  Under the revised RESPA regulations, we see a description of the buyer’s right to shop and select his or her service provider.  This appears in the TILA-RESPA Final Rule, which provides the following:

19(e)(1)(vi) Shopping for settlement service providers.

  1. Shopping permitted.

A creditor permits a consumer to shop for a settlement service if the creditor permits the consumer to select the provider of that service, subject to reasonable requirements.

Upon review of the language in this regulation, while it appears that a borrower may have the right to select his or her closing agency, it becomes apparent that the service provider selected will be “subject to reasonable requirements” imposed by the lender.  If you dig a little deeper into what “reasonable requirements” really means, the official comments to this regulation state:

19(e)(1)(vi) Shopping for settlement service providers.

1.Permission to shop.

Section 1026.19(e)(1)(vi)(A) permits creditors to impose reasonable requirements regarding the qualifications of the provider.  For example, the creditor may require that a settlement agent chosen by the consumer must be appropriately licensed in the relevant jurisdiction.

After reviewing the attitude of the CFPB with regard to consumers’ rights, and the regulations and official comments to those regulations, it seems that the buyer/borrower does have a right to choose, but that right has limitations.  The CFPB has made it clear that the lender can impose restrictions on whom the buyer/borrower can choose.  While the official comments provide an example of the right to require those chosen to be properly licensed, it is clear that other requirements also may be imposed.  This leads me to the next important question.

Can a lender refuse to accept a buyer/borrower’s right to select your closing agency?

In today’s environment, financial institutions must maintain tight controls over the nonpublic personal information of their customers.  To do so, they must closely manage the third-party vendors chosen to close their transactions.  One can infer, just as the CFPB has indicated, it is permissible to refuse the selection of an improperly licensed closing office; it would be equally permissible for a lender to refuse to allow a buyer/borrower to use your office if your ability to protect the NPI of the lender’s customers was in question.  Similarly, a lender’s requirement that you demonstrate that you fairly charge its customers, appropriately safeguard their escrowed funds, or promptly respond to all consumer complaints could be deemed “reasonable restrictions” by the CFPB in determining whether your agency can close customers’ transactions.

In the final analysis, while the buyer/borrower’s decision to choose your office trumps the desires of sellers and/or realtors and lenders involved in an AfBA, the lender’s right to require you demonstrate your ability to protect NPI outweighs the buyer/borrower’s rights.

As a result, it is critical that your office takes steps to easily demonstrate that your policies and procedures afford the essential protections that lenders have the right to require.  One easy way to demonstrate your ability to protect NPI, charge consumers appropriate rates, appropriately respond to consumer complaints, and safeguard consumers’ escrowed funds: become certified as fully compliant with ALTA’s Best Practices.

Another blog similar in topic—“What Do You Mean I Can’t Close My Client’s Real Estate Transaction?”—recently was released by George T. Holler, founder of Milford, Connecticut-based Holler Law.  In that blog, which featured interviews with nationally renowned RESPA compliance attorney Marx Sterbcow and former CFPB attorney Richard Horn, Sterbcow states: “If a lender accepts title insurance from an attorney it hasn’t vetted, that lender will be liable for failing to supervise its service providers.  If there is a data breach with the borrower’s Social Security number, or if the attorney violates some consumer protection law, the lender will be liable.”  Sterbcow sees a further risk for the lender regarding loan buybacks: “If there is an underlying violation, secondary market investors could force a buyback of that loan.

The conclusions I have reached in my research are echoed in the final comment from that article:  “For lenders, the days of merely reviewing ‘policies and procedures’ packages from attorney agents are quickly coming to an end.  The CFPB requires lenders to undertake ongoing oversight and take appropriate action where needed.  Keeping a review package on file does not satisfy this requirement.  Sterbcow recommends lenders require that their agents have a third-party attestation or certificate from a reputable CPA firm.  ‘That is quickly becoming the minimum standard for lender oversight,’ he said.”

Conclusion

If you want to ensure that all the efforts you have put into serving your past customers can result in their unfettered ability to send you business in the future, you must eliminate any possibility of a lender refusing to accept your services.  As is indicated by Richard Cordray’s quote above, the CFPB’s desire to ensure consumers can shop and select their service providers is a high priority.  The CFPB will not tolerate obstruction of the buyer/borrower’s right to choose unless the lender has justified concerns about your abilities.  Achieving a certification of compliance with ALTA’s Best Practices is a valuable tool that demonstrates you can meet the reasonable requirements of the lending community.  By providing this level of independent third-party assurance, you will be able to continue to service all those past customers who wish to use your services in the future.