Consumer's Responsibility to Shop Settlement Services

It's the consumer's ultimate responsibility to shop, compare and select the title company for their real estate transaction. The following reports and excerpts from various regulatory agencies, an industry trade association and a consumer advocate organization all promote and encourage consumers to shop and compare services and costs of title insurance and closing settlement services.

The Government Accountability Office (GAO)

The GAO issued a report April 2007 titled "Title Insurance - Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers" after performing a detailed review of the laws, regulations and market practices of California, Colorado, Illinois, Iowa, New York and Texas. Their analysis of data, studies, regulatory oversight, practices and environment recommends actions to educate consumers and improve their ability to comparison shop for title insurance services, based on the following concerns:

Lack of consumer knowledge about title insurance and marketing to real estate professionals (i.e. real estate & mortgage brokers) that result in little pressure on title companies to compete on price.
Conflicts of interest may arise when the real estate professional making the referral (recommendation) has a financial interest in directing the consumer to a particular AfBA title company. Under such circumstances the real estate professional may be motivated to make a consumer referral based not on the consumer's best interests but on the real estate professional's best interests.

The Government Accountability Office report titled "Title Insurance - Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers" can be viewed in its entirety at http://www.gao.gov/new.items/d07401.pdf

The Department of Housing and Urban Development (HUD)

Congress in 1974 created the Real Estate Settlement Procedures Act (RESPA) to be enforced by HUD for the sole purpose to educate and protect consumers in acquiring a mortgage and necessary settlement services.

HUD recently issued a revised RESPA Rule on November 17, 2008 (mandatory compliance of January 1, 2010) to provide consumers the following:

to simplify and improve the process for shopping and obtaining mortgages
provide more accurate estimates of costs of settlement services
make it easier for consumers to shop among settlement service providers

HUD's Real Estate Settlement Procedures Act (RESPA) can be viewed in its entirety at http://www.access.gpo.gov/nara/cfr/waisidx_09/24cfr3500_09.html

HUD's Settlement Cost Booklet

HUD's booklet identifies the following areas that should be noted, which basically reinforces the Consumer's ultimate responsibility of effectively shopping for their mortgage and necessary settlement services

IV. Shopping for a House

Role of the Real Estate Agent or Broker

Frequently, the first person you consult about buying a home is a real estate agent or broker. Although these agents and brokers provide helpful advice, they may legally be representing the interests of the seller and not yours. You can ask your family and friends for recommendations.

Sometimes, the real estate broker will offer to help you obtain a mortgage loan. He or she may also recommend that you deal with a particular lender, mortgage broker, title company, attorney, or settlement/closing agent. You are not required to follow the real estate broker's recommendation, and you should compare the costs and services offered by other providers before making a decision.

Terms of the Sales Agreement

Before you sign a sales agreement, here are some important points to consider. While the real estate broker will probably give you a preprinted form of the sales agreement, many terms are negotiable so you may make changes or additions to the agreement.

Settlement Costs

You can negotiate which settlement costs you will pay and which will be paid by the seller. The seller may contribute a lump sum amount or may agree to pay for specific items on your behalf.

Affiliated Businesses

When you are shopping for your home and your mortgage, a settlement service provider may refer you to its affiliated business. Affiliated business arrangements exist when several businesses are owned or controlled by a common corporate parent. When a lender, real estate broker, builder, or others refer you to an affiliated settlement service provider, RESPA requires that the referring party give you an Affiliated Business Arrangement Disclosure. Except under certain circumstances, you are generally not required to use the affiliate and are free to shop for other service providers. You should shop around to determine that you are receiving the best service and rate.

V. Shopping for a Loan

Your choice of mortgage lender or broker, as well as type of loan itself, will influence your settlement costs and your monthly mortgage payment. You may find a listing of local lenders and mortgage brokers in the yellow pages and a listing of rates in your local newspaper. You may also wish to search the internet for lenders and brokers and their advertised rates. You can ask your family and friends about loan originators they have used and recommend.

Note: Whether you apply for a loan with a lender or mortgage broker, you should receive Good Faith Estimates of settlement costs from multiple loan originators to make certain you get the best loan product at the lowest interest rate and lowest settlement costs.

VII. Shopping for Other Settlement Services

There are other settlement services that the lender will require for your loan. You may be able to shop for these services or you may choose providers identified on the written list you receive from the loan originator. If you select providers on the list, the charges shown on the GFE must be within the 10% tolerance. Even though selecting a settlement service provider that is not on the list nullifies the 10% tolerance, you still may be able to find a better deal by shopping and selecting a provider yourself. However, remember that those charges could increase at settlement.

Title Services and Settlement Agent

When you purchase your home, you receive "title" to the home. Certain title services will be required by your lender to protect against liens or claims on the property. Title services include the title search, examination of the title, preparation of a commitment to insure, conducting the settlement, and all administration and processing services that are involved within these services. Many lenders require a lender's title insurance policy to protect against loss resulting from claims by others against your new home. A lender's title insurance policy does not protect you.

If a title claim occurs, it can be financially devastating to an owner who is uninsured. If you want to protect yourself from claims by others against your new home, you will need an owner's policy.

To save money on title insurance, compare rates among various title insurance companies. If you are buying a newly constructed home, make certain your title insurance covers claims by contractors. These claims are known as "mechanics' liens" in some parts of the country. In many states, title insurance premium rates are filed with the state and may not be negotiable, but other title service related charges may be. Be sure to ask your title agent about any available discounts such as a reissue rate or a simultaneous issue discount.

Title services also include the services of a settlement agent. Settlement practices vary from locality to locality, and even within the same county or city. Depending on the locality, settlements may be conducted by lenders, title insurance companies, escrow companies or attorneys for the buyer or seller. In some parts of the country, a settlement may be conducted by an escrow agent. Unlike other types of settlement, the parties may not meet around a table to sign documents. Ask how your settlement will be handled.

The Department of HUD's Settlement Cost Booklet can be viewed in its entirety at http://www.hud.gov/offices/hsg/ramh/res/Settlement-Booklet-January-6-REVISED.pdf

The American Land Title Association (ALTA)

The following are excerpts from the industry's national trade association, the American Land Title Association.

On September 18, 2007, ALTA® launched "The Title Industry Consumer Initiative," which details the association's five-point strategy for improving industry oversight and educating and protecting consumers. The initiative was developed in response to the recommendations by the Government Accountability Office (GAO) in a report it issued in April 2007.
The Title Industry Consumer Initiative includes a consumer education program, the adoption of "Principles of Fair Conduct," plans for member education on regulatory compliance and ethical standards, and a plan for working more closely with state and federal regulators to ensure that the title industry is meeting the needs of consumers.
The thrust of ALTA®'s Consumer Initiative is to help consumers make informed choices when it comes to title insurance and title-related services. ALTA® has developed a consumer Web site, www.homeclosing101.org, which provides an overview of the closing process and explains the purpose of title insurance including the process of the title search and repairing title defects. The site also describes how consumers can shop and compare prices.
Another major component of ALTA®'s Consumer Initiative is its newly adopted "Principles of Fair Conduct," which state what ALTA® expects of its members: to engage only in business practices that are lawful and consistent with a high standard of ethical behavior, and to treat consumers in a fair and ethical manner. The Principles also encourage members to provide consumers with timely and comprehensive information on their policies, services, products and prices to enable consumers to shop among providers of title-related services.

The American Land Title Association's "The Title Industry Consumer Initiative," can be viewed in its entirety at http://www.alta.org/about/Initiative.pdf

The Consumer Federation of America (CFA)

The CFA in April 2006 provided testimony of J. Robert Hunter, Director of Insurance for CFA before the House Committee on Financial Services Subcommittee on Housing and Community Opportunity identifying a marketing paradigm in the title insurance industry known as "Reverse Competition" that does not foster a competitive market place for the benefit of consumers. The following excerpts address the primary issue of the report.

"Reverse competition refers to a market structure in which the seller of a product markets the product to an intermediary instead of the ultimate purchaser of the product. In the case of title insurance, title insurers, market their products to real estate professionals (i.e. real estate and mortgage brokers…etc.) who because of their position in the real estate transaction, are able to steer the consumer who is actually paying for the product to a particular title agent or title insurer. The ultimate consumer has little or no market power in the title insurance transaction because title insurance is required for obtaining the loan or purchasing the property and because the consumer, who infrequently purchases real estate has relatively little knowledge of title insurance. The title entities with the market power in title insurance are those people who are able to steer consumers to particular title agents or title insurers. And the competition among title agents and title insurers for the business of the real estate professionals, causes title insurance premiums to increase as title agents and title insurers spend money and provide various considerations to the referrers (i.e. real estate and mortgage brokers…etc.) of title insurance business".
The testimony further identifies that "the title insurance market is not competitive and that consumers assume that transaction intermediaries (real estate brokers, mortgage brokers and title companies) are acting in the consumer's best interests, when in fact most intermediaries are acting in their own financial interests" and that "Competitive markets cannot function when the entity making the decision to purchase a product is not the same entity paying for the product".

The Consumer Federation of America (CFA) report can be viewed in its entirety at http://www.consumerfed.org/pdfs/Title_Insurance_Testimony042606.pdf

In summary, real estate professionals (i.e. real estate agents ⁄/ brokers, lenders & attorneys) have no fiduciary responsibility to shop and compare settlement services, such as title insurance and closing services, for the consumer. Remember, it's the consumer's ultimate responsibility to shop & select the title company for their real estate transaction.