Who Pays the Title Insurance Premium? Is State Regulation Really Necessary?
Thursday, November 12, 2009
By: Jeffrey A. Rattikin
Thursday, November 12, 2009
So, it appears that the State of California has once again reverted to the age-old practice of resolving readily negotiated contract issues by ramming down more government regulation. An issue as easy as deciding what title company should handle the closing of a real estate transaction is now dictated by legislation, rather than free market choice.
Aimed at preventing banks from dictating the escrow and title services used in bank-owned (REO) property transactions, California’s Assembly Bill 957 was approved and immediately implemented last month, dubbed the Buyer’s Choice Act. According to Inman News, the bill provides that sellers of one- to four-family homes are barred from requiring a buyer to purchase a particular title insurer or escrow provider as a condition of selling the property.
As a result, the banks, who need to rely on the experience of the title closer when handling a specialized transaction such as an REO sale, are forced to take their transaction to any number of buyer-suggested title companies, who may have limited experience in REO’s, and may even be located out of state. It is evident that the inefficiencies resulting from the inevitable learning curve and offsite communication breakdowns will lead directly to delays, excess costs and quite often lost transactions.
In Texas, the choice of a title company is freely negotiated between the parties. Traditionally, the seller pays for the title policy, due primarily to the seller’s contractual obligation to pass good title to the purchaser. Since the seller pays for the policy, it makes sense that the seller should be able to choose the provider. It is the buyer, however, that will be the beneficiary of the title policy, and they have every reason to demand that the title insurance be closed and backed by a reputable and trustworthy company. Both sides desire and expect a smooth and professional closing experince, and both sides hold reasonable arguments for their ability to choose. But the reality is, no party to the transaction wants to lose the deal over an argument as to what company shall act as closing agent. At some point, sellers and buyers are able to reach a mutual decision on an acceptable title company without tanking the deal.
Some real estate practiioners are under the mistaken belief that federal law prohibits a seller from requiring a buyer to close at a certain title company, citing a portion of the Real Estate Settlement and Procedures Act. The Act provides, in part, as follows:
(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 euqal to three times all charges made for such title insurance
A close reading of the statute reflects that the seller is prohibited from requiring a partiucalr title company only if a) a federally backed loan is used, and b) the buyer is required to pay for the policy. As is the custom in Texas, if the seller pays the title policy premium, the statutory prohibition would not apply, and the seller could direct the closing in its discretion.
In this day and age of ever-increasing governmental bureaucracy and red tape, yet another regulation aimed at controlling routine contractual negotiations represents an unneeded and unwanted intrustion on the private property rigths of citizens. Our officials need to direct their efforts on the more pressing issues of our time.
Copyright 2009 Jeffrey A. Rattikin, all rights reserved