WEEKLY PRACTICE TIP - REVISED

BROKER RISK MANAGEMENT

WEEKLY PRACTICE TIP

REVISED

 

Buyer’s Choice Act

For Title and Escrow Services in Foreclosed Property Sales

 

1.  NEW CALIFORNIA LAW:  The new California “Buyer’s Choice Act” (which went into effect immediately upon the Governor’s signature on October 11, 2009) prohibits a party who acquired title to a residential 1-4 unit property at a foreclosure sale (i.e., a trustee's sale) from requiring, either directly or indirectly, as a condition of selling the property, that the buyer purchase title insurance or escrow services from a particular title insurer or escrow agent.

 

However, the law does not stop a buyer from agreeing to accept a title insurer or an escrow agent recommended by the seller -- if written notice of the right to make an independent selection is first provided by the seller to the buyer.

 

NOTE:  This new California law does not clarify as to whether the law applies or doesn't apply depending on who pays for the title insurance or escrow services.  So, it is prudent to assume that it applies regardless of which party pays for the title or escrow fees in a transaction.

 

A "seller" subject to this law can be a financial institution, or an individual lender, who foreclosed and acquired title to a residential 1-4 unit property at the foreclosure sale.  Thus this law applies only to such sellers AND TO THEIR AGENTS.

 

PENALTIES:  A “seller” or their agent who violates these provisions will be liable to the buyer for an amount equal to three times all charges paid for the title insurance or escrow services.

 

In addition, any person in violation will be deemed to have violated his or her licensing law and will be subject to discipline by the DRE.   A transaction is not invalidated solely because of such a violation.  This law remains in effect until January 1, 2015, at which time it sunsets.

 

2.  EXISTING FEDERAL LAW:   RESPA prohibits a seller in ALL residential 1-4 property transactions (on which there is a federally-related loan – essentially all institutional loans) from requiring the buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale.  Escrow services are not covered by this law.

 

However, according to HUD, it is not a violation of RESPA to require a buyer to use a particular title insurance company so long as the seller pays for it. 

 

Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance. 

 

See Weekly Practice Tip entitled::   “Seller Requires Buyer to Use a Specific Title Company”

 

REO SELLER REACTION TO THIS NEW LAW:  Perhaps predictably, the REO sellers have reacted quickly to this new law. 

Typically, if the buyer requests to use certain title and escrow companies, and the contract states that seller will pay them, and if there is no counter from the seller on this point, that is what happens.  

However, REO lenders are now coming back with a counter that basically states that seller will pay all or a part of title and escrow, or alternatively agree to give a credit to buyer, but only if the buyer agrees to go with the title and escrow companies “recommended” by seller.  Thus, if buyer wants to go with the title and escrow companies requested by buyer, then buyer must pay. 

This, of course, makes the issue of who pays theoretically subject to negotiation (and therefore not a violation of the Buyer’s Choice Act) but, in fact, REO lenders do not negotiate very often, so the buyer is stuck with the option of accepting the seller’s recommended title and escrow companies with the seller paying all or part of those expenses (or granting a credit) or else insisting on their own title and escrow companies and paying for it.

This, unfortunately, is legal under the Act.

PRACTICE TIPS:

 

1.  REO Listing Agents: 

 

A.  Do not be involved in a REO transaction where the REO seller is requiring the buyer to use a particular title or escrow company.  Advise the REO seller of the new California law and that you cannot participate in a transaction where the buyers are compelled to use a specific title or escrow company.

 

            B.  If the REO seller is recommending that a particular title or escrow company be used, be sure to include a notice of the buyer’s right to make an independent selection of such a company prior to entering into a contract where one of these recommended services is used.

 

2.  REO Buyer Agents:  If you encounter a REO seller or listing agent requiring your buyer to use a particular title or escrow company, advise them of the new California law prohibiting this practice.  If the seller and/or listing agent continues to insist on using a particular title or escrow company, advise your buyers and recommend that they talk to an attorney about their rights under this new law.

 

3.  All Buyer Agents:  If a seller on any residential 1-4 unit property (on which there is a federally-related loan) insists that a particular title company be used, and the buyers are expected to pay for that service, advise your buyers of the provisions of RESPA and advise them to consult with an attorney regarding their rights under RESPA.

 

            FORM:  You may use the Advisory on the following page to advise your buyers

of their rights under this act.

 

DO NOT FORWARD TO SELLERS OR BUYERS.  This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents.  It may not be reproduced or distributed without the express written consent of Broker Risk Management.  The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.