This question returns as the hot topic of the day every few years, revived by changes in promulgated contracts and tweaks to federal and state regulations. Several respected legal minds have weighed in, and the details matter in getting from federal law to day-to-day business practice in Texas.
The most common regulatory citation in this discussion is Section 9 of the federal RESPA law (Real Estate Settlement Procedures Act), which states that sellers may not “require” a buyer to use a particular title company as a “condition of the sale,” where the buyer is purchasing with a “federally related mortgage loan.” Phillip Schulman, formerly counsel for the Department of HUD and now with the DC firm of K&L Gates, is considered one of the most reliable interpreters of RESPA. His article in the March issue of Realtor Magazine made some important distinctions, and points the way for how we apply the rule in Texas. Schulman explains that “required use” in the context of RESPA means a buyer must use a particular service provider AND is paying the charges related to this service. This is an important consideration in other states where the buyer typically pays for the title policy. In Texas, more often than not, the seller pays for the cost of the owner’s title policy, pointing the way for the choice of title company to remain a negotiable item in Texas.
Schulman also acknowledges that there are typically two policies issued – an Owner’s Title Policy and a Loan Policy. The Texas Department of Insurance promulgates a “simultaneous issue” rate for the lender’s policy of $100, plus the cost of lender-required endorsements. Schulman states that the buyer can pay for the Loan Policy without the seller being in violation of RESPA as long as that buyer is free to purchase the policy anywhere. In Texas, a buyer would pay the full rate if they purchased a Loan Policy separately, but theoretically a buyer is free to make that choice. Schulman says as long as the seller pays for the owner’s policy, the seller may negotiate to use their preferred title provider.
Schulman also makes a distinction between the choice of settlement agent (the transaction management and closing arm of the process) and the title insurance company (the underwriting entity issuing the title policy). In theory, a seller could require the use of a particular title services provider as long as that provider can issue a policy from the buyer’s preferred title insurer. In this scenario, an independent title agent who has a choice of underwriters would be able to accommodate the preferences of both the seller and the buyer.
Here in Texas, the Hancock McGill firm is a regular contributor to this discussion. Here’s their take: “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 firm advocates a conservative position on the issue, suggesting that a seller who wants to control where the transaction closes would be prudent to pay both the Owner’s Title Policy and the $100 Loan Policy on behalf of the buyer.
The clearest statement on the application of the RESPA rule in Texas comes from the Texas Association of Realtors: “If the seller pays for the owner policy, the choice of a title company is a matter that can be negotiated in any contract. The only law governing this issue is under the Real Estate Settlement and Procedures Act (RESPA), which provides that if the buyer pays for the owner policy, the buyer is entitled to select the title company.”
One small wrinkle in this discussion comes from the Department of HUD. HUD has recently implemented a “Buyer’s Choice Program,” which allows buyers of foreclosed properties to choose the title company – if the buyer pays the fees. HUD has historically required the use of specific providers specializing in the unique requirements of these transactions. HUD will still bear the cost of title fees if the buyer agrees to use one of these preferred providers.
So, who picks? Based on legal opinion, it seems safe to say that the choice is a negotiable item in Texas, with that negotiation being tied closely to who pays for the cost of the service. In the day-to-day, market forces affect the balance of power in these negotiations. With inventory low in many Texas metro areas and a steady stream of new residents moving to the state, sellers have some advantages in all areas of negotiation. Just bear in mind that a seller who tries to both dictate the choice of title company and negotiate for the buyer to pay the costs is violating RESPA if there’s a loan involved.
Sr. Vice President of Business Development
Independence Title Company