You Can Use Your Own Settlement Company, But The Buyer Pays A Penalty?

Managing Real Estate Broker with Coldwell Banker Elite

Law Books

Same Violation - Different Twist

From time to time fellow agents will forward to me things along the way that they find interesting or questionable.  Often it's the same old stuff, but recently someone forwarded a listing description that got my attention.  Essentially it said that the "buyer is free to use any settlement company they choose, but if they don't use the Listing Agent's/Seller's preferred settlement company than the buyer must pay a certain fee" (paraphrased).

The issue of preferred settlement company has been a long standing issue.  RESPA has been around since before I was born.  It was enacted in 1974 to ensure that Buyers were treated fairly and that settlement service providers, attorneys and real estate agents weren't engaging in kick-backs, etc...  

Rarely did we see blatant violations of this federal law until short sales became move ubiquitous in the market place.  With the short sales there came a never-ending list of odd practices and listing agents trying to find innovative ways to get buyers to use their preferred settlement agent became more common.

Usually the violations manifest themselves in the counter or rejection of an offer based on the use of a preferred settlement company. Don't be confused, incentivizing the use of a preferred vendor is ok.  If I said, "I'll pay your title insurance if you use XYZ settlement attorney", than that would be ok.  However, to penalize me for not using your preferred vendor (as stated in the property description used as an example above) seems to be out of alignment with the spirit of RESPA. Sure enough after some checking around, we found a clarification from RESPA from 1997.  Here's what it said:


(29) A seller violates Section 9 when it requires the payment of a fee to use a title company other than the one designated by  the seller.

December  17, 1997

This is responds to your August  14, 1997 letter to this office. In your letter, you state that you represent a client  that is purchasing a new home from a developer. You state that the developer/ seller’s purchase contract requires that your  client obtain owner’s title insurance from  a company designated by the  developer/seller. The  letter specifies  that your  client  may  opt  to obtain  such  title  insurance from an agent  or company  of his choosing, but  should  the option  be exercised,  he would  be required to pay for the developer/seller’s attorney’s fees and  administra­ tive costs in connection  with  the closing, in the amount of $1,050.00.

Consistent with  the long-standing position  of this  office, the provision you describe  is violative of Section  9(a) of the  Real  Estate Settlement Procedures Act (RESPA)  and  its  implementing regulation, which state that “no seller  of property . . . shall  requiredirectly 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.” 12  U.S.C.A.  2608(a);  24 CFR  3500.16  (emphasis added). A requirement that the buyer pay additional fees if it chooses a title  insurance company other  than the one selected  by the developer  effectively requires that the purchaser use a partic­ular  insurance company  in contravention of RESPA.

In addition, Section  9(b) of RESPA provides for damages which include  a payment from “sell­ er[s]  who violate  the  provisions of subsection (a) . . . in  an  amount equal to three times all charges made for such  insurance.” 12 U.S.C.A. 2608(b).


John  P. Kennedy

Associate  General Counsel  for Finance And Regulatory Enforcement

The Bigger Picture

Ok, so there it is in black and white that this is probably a violation. My bigger concern is why would the listing agent put that kind of statement in the area that should be utilized to tell a story that will entice the buyer into the house with the intention of buying it?  Why would a listing agent or seller want to do anything, beyond what's customary in the market, to scare off buyers?  How is that possibly working in the Seller's best interest? Disclosure:  I am not an attorney.  The information provided has been confirmed as accurate by others, who are attorneys.


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Matthew Rathbun, Executive Vice President


Coldwell Banker Elite | Fredericksburg, Virginia  | 540.455.3350 |

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