Owner’s Policies Labeled 'Optional' But Education Is Not
|May 20, 2014|
Prepare Now for the CFPB's Integrated Mortgage Disclosures|
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CFPB Releases Guide to Complete Integrated Mortgage Disclosures
Four years ago, the Real Estate Settlement Procedures Act (RESPA) was reformed and HUD began requiring the use of a new Good Faith Estimate (GFE) and a new Settlement Statement with the hope of helping consumers comparison shop. While there’s no data to support whether this goal was achieved, having Owner’s Title Insurance quoted on the GFE helped many title agents have their best years in a while. Now, the industry is in the midst of transitioning to new mortgage disclosures once again—all in the name of helping consumers understand their transaction, according to the Consumer Financial Protection Bureau (CFPB).
The Bureau released its final rule for integrated mortgage disclosures in November. Beginning Aug. 1, 2015, a three-page Loan Estimate will replace the GFE and early TIL, while a new five-page Closing Disclosure will replace the HUD-1 and final Truth-in-Lending (TIL) disclosure. While the integrated forms make improvements in the way they provide information to the consumer, they fall short in their disclosure of title-related fees to consumers.
In the final rule, owner’s title insurance must be labeled as “optional” on both the Loan Estimate and Closing Disclosure. This concerns many title agents because telling a consumer that owner’s title insurance is “optional” may dissuade homebuyers from purchasing the same protection that lenders receive.
Calling owner’s policies “optional” on the integrated disclosures will have a varied impact depending on market traditions of who pays for the policy. In many markets—including Illinois and Wisconsin—it is common for the real estate contract to state that the seller pays for the owner’s policy. In Ohio, however, there is no standard as to who pays for an owners’ policy. “It is pretty much designated by area,” according to Pamela Daley-Jennings, manager and co-owner of First Lima Title Agency in Ohio.
“The new rule is going to absolutely devastate my owner’s title insurance business,” she added. “The fact that it is listed in a separate area with the word ‘optional’ by it makes it seem unimportant to the entire process.”
In Jennings’ market, real estate contracts do not include language saying the seller pays for the owner’s policy. Historically, she said it has been uncommon for buyer’s to purchase coverage for themselves. “Things are so competitive around here, that years ago, one bank even forwent title insurance, which resulted in numerous lenders following suit,” Jennings said. “This was acceptable by Freddie Mac and Fannie Mae because it was the ‘standard’ in our area. The housing market crash put an end to that practice as Fannie and Freddie would no longer accept the title opinion instead of title insurance.”
Many community banks continue to rely on title opinions, according to Jennings, but the fact that RESPA required owner’s title insurance to be quoted on the GFE greatly improved the percentage of Owner’s Policies that consumers have purchased.
“Since it has not been the standard in our area, we can’t even get the Realtors to promote it,” Jennings added. “The lenders see it as an additional, unnecessary cost to their buyers, so we don’t have their support either. About the only time we can get them to suggest it to their client is when they are purchasing a bank repo.”
In Florida, there are pockets of the state—such as Dade, Broward and Manatee counties—where the buyer pays for the Owner’s Policy. Vincent Cassidy, president of Majesty Title Services, agrees that this description is troublesome and will be a bigger issue where buyers pay.
According to Rich Patterson, president and CEO of Connecticut Attorneys Title Insurance Co., the majority of transactions in the New England states do not result in the issuance of owner’s policies. This is due to a variety of factors. In Massachusetts, a title certificate is provided to the purchaser of a residential resale by an attorney. In other jurisdictions, attorney agents are not convinced of the value of an owner’s policy because a title search has been conducted by someone they trust and the attorney examined the title. Resistance to the higher cost of an owner’s policy from real estate agents and mortgage lenders also plays a role, Patterson said.
“I am not sure whether labeling the owner’s policy as ‘optional’ will make much of a difference here,” he added.
Cecelia Adams, owner and manager at RSI Title in Maryland, believes this will play out poorly in the market. With lenders required to provide the Loan Estimate three days after receiving a mortgage application, the buyer will notice one of the fees labeled as “optional.” If the buyer is trying to save on closing costs, the message unfortunately tells them that owner’s title insurance may not be needed.
“At this point in the process, this form is being delivered directly from the lender,” Adams said. “Who are we kidding that we actually will have a voice in the process? Do you think that the lender will be able to inform the consumer how important title insurance is for the homebuyer? This is an uphill battle at this point for anyone in this business. When the final form is provided to the purchaser three days before closing, it may be too late. The buyer has already established how much money they will need for their purchase, which may not include the owner’s coverage.”
At Paragon Title & Escrow Company in Washington, D.C., attorney Richard Fritts tells buyers every month how the seller’s owner’s policy aids in getting transactions settled on time. Without an owner’s policy, issues such as unrecorded releases or mistakes in filed documents, could delay settlement until they are resolved, possibly causing the loss of a loan lock or even a sale.
Recently, Paragon Title handled a deal where—three years ago—the sellers of a property recorded a deed transferring the property to their revocable trusts during the gap period and never told anyone. The deed had not been indexed when the next deed was recorded.
“This resulted in the deed that the sellers signed in their individual capacities conveying the property to the buyer being invalid,” Fritts said. “Because the seller had an owner’s policy, the settlement on a refinance went through as scheduled while the deed was in the process of getting corrected.”
A few states—such as California, Louisiana and Pennsylvania—require a buyer to sign a statement if they want to waive owner’s title coverage.
Phil Janny of the law firm Plunkett & Graver recalls one time when a buyer in Pennsylvania waived coverage of an owner’s policy. He’s unsure how the word “optional” will impact consumers in his state, but said the CFPB’s decision fails to protect consumers when purchasing one of the biggest investments in their life.
Janny said the federal tax forms provide a great example of paying for something without modifying it with “optional.” On the tax forms, people can check a box if they want $3 to go toward the “Presidential Election Campaign.” The form indicates that checking the box will not change the tax refund.
“This to me seems to be a prime example of the definition of optional, and yet the word optional in not used on any of these federally regulated forms, but the CFPB chose to use it on the new Closing Disclosure,” Janny said. “If just one consumer misconstrues the interpretation of the word optional on this form and does not purchase an owner’s title insurance policy as a result, and that consumer has a title claim, then shame on the CFPB. Their mission failed by not protecting the consumer as a result of the poor choice of wording on the disclosures.”
In California, it’s rare that a buyer waives an owner’s policy. If they do, the document they must sign states:
“Important: In a purchase or exchange of real property, it may be advisable to obtain title insurance in connection with the close of escrow since there may be prior recorded liens and encumbrances which affect your interest in the property being acquired. A new policy of title insurance should be obtained in order to ensure your interest in the property that you are acquiring.”
Patrick Miller, president of Preferred Title Company in Louisiana, said he asks buyers that elect not to purchase an owner’s policy if it was their decision or if others offered advice. He makes a note of who advised the buyer not to purchase coverage.
“We have made an effort in our area to educate lenders and real estate agents on the positives of owner’s title insurance and I would say 90 percent or more of residential and commercial buyers walk into the closing knowing they want coverage. It is an issue of education,” Miller said.
Randy Bradley, executive vice president of Mother Lode Holding Co., which provides title insurance, underwriting and transaction support services across the country, said the traditional payer of an owner’s policy varies by county. In addition, it’s always negotiable and can be split between the buyer and seller.
Education Not an Option, But a Necessity
“This puts the onus on us to actually explain the value of our product. If we can’t effectively do that, we shouldn’t be selling it,” Bradley said. “So, I view this as an opportunity for us to get better at explaining our value to the consumer. In doing so, we just might get consumers to actually direct their business back to the company that took the time and explained the value of title insurance.”
While the “optional” modifier is a challenge, it’s also an opportunity. Many title professionals overwhelmingly agree with Bradley that educating consumers about the product should be a priority.
Diane Evans, senior vice president of Land Title Guarantee in Colorado and ALTA’s president-elect, said part of the argument against the use of “optional” should go back to the basics and the role of the title agent, and confirming seller’s ownership rights and the legal description.
“Once these items are confirmed, ownership rights can be transferred to the buyer,” Evans said. “The guaranty of those rights can be protected with title insurance.”
To help educate consumers and others about the value of title insurance, ALTA offers the Title Insurance Education e-Kit, which includes information in a variety of formats that members can download. Items available for download from ALTA’s website include a homebuyer presentation, videos, articles, social media content, brochures and other material that members can use for educational purposes. Because social media is a powerful tool to reach a wider group of people and provide education about title insurance, ALTA also provides sample content that members can use on Facebook and Twitter.
“All parties involved in the real estate process—especially consumers—should have an understanding of the importance of title insurance and what’s involved in the closing process,” Evans said. “The various elements included in the e-Kit can assist in explaining the closing process and how title professionals help consumers get the keys to their home and also how title insurance protects them in case ownership of their home is ever challenged.”