Minnesota Department of Commerce Costs Homebuyers 63 Million Dollars.(first in a series on the Minnesota Department of Commerce)
“DOC” is the Minnesota Department of Commerce
“HUD” is the Department of Housing and Urban Development
“RESPA” is the Real Estate Settlement and Procedures Act
“MNAR” is the Minnesota Association of Realtors
“CAARE” is Consumer Advocates in American Real Estate (us)
This is a story of how the Minnesota Department of Commerce (“DOC”) made a mistake that has likely cost Minnesota home buyers at least forty-five million dollars and continues to add up daily. Even worse is that the victims are mostly low income and first-time homebuyers who cannot afford these extra fees.
On an individual basis, homebuyers can expect to pay approximately $500 more in closing fees than they did prior to the DOC’s error. Over the last 21 months that adds up to over $63,000,000 in extra and unnecessary fees.
Any time a group of competitors privately meets, we should be wary. Competitors leaving the room in agreement upon a 63 million dollar price increase, create a regulatory and investigative matter. We have compiled a lot of facts that leave us with a lot of questions. Did competitors conspire to mislead government regulatory authorities into facilitating a price-fixing scheme? Did the Minnesota Department of Commerce make a terrible mistake and then attempt to cover it up? When real estate competitors changed one of their forms, was it an accident that closing fees increased? The facts demand an investigation.
CAARE uncovered the following information and has worked on this matter for over a year and a half. We have met with dozens of people, traveled to Washington DC to meet with HUD officials, drafted memoranda, designed, prepared and delivered presentations and much more. A partial summary/chronology of the work we did and how the DOC negated our work without justification is available by clicking on this link (click here for a chronology of our work).
The Minnesota Department of Commerce’s Press Release
On August 17, 2010, the DOC issued an incorrect statewide press release (click here) to the real estate industry instructing all real estate practitioners that certain seller title fees were now required by federal law to be “disclosed” as buyer fees. Almost immediately after that press release, the Minnesota Association of Realtors (“MNAR”) announced that they had changed their standard purchase agreement form to facilitate that change (click here to see their announcement). However, their change did not just require certain seller fees to be disclosed as buyer’s fees, they changed their form to make buyers responsible for paying those seller title fees. What MNAR failed to disclose to their members, was that this change would wipe out two title company discounts and would take money out of homebuyers’ pockets and put it in the pockets of their member’s title companies.
As it turns out, MNAR had been working with the title insurance industry on this issue months before the DOC’s announcement. In addition, they had been directly consulting with the DOC and had planned to change their purchase agreement long before the DOC’s press release. The DOC failed in their due diligence and overly relied upon the industry that they regulate for advice on this matter.
At a time when the residential real estate market is already struggling, can we really afford to strap homebuyers with extra and unnecessary fees? The loss of those discounts has cost Minnesota homebuyers approximately $63 million in unnecessary closing fees over the last 21 months, pocketed by title insurance companies. Those costs continue to accrue. When presented with their error, the DOC has been unresponsive and uncooperative to the point of interfering with CAARE’s efforts to repair the problem.
The DOC stated that their press release or “FAQs” was prepared after discussion and agreement with HUD in keeping with their role in monitoring compliance with a federal law called the Real Estate Settlement and Procedures Act (“RESPA”). The DOC’s FAQs were “to help clarify, and assist in ensuring compliance with the new RESPA Regulations.”
However, the DOC had made some serious errors in their communications with HUD. RESPA, as interpreted and enforced by HUD, does not require that seller’s fees be disclosed as buyer’s fees. RESPA also does not require buyers pay those seller’s fees. In fact, such a mix-disclosure would actually violate the law the DOC supposedly was enforcing.
The DOC’s RESPA Violation
RESPA is a statute that provides for consumer disclosures and that prohibits kickbacks. It requires lenders accurately disclose the fees that buyers are likely to be charged:
“Each lender shall include … a good faith estimate (“GFE”) of the amount or range of charges for specific settlement services the borrower is likely to incur in connection with the settlement as prescribed by the Secretary…” (parentheses and emphasis added).
In Minnesota, the abstracting (or “title search”) has always been a seller’s fee. It is not likely that borrowers would be charged for this seller’s fee.
Here is what the DOC stated in their press release:
“1) Q: Can I charge the “seller’s” portion of the search and examination fee on line 1101 in the seller’s column?
A: When asked, HUD’s response states that the search and examination fees are considered “Title Services” and “must remain in Block 4 of the GFE and in Line 1101 of the HUD-1 in the borrower’s column….”
The DOC was instructing the entire real estate industry that it must now disclose the seller’s abstracting (also known as “title search”) fee as a buyer’s fee. They were requiring that “disclosure” appear on the buyer’s official good faith estimate (“GFE”) and final HUD-1 (settlement closing statement). The DOC was wrong. They had asked the question wrong. They did not mention to HUD that Minnesota law and practice differs from most other states in the nation in that sellers normally pay for the abstracting fees in Minnesota.
DOC has no Authority
Neither the DOC nor HUD has authority to require that seller’s fees be disclosed as buyer’s fees. To do so would be a violation of RESPA.
The following comments are from Howard A. Lax, a well-known RESPA lawyer. These comments appeared in an article (click here to read the article – No longer available online) in RESPA News:
“ states that the HUD-1 and HUD-1A “….shall conspicuously and clearly itemize all charges imposed upon the borrower and all charges imposed upon the seller in connection with the settlement.”
“In other words, the GFE and the HUD-1 must only show fees that are imposed on the borrower by agreement or by law. Charges imposed on the seller by the lender or agreement of the parties must be disclosed as seller paid fees. Nowhere in RESPA does HUD have authority to require disclosure of borrower fees that the borrower is NOT likely to pay any fees that are NOT imposed on the borrower.”
“HUD has no authority to require the parties to re-characterize the terms of a valid and binding purchase agreement or loan commitment. states: “Nothing in this chapter shall affect the validity or enforceability of any sale or contract for the sale of real property or any loan, loan agreement, mortgage, or lien made or arising in connection with a federally related mortgage loan.” Hence, if the purchase agreement says the seller will pay a fee and the purchase agreement does not say that the seller will reimburse the fee to the borrower, the GFE and the HUD-1 should follow the purchase agreement.” (emphasis added)
The DOC had made an inexplicable mistake. No law requires seller’s fees to be disclosed as buyer’s fees, much less be charged to the buyer. In fact, the DOC was instructing the real estate industry to violate the law.
DOC is Unfamiliar With or Ignores Minnesota Real Estate Law and Practices
Minnesota is different. Minnesota is one of a handful of states where the law and practice dictate that seller pays for abstracting (“title search”). DOC either was ignorant of this or deliberately ignored it. Otherwise, DOC could not have logically reached the conclusion that it did.
In order to avoid mischaracterization of fees in states like Minnesota, RESPA created an exception to the general rule that certain fees be disclosed as buyer’s fees. Here is the RESPA exception as it appears on HUD’s website:
“GFE – Seller Paid Items.
…Charges that typically would not be charged to the borrower, but would be charged to another party — such as the seller — do not have to be included on the GFE….” (emphasis added)
The DOC appeared to know about this exception because they applied it in their next FAQ when they applied it to the seller’s closing fee:
“2) Q: Can I charge the “seller’s” portion of the closing fee on the seller’s side of line 1101?
A: Per a HUD representative, “if it is customary for the seller to be charged a separate fee for the settlement closing, it may be listed in line 1102 in the seller’s column.”
The seller’s closing fee (“service of conducting a settlement”) and abstracting (or title search) are defined in the same section of RESPA and are treated identically. The DOC applied the exception to one seller’s fee but not to the other. Here is the reference:
“ defines “title services” as any service involved in the provision of title insurance (lender’s or owner’s policy), including but not limited to: title examination and evaluation; preparation and issuance of title commitment; clearance of underwriting objections; preparation and issuance of a title insurance policy or policies; and the processing and administrative services required to perform these functions. The term also includes the service of conducting a settlement.” (emphasis added)
HUD is not familiar with all the different laws and practices that occur in each state. They rely upon each state to properly inform them of those practices. Based on our meetings with the DOC it was evident to us that the DOC had little knowledge of Minnesota real estate laws and practices. In fact, we do not believe that they understood the consequences of their actions even after we explained them. Therefore, it seems likely to us that the DOC did not properly convey to HUD the pertinent facts and consequences necessary for their press release. Apparently, their only “due diligence” was to talk with some title company executives and MNAR. As a result, Minnesota homebuyers are now paying for seller closing costs as well as higher fees for those same services.
Minnesota Association of Realtors Exploited the Situation
Almost perfectly timed with the DOC’s press release, MNAR made their own announcement. However, instead of just disclosing seller’s fees as buyer’s fees, they went a step further. They created a new purchase agreement that actually shifted the seller’s fees to the buyer and then went on to inform their membership, who in turn misinformed the public, that it was a RESPA requirement (it was not). The DOC never said that buyers had to pay sellers’ fees – Only that they are disclosed as buyer’s fees. Most of MNAR’s largest corporate members own title companies that stood to benefit from this change.
MNAR had been working on this change for months prior to the DOC’s press release and MNAR had apparently consulted with the DOC through one of their members who is an executive at a title company. MNAR credited two title company executives and a private attorney for drafting the new form (click here to see the announcement – same document from above section). A title company executive might have proposed the idea to the DOC as well. Paul Hanson, Chief Investigator of the DOC told us that he had met with title company executives prior to issuing the DOC press release. However, in an answer to our Data Practices Request, Mr. Hanson later claimed that he did not know with whom he met when he met them, what was discussed and he has no e-mails or calendar events providing any details about this meeting. However, in our meeting with Mr. Hanson, he had discussed meeting with the title and real estate industry representative.
To us, it seemed pretty clear that this change was harmful to homebuyers. MNAR’s CEO, Chris Galler appeared to acknowledge this a well when he wrote an e-mail to participants in a meeting on this topic, “Changes that shift a fee from seller to buyer may have a negative market impact for buyers who have insufficient financial resources to consummate the transaction. In a real estate environment where some buyers are unable to bear any additional costs, even where it is a shift of a relatively small cost that had otherwise been paid by the seller, as an industry trade association we are sensitive to not making changes that further stall or prevent transactions from occurring.”
However, Mr. Galler took a different position when talking about their new purchase agreement more publicly in an interview on April 2011, “It really doesn’t discriminate against anybody and it doesn’t cost buyers anything.” (Click here for article)
We believe that shifting fees to buyers that they otherwise would not have had to pay is harmful to buyers. Making them pay hundreds of dollars more per closing for those fees is even more harmful.
How It Hurts Homebuyers
At first glance, it would appear that no one except sellers stood to gain from shifting the seller’s fees to the buyer. Shifting the abstracting (or title search) fee to the buyer appeared to cause the homebuyer to pay an extra $150 – 300 in fees – if you looked no further. However, as we later discovered, there were other consequences of this fee-shifting that few could identify, except title company executives (and CAARE). Making the buyer pay for one of the seller’s fees changed the dynamic of the transaction and indirectly eliminated two substantial and widespread consumer discounts on title fees. It was a huge windfall for title companies.
With the loss of those two discounts, a typical buyer was now looking at paying 67% more for title insurance and likely more than double for abstracting. This amounts to at least $500 in increased closing costs for buyers per transaction. According to the MNAR housing data, over the last two years, there were almost 160,000 residential real estate transactions in Minnesota. Despite CAARE’s efforts, these improper and excess charges have been occurring since September 1, 2010. We believe that homebuyers have already unjustifiably been charged and required to pay at least $63 million in unnecessary fees.
Here is how the discounts used to work. More than ten years ago, title companies began accepting the seller’s prior title insurance policy as a form of abstracting evidence. When the seller provided the buyer with their prior policy, it would give rise to two discounts.
First, the buyer would be entitled to a 40% discount (called a reissue credit) on their new title insurance policy. Title insurance can often cost in excess of $1,000. Title insurance companies all had filed rates with the DOC, which included this substantial reissue credits.
Second, the seller would benefit in the form of a discount on their abstracting. Instead of a very expensive 40-year abstracting search, the prior policy would enable the title company to search only back to the last deed transfer (often well under $100). A 40-year search can easily cost hundreds of dollars. Prior to MNAR’s new purchase agreement, both of these discounts had become a routine part of most metro area transactions. Those discounts represented a lot of money for consumers.
With MNAR’s purchase agreement change, the buyer and seller’s interests were no longer aligned. Because the seller no longer pays for abstracting, there is no longer a discount for the seller to receive. The seller no longer has a financial incentive to provide their prior policy to the buyer. That means the buyer is now paying full price for their title insurance. In addition, since the seller is not providing their old title policy to the buyer and the buyer is now paying for abstracting, the buyer is likely paying double the cost for abstracting as they should be. Both discounts have largely vanished from the Minnesota residential real estate process.
Buyers are now typically paying 67% more than they used to pay for title insurance and they are paying at least double what sellers used to pay for abstracting. By changing their purchase agreement, MNAR helped all their title insurance affiliate members make a lot more money. It has also harmed individual buyers as well as Realtors who work with homebuyers who can no longer afford to buy homes. It has harmed sellers and the real estate market in its negative effect on the prospective buyers.
How it Hurts Realtors
MNAR falsely told its Realtor members that the new purchase agreement was a requirement of HUD. Their educational materials read, “RESPA now requires buyers to pay for seller’s title charges”. Members were taught this incorrect information in DOC approved continuing licensing classes presented and written by their own association. They had no reason to doubt this information. This is important because Realtors rely on DOC approved classes and their association for accurate information that is often used in advising their clients. If Realtors had known that this information was false, they could have chosen to use other purchase agreement forms and guided their buyer clients so that the extra charges could have been avoided.
In addition, Realtors lost business to buyers who otherwise may have qualified for financing had it not been for this change. And Realtors’ reputations have been tarnished in that many of them relayed this bad information to their clients and now need to go back and tell their clients that they paid too much for title insurance and abstracting.
We believe that MNAR put the interests of their corporate members’ affiliated title companies above those of their own membership and we want Realtors to know this so that they can institute positive change from within.
MNAR’s and DOC’s Response – “It’s Negotiable” – A Myth
Rather than fix the new purchase agreement that was needlessly changed, MNAR defended their decision by claiming that the fees are still negotiable. The DOC stood behind MNAR and ignored our requests to issue a corrective press release. MNAR even created an addendum and claimed that this addendum addressed our concerns because it made these fees “negotiable.” The DOC said the exact same thing to us. However, the addendum fails to address the problem and so does their logic.
First, although the closing fees are (technically) negotiable, the new purchase agreement still shifts to the negative the bargaining position of the buyer. Buyers are harmed.
Second, the new purchase agreement has all but wiped out two substantial discounts discussed above. Even if buyers were able to negotiate for sellers to pay these fees, the practices that generated these discounts are still likely to be gone. However, as you will see in our third reason, these fees are NOT negotiable.
Third, and most important, lenders prohibit sellers from contributing excess money towards buyers’ closing costs. MNAR knows this and the DOC should know this (we explained it to them). Lenders limit how much money a seller may contribute towards a buyer’s closing costs because they want to know that the buyer is investing a certain amount of their own money in the transaction. When a seller contributes money towards a buyer’s closing costs, that throws off the lenders’ calculations. With the new purchase agreement, the abstracting fee is now construed to be a seller’s contribution to which these limits are applied. In most transactions, it does not matter what is in the purchase agreement, because the abstracting fee is no longer “negotiable,” and the seller is often prohibited from paying it.
Today, a typical buyer negotiates for the seller to contribute the maximum allowable by lenders (3 to 6% depending upon buyer’s qualifications and lending program). If a buyer has already maxed out their allowable seller contributions (and most have), then that means that buyer will be prohibited from asking the seller to pay the additional closing costs MNAR has shifted to the buyer. MNAR’s addendum fails to address the problem. These fees are not negotiable because lenders will not allow them.
The DOC has been non-responsive to us on this issue even when presented with a Data Practices Request.
Who Was Really Behind MNAR’s Purchase Agreement Change – You Decide
These are the facts:
- No legal authority exists or existed for the DOC or HUD to require seller’s fees to be disclosed as buyer’s fees.
- No governmental authority told MNAR that buyers now had to pay for seller’s fees. RESPA does not require buyers to pay seller’s fees.
- The Minnesota State Bar Association did not reach the same conclusion as the MN DOC or MNAR and they did not change their purchase agreement.
- The title insurance industry stood to gain all the money that this has cost homebuyers. Realtor firms own most title companies in the metro area.
- The purchase agreement change was likely first promoted by a title firm.
- MNAR Forms Committee was comprised mostly of competitors whose firms were affiliated with title companies. Title companies stood to benefit from this change.
- MNAR’s Forms Committee’s actions caused all the members’ title firms prices to increase.
- MNAR facilitated and was present at Forms Committee meetings that resulted in these industry-wide title company price increases.
- Because of this change, fewer homebuyers could afford homes and that hurt individual Realtors as well as homebuyers.
- MNAR used DOC approved licensing classes to tell its membership that RESPA required buyers to pay the seller’s title charges (click here to see relevant materials from one of those classes). We have materials from two classes taken about 9 months apart.
- MNAR told its membership (click here to see MNAR’s announcement – see the first line) that the new purchase agreement was the result of the MNAR Forms Committee working with people from the title association and the Minnesota Bar. No one had been authorized by either organization to pledge the support of their respective trade associations.
- There was no good reason for MNAR to change their purchase agreement and that change unfairly wiped out title insurance discounts for consumers.
- Title firms have profited from this change.
- The DOC was made aware of their mistake, they were made aware of the false information being disseminated by MNAR in DOC approved classes and failed to investigate.
How Did the DOC Allow This to Happen?
We have a lot of questions about how this situation came about and why the DOC’s internal investigative procedures failed to detect a problem even after it was placed clearly in front of them.
How was a DOC press release of such magnitude issued without any records of its origin? What kind of procedures is lacking at the DOC that would allow the DOC to issue such a press release without the necessary due diligence into the affected law and real estate practices? What types of procedures are in place at the DOC to ensure that Data Practices Requests are complied with? Why did the DOC fail to investigate MNAR for teaching false information in their classes about the reasons for the purchase agreement change? Why did the DOC refuse to correct their error when confronted with evidence that they had made a mistake? Why did the DOC stand in the way of correcting the error when CAARE had secured a solution from HUD?
The DOC told us that they do not retain any records that are not part of an investigation or intentionally saved for longer than 6 months. That means that they routinely destroy records that may be incriminating for them. They used this to dodge our Data Practices Request and claimed that they had no information on their press release that cost Minnesota consumers $63 million.
We understand that even the DOC can make a mistake. However, what was striking for us was what happened after we alerted them to the error. Not only did they not investigate the error, by their own admission, but they appeared to be covering up their mistake. By their own admission, they refused to analyze the impact their press release had on title insurance discounts. They refused to investigate if MNAR was using DOC approved classes to disseminate incorrect information about the press release. They refused to investigate if the resulting price increases were actually part of a price-fixing scheme. They refused to consider information CAARE had provided them about the law and real estate practices. And they refused to work with HUD to issue a corrective press release once CAARE had secured HUD’s assistance, effectively negating our work.
CAARE met with Commissioner Rothman twice to explain the error and propose a solution. We received no communications from the DOC explaining or supporting their press release as being an accurate representation of the law. They demonstrated an almost complete lack of knowledge about Minnesota law and real estate practices in regards to this issue and an unwillingness to learn about the law or those real estate practices.
We believe that if proper vetting procedures existed at the DOC that the press release would never have occurred and that Minnesota homebuyers would not be paying more for closings and title insurance.
What Needs to Be Done
The DOC serves an important role in protecting real estate consumers through the DOC’s regulating of real estate licensees. Part of that role requires knowledge about the law and real estate practices in Minnesota. Part of that role requires due diligence in vetting out the truth and having procedures in place that allow mistakes to be exposed and corrected.
We want to see our concerns for Minnesota consumers addressed in a thorough and unbiased manner. We believe that we have stated a reasonable case that demonstrates that homebuyers have been negatively affected by an error by the DOC. We want our analysis properly reviewed by qualified people who have no connection to the real estate industry that is benefitting from this.
In addition, we would like to see a requirement that the DOC and other government entities retain e-mails and other data for the statute of limitations period or 6 years (whichever is longer).
Most importantly, we hope that our work results in a corrective press release to lenders, Realtors, title companies and other real estate professionals informing them that in Minnesota the seller’s fees fall under the RESPA exception and do not need to appear on the GFE and do not need to be paid for by buyers. This will help homebuyers and ultimately the Minnesota housing market.