Consumer Financial Protection Agency Bill – badly manipulated by industry groups

Large multiple industry interests are watering down the Consumer Financial Protection Agency (CFPA) bill through intense lobbying.  One of the most recent amendments to the bill excludes the title insurance industry because it was argued that they are already well regulated at the state level.  Keep in mind that it is not just the American Land Title Association that wanted this exception.  This amendment also benefits the mortgage, builder and Realtor lobby whose members all own substantial interests in title insurance companies.  They might as well own the appraisal firm too…

At the very least, the reasoning for excluding title insurance products is in error.   Title insurance is not well regulated at the state level – anywhere.  In addition, if one carefully examines the role of the title insurance company they will find that title companies also provide closing services to the lenders in addition to insuring the title.  A bad title company is in a unique position to facilitate the closing of a bad loan by insuring over title defects and mis-disbursing lender funds.

Although little attention has yet to be drawn to the significance of the title insurance industry, perhaps that should change. 

First, it is not true that title insurance is well regulated at the state level.  Although we have seen some enforcement actions at the state level in recent years, there is very little being done at the state level in regards to auditing escrow accounts, setting reasonable educational or experience standards for title insurance licensees, or scrutinizing unhealthy relationships between commission based service providers and safeguard service providers like title.  

As an example of the poor regulatory position of states, we recently attempted to perform a Data Practices Request (same as a Freedom of Information Request but at the state level) with the Minnesota Department of Commerce to identify the licensed title agencies in Minnesota.  Commerce was unable to fulfill this request because they didn’t even know who the title agencies were.  Keep in mind that it is the title agency that often receives the lender funds, disburses them and is also responsible for stopping bad transactions if the title is bad or the lender instructions are not met.  There could not be a better opportunity for financial fraud.  These title agencies handle hundreds of BILLIONS of dollars of consumers’ funds in Minnesota alone and the Commerce Department doesn’t even know who they are.

Aside from being subjected to little regulatory or legislative restrictions, there are other reasons that the title insurance industry should come under the umbrella of the CFPA.   Title agencies are often owned by, affiliated with, or selected by mortgage companies, builders and real estate brokerage firms.  Since title agencies hold the purse strings to the transaction funding, being able to exert undue influence over the title agency has become an important asset.

Imagine a cash poor builder who owns a property with mechanics liens and that property is subject to an underlying blanket mortgage that should be paid off at closing.   Imagine a property with a thirty thousand dollar real estate brokerage commission riding on the deal.  Or how about a mortgage lender that is short on transactions.  Imagine each of these firms owning a title company.  Each of those firms (representing three different industries) is in a position to influence whether or not the title company raises objections and closes the transaction.   If the last chance to stop a bad transaction rests with a title company, shouldn’t they be subject to the CFPA?   And what about the fact that the decision to fund the lenders’ money on a bad loan is influenced and possibly controlled by a builder, mortgage firm or real estate brokerage firm?   Shouldn’t they also be subject to the CFPA?

This exception was carved out by a Minnesota Congressman named Paul Erickson, a Minnesota Republican.  Minnesota may actually be the starting place where controlled business got its foothold and where it possibly has the most widespread effects.  It is typical for builders, brokerages and mortgage lenders to own title companies in Minnesota.  It should come as no surprise that Minnesota authored this atrocity they call an “amendment.”

Builders Should Not Own Title Companies

 

Builders want to continue to force consumers to use their in-house title companies.   Allowing a builder to own a title company is little different than allowing a builder to determine if his own title is any good.  Builders recently pummeled HUD with a mountain of letters and a lawsuit to protect this anti-competitive, anti-consumer and manipulative arrangement.

New construction closings are likely the most complex and risky transactions a consumer or lender will ever do.  The title issues are enormously complex, fraud abounds and the potential for coercion and bait and switch is huge.  And it is the title company that must sort through the complex purchase agreements to properly represent them in the settlement agreement.  It is the title company that must uncover title defects created by the builder, mechanics liens that the builder hasn’t paid and handle situations where the buyer and builder disagree.  Of course, builders want to own the title companies that make these decisions.  What better way to protect their investment.

It doesn’t take long to imagine a routine real life scenario where a builder might abuse his ownership of a title company.  Here are a few:

  • Sub-contractors have filed mechanics liens on the property and the builder disputes them.
  • There is a blanket underlying mortgage on the entire development and the builder doesn’t want to pay off the part due to release the subject property.
  • The builder is in financial difficulty and the title company is a perfect bank to “borrow” money.

Residential new construction is already a problem for consumers in that the purchase agreements are best described as contracts of adhesion and offer consumers no meaningful protection whatsoever.  The forms are typically custom forms in excess of 20 pages that would cost a fortune to even have an attorney review.  Consumers are already at a severe disadvantage.

In addition, title companies are responsible to collect and disburse funds in an unbiased manner that follows the instructions in the purchase agreement.  Is there any possible way to call a builder’s title company unbiased? 

And if the builder is trying to cover up title defects such as unpaid mechanics liens or unpaid mortgages, what better way to do that than by owning your own title company?

The other problem is that builders coerce buyers to use their biased title companies by offering fake discounts that exceed the price of the title work often by a factor of 5 or more.  Free rooms, $10,000 in discounts, free granite countertops are all things that we have seen.  When the title fees are only $1200 or so, the so-called “incentive” to use their title company becomes more of a demand than a choice.

And if the builder is capturing all of the buyers’ title work that comes through the door, what does that do to competition?   Competing title companies that offer title work for less won’t be considered because they would essentially have to pay the buyer $8,000 to match the benefit the consumer is getting from the builder.  The discount is nothing more than a stick to whack the buyer with if the buyer refuses to subject himself to the risky proposition of allowing the builder to examine his own title. 

Allowing builders to own a title company allows the builder to neutralize the safeguards that the title company is there to provide.  If you’re going to allow that to happen, it is CAARE’s position that you would be better off not even examining title at all.

Appraiser’s Code of Conduct Under Scrutiny

On July 28th, 2009 CAARE was briefly interviewed on public radio about the problems with the new Home Valuation Code of Conduct.  The purpose of the HVCC is to obtain sound appraisals free of influence and coercion from vendors and parties to the transaction.  The goals are accomplished by preventing interested parties from communicating directly with appraisers. 

CAARE supports the idea of an HVCC but finds severe defects in the way this idea was implemented.  The end results of this first attempt at a good idea are higher prices and lower quality appraisals for consumers, lower pay for appraisers and the creation of an unregulated new profit center called Appraisal Management Companies (“AMC”).  We have solutions.

We ask, “Why to stop with appraisals?”  All the safeguard industries for which residential real estate depend are also routinely subjected to coercion, undue influence, bribery and self-dealing.  An economic recovery is likely to stall if those other areas are not also addressed.

It is time to remove all conflicts of interest from the residential real estate.

Minnesota Department of Commerce Costs Homebuyers 63 Million Dollars

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.

 

For Buyers

Tools and tips for home buyers.

 

How to buy a house.  One of our most popular features.

Consumer Friendly Buyer Representation Clauses. Consider adding some of these clauses to the Buyer Representation contract that your Realtor provides to you.

How to Negotiate Buyer Broker Fees. Some of our readers have saved thousands of dollars by following this advice.

LIST of Buyer Agents Whose Fees Are Fair.  List of buyer agents who are willing to discount their fee.  We have yet to come across an agent who will not pay a 25% referral fee to another broker.  In other words, all agents should be willing to discount by this amount.

LIST of Exclusive Buyer Agents.   If you can find one of them in your area, you should strongly consider hiring them.  And in order to avoid conflicts of interest, they focus only on buyers and their firms will not accept seller listings. 

LIST of Independent Title Agents.  Title insurance agents which are not affiliated with other real estate service providers have to compete for your business and are likely to cost less and provide more safeguards.

LIST of Top Ten Worst Practices.  Be aware of these bad practices.

Save $300.   One simple tactic will save you $300.

Open House Form for Buyers.  Without a FORM like this buyers risk forfeiting half the commission to the listing broker and losing their right to hiring their own agent.

Pledge of Allegiance for Buyers.  A starting point.

Reissue Credits on Title Insurance.  Ask your Realtor or title company to obtain the seller’s prior owners title insurance policy and you may receive a substantial discount on title insurance.


Articles

Survey – Real estate attorneys – See what attorneys think about dual agency and controlled business arrangements (“one stop shopping”)

Avoid Dual Agency.  Consumers top two reasons for hiring Realtors is to help negotiate price and terms.  Realtors are prohibited from doing both in a dual agency.

Dual Agency Schemes. Brokers receive a double commission in dual agency transactions and they have developed numerous schemes to artificially increase the frequency of dual agency.

Designated Agency. Is it Fraud?

Don’t Get a Home Warranty.   The limitations on coverage and fees make these warranties a waste of money for consumers.  Realtors or their firm often are incentivized to sell these to you.

Negotiating With Buyer Agents.   They are NOT FREE.   If an agent tells you not to worry about their fee because it is free and the seller is paying it, that is your signal to find another agent.   Here we explain some common negotiating techniques.

Avoid Open Houses.  Read this article before you decide to view open houses.  Open houses are for helping Realtors find buyer clients, they do not sell houses.  We also have a form to help buyers who still wish to visit open houses (see number 4 above).

“One Stop Shopping”  Do not ever use services that are affiliated with your Realtor, brokerage or builder firm.  The service industries designed to provide safeguards to ensure healthy residential real estate transactions are now actually owned and run by the firms which have huge stakes in the transaction such as builders, Realtors, and lenders.

How To Search for a Home Online.  Tips and traps of using online search services to find a home. 

Chronology of CAARE’s work on DOC

CAARE’s Work on this Project – a Chronology

Since the Minnesota Department of Commerce (“DOC”) initially issued their press release, CAARE has gathered many facts on this matter. We have done research, met with the DOC, met with MNAR, presented before a roundtable of MNAR and several other trade associations, convinced the Minnesota State Bar Association not to change their purchase agreement, and a lot more. We even went to Washington DC and got the initial cooperation of HUD, only to have the DOC negate our work by refusing to cooperate with HUD. Follows is a chronology of some of the things that we have done. 

On September 28, 2010 (approximately one month after the DOC’s press release), CAARE sent a letter to DOC’s Paul Hanson (we copied Glenn Wilson, the Commissioner of Commerce at the time). We explained the situation and the error, cited the law and explained the ramifications of the mistake (click here to see a copy of that letter). We asked them to retract their press release and issue instructions to the Minnesota Association of Realtors to delay the implementation of their new purchase agreement. We received no response until Commissioner Glen Wilson left office at the end of the year. Paul Hanson of the DOC failed to respond to every communication we sent to him. However, we were able to meet with Commissioner Rothman twice after he took office (the latter time with Mr. Hanson). 
 
On September 22nd, we attended a continuing education class approved by the DOC and presented by MNAR. The speaker was the Chair of the MNAR Forms Committee, Wayne Gilbert, who is also an attorney and a real estate broker.   He is an agent with Burnet Realty and it was a title executive from his sister company Burnet Title who first suggested the change to the purchase agreement. Mr. Gilbert told the class of approximately 200 licensees that the change to the purchase agreement was a HUD requirement. His course materials incorrectly stated that RESPA now required that the buyer pay for seller’s fees.
On September 23rd we sent an e-mail to Mr. Gilbert explaining that we questioned whether HUD could require Minnesota buyers to pay the sellers’ abstracting fee. We attached a copy of the RESPA exceptions. We sent several follow-up e-mails and received no response.
 
It took us until December 3rd to get a communication from HUD directly refuting MNAR’s statement that they changed the purchase agreement because it was a HUD requirement. The e-mail was widely circulated throughout the Minnesota real estate industry. The e-mail was from the same HUD official with whom the MNAR representatives had been talking (click here to see that e-mail). HUD’s e-mail stated that “RESPA does not require the borrower to pay for the abstract” and “Nothing in RESPA requires the modification of a purchase agreement to charge the purchaser/borrower for the abstract.”
 
We immediately sent a copy of HUD’s e-mail to Mr. Gilbert and explained again how the new purchase agreement was harming homebuyers. We asked that MNAR pull their purchase agreement from the marketplace. Mr. Gilbert finally responded but only to tell us that they would take our comments into consideration at the next Forms Committee.
On December 27th we were contacted by the CEO of MNAR, Chris Galler, who wanted to meet to discuss our issues. At our January 3rd, 2011 meeting we gave a powerpoint presentation outlining all the issues. Mr. Galler indicated that he was aware that HUD did not mandate the change and promised that he would look into having the class materials revised. We took the class again in May, 2011 and the instructor was still stating that the purchase agreement change had been mandated by HUD. MNAR was still misinforming their Realtor members.
 
On January 7th Mr. Galler invited us to their next Forms Committee meeting to discuss our issues. He proposed that at this meeting they would also invite 3 other real estate related trade associations and have HUD attend via conference call. He indicated that they were open to the idea of a change to the purchase agreement and felt it was important to work with the other associations towards a resolution.
 
On February 10th we received an e-mail from Mr. Galler that they were meeting on February 25th with all the industry representatives and indicated that we would not “need to be in attendance.” He told us later that a Burnet title representative objected to us being there and that she would not attend if we were there. On February 20th we sent an e-mail to Mr. Galler that we took offense to being excluded from the meeting on the 25th and copied the media and governmental officials. This resulted in an invitation to present our issues at the meeting and take questions. After our presentation, Mr. Galler asked us to leave and escorted us to the door and the meeting went on without us. MNAR elected not to change their purchase agreement.
 
On April 5, 2011, we sent a letter to Barton Shapiro of HUD asking for an opinion letter regarding application of the RESPA FAQ’s to the Minnesota’s situation (click here for a copy of that letter). On April 11th, we visited senior HUD officials, Mr. Shapiro and Mary Jo Sullivan of HUD in Washington D.C. At that meeting we explained to Mr. Shapiro how abstracting has always been a seller’s fee in Minnesota. He told us that if that was the case, then it would fall under the RESPA exception and not have to be disclosed as a buyer’s fee.  We asked for him to put that in writing. Mr. Shapiro seemed willing to help and we thought that the problem might be resolved. However, Mr. Shapiro then indicated that he knew Mr. Hanson and that out of professional courtesy he would discuss the situation with him. It was at this point that Mr. Shapiro became unresponsive to our requests.
 
On April 15th we sent an e-mail to Mr. Shapiro and Ms. Sullivan detailing the contents of the letter we would need from them restating what he had said to me in the meeting (see copy of that e-mail here). We followed up on April 21, 25, 27 looking for a response. On May 6th we drafted a proposed joint press release for the DOC and HUD in hopes of streamlining this process and e-mailed it to both of them (see that e-mail here). It was at this point that Mr. Shapiro responded and indicated that, “this Department and the Minnesota Department of Commerce will discuss this issue directly and consider any next steps that may be taken. We will then get back to you.”
 
It is important to note that Mr. Shapiro agreed that seller’s fees do not need to be disclosed as buyer’s fees. He had cited the RESPA exception for this. 
 
On May 20th we followed up with Mr. Shapiro again. This time it became clear that Mr. Shapiro was talking about this issue with someone from Minnesota who was providing him with inaccurate information. He now began to question if sellers really paid for abstracting in Minnesota. On May 20th he wrote, “I have been looking into this and it is unconfirmed that sellers always pay for abstracting, especially in a heavy short sale market.” 
 
Over the next few days we made contact with the Real Property Law Section of the Minnesota Bar Association. One of the foremost residential real estate attorneys in the state was willing to go on record with HUD to explain that even in short sales it has always been the practice that sellers pay for abstracting. We produced James M. Neilson to speak to HUD (here is our e-mail with his bio attached). In addition, we provided HUD with copies of HUD-1 Settlement Statements (with personal information redacted) showing that sellers paid for abstracting in short sales. We received no response. 
 
On June 10th we sent an e-mail to HUD and the DOC asking for an update. We explained how buyers were being harmed and how the facts seemed to indicate the possibility of a price fixing scheme. We explained how MNAR was continuing to misinform their licensees that the new purchase agreement was mandated by HUD. The response we received was from Mr. Hanson (the first we had heard from him in many months) and copied to the HUD officials, “Would you identify these Minnesotans that have lost this money. Would appreciate a complete list and presumably most are not your title company’s customers. We have no complaints about this other than from you. Thanks and I will look for your data file on this. Off today but in Monday. Paul.” He copied the people at HUD, but did not copy Commissioner Rothman. The CAARE board member to whom Mr. Hanson was responding has an ownership interest in a title company and has been compelled by state law to collect these higher fees charged in the new MNAR purchase agreement. That board member has been retaliated against in the past for exposing problems in the industry and had a lot to lose by exposing this problem to Mr. Hanson. 
 
Mr. Hanson’s position was untenable since we knew that it was the DOC’s job to investigate situations like we had described especially if there were no complainants. In fact, some of the most egregious problems occur without the knowledge of consumers. If we were to follow Mr. Hanson’s logic, the DOC no longer investigates secret price fixing schemes, but only those that are properly disclosed.
 
It had become clear that Mr. Hanson had convinced Mr. Shapiro that Minnesota did not care about this issue. It was disheartening to see such an obvious display of cronyism by Mr. Shapiro. To this day we have no idea why Mr. Hanson would take such an anti-consumer stance on such an important matter that directly affected low income and first time home buyers. But we do know that he interfered with our work to correct this problem and because of him, Minnesota homebuyers have paid an extra 45 million dollars in title fees over the last year and a half.
 
On November 28th, 2011 we received another delinquent “response” to a Data Practices Request from the DOC. Our e-mail requests went unanswered so we resorted to this statutory procedure of gathering data. We were following up on promises that had been made by Mr. Hanson in our meeting with him and the Commissioner and we wanted to find out the facts surrounding the origins of the press release. Here is what they told us. The DOC had no records of any kind pertaining to their press release. They had no e-mails, calendar appointments or any other relevant media. They did not know who drafted the press release. They had no information of any due diligence that was done in regards to their press release including whether research was done into the RESPA exceptions. The DOC did not investigate our complaint filed with Paul Hanson in regards to MNAR teaching false information to their licensees. Paul Hanson has no information regarding who the title executives were with whom he consulted regarding their press release or what was discussed.