Category: Minnesota

Minnesota’s Liberty Title fined $45,000

Minnesota’s Liberty Title was fined $45,000 for allegedly providing “numerous things of value” to a licensed real estate salesperson in exchange for settlement service referrals. Last year the Commerce Department fined Title Smart for allegedly engaging in another kickback scheme and they were fined a similar amount (click here).

The Liberty Title case is significant in the sheer number of infractions (11) and dollars allegedly spent by Liberty Title on this one licensee. What is shocking is that any one of the infractions could have resulted in a serious licensing violation. To see eleven infractions in just one case is over the top and should set off the alarms for regulators all over the country. We believe the DOC was using this case as an example to demonstrate what Liberty was doing with many of their other customers. We have seen evidence of Liberty sponsored events that involved over 300 of their customers. Plus, this isn’t Liberty Title’s first run-in with the Minnesota DOC.

Although the DOC applied a percentage of business referred analysis to this case, we don’t think they needed to. Providing things of value to a licensee who was in a position to send them referrals was probably enough. The fact that this particular licensee apparently increased their referrals to Liberty after receiving these things of value is disturbing. Realtors in Minnesota are fiduciaries and it becomes predatory if their advice to clients is influenced by bribes.

This action is important because title companies provide key services that ensure the integrity of the transaction and consumers rely heavily upon the title company selection advice that they receive from their Realtors or loan officers. Consumers are particularly vulnerable because they do not understand what title companies do, how much they charge and why they are important. Therefore, it is so important that the advice that they receive from their agents and loan officers is free of inappropriate influences that could result in bad service, overpaying and even title claims.
Title companies investigate and examine title and make important title and closing decisions. It is extremely important that their work is completed impartially and not influenced in any way by financial relationships with Realtors, loan officers, attorneys, or builders. Federal law on kickbacks is extremely strict and clear and has no minimum tolerances. RESPA (“Real Estate Settlement Procedures Act”) prohibits the giving and accepting of “any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” That means that a title company shouldn’t even buy a Realtor a cup of coffee.

Unfortunately, the problem with kickbacks is severe throughout the country and consumers should be on the lookout and avoid all kinds of cozy relationships. Consumers should also be aware that the Realtor lobby was successful in carving out a huge exception to the anti-kickback provisions for affiliated title companies. While it may now be legal for title companies to affiliate with real estate brokers, lenders and builders, we believe that they are still bad for consumers. At the very least such relationships raise all kinds of conflicts of interests that should concern consumers. Do you really want a broker with a 5 figure commission riding on the deal closing influencing the decision making process of the title company?

Our advice to consumers is to Google their state with “independent title company” or “compare (insert state) title companies” and decide for themselves who they feel most comfortable closing. Not only might they avoid conflicts, they might find themselves saving some money too.

Links to Liberty Title’s Enforcement Action (click here)

Minnesota Consumer Alert – Edina Realty

Consumer Alert – We found the following problems with Edina Realty’s listing practices contained in a 2011 listing contract provided to us (we appreciate a newer copy if you would like to send us one). This list is not meant to be comprehensive.

1.  Anti-consumer Marketing Practices. Edina Realty excluded most of their clients’ listings from Zillow.com, Trulia and Realtor.com (the top buyer frequented websites in the country) for three years. We believe they may still be doing this on many of their properties. This practice increases the chance that Edina Realty will collect a double fee while likely sacrificing their clients’ interests in selling their homes for the highest price and in the shortest time possible. Click here to watch a short video from the Today Show on How Not To Market Your Home Online.

Edina Realty includes the following boilerplate language in the listing contract we have:

2. Pocket Listings. This is the practice of intentionally withholding listings from all marketing websites, including the MLS. Agents may advise their sellers that it is a good idea to test market the property just within Edina Realty for a few weeks in order to gain information about the price and how well it shows. They may provide other reasons. However, it is rarely a good idea to intentionally limit the market exposure of a property – especially the most valuable asset a client is likely to own. We believe Edina Realty routinely engages in the practice of pocket listings and we highly recommend that you avoid this practice. Here is a short article about pocket listings: Pocket Listings.

3. Closing Services Notice is incomplete and self-serving (in our opinion). Title companies investigate and examine title and make extremely important closing decisions. They provide consumers with an incredibly important safeguard service. Edina Realty wants you to use their title company and persuades many people to pick their title company by causing them inconvenience if they do not. Instead of providing their clients with a list of impartial title firms and their fees, Edina Realty provides their clients with a choice that puts the onus on the client to go figure out how to compare title firms: pick Edina Title or go find your own title companies the only two choices. Does Edina Title rubber stamp deals so that Edina Realty can collect their commission? Is Edina Title looking the other way and saddling their clients with title defects? Are they capturing their clients and charging them more than other title companies? We do not know, but the conflict exists and we suggest that you do an internet search to compare Minnesota title companies and find one that is independent of affiliations. 

4.  Edina Realty Home Warranties are being sold to clients in the listing contract. Home warranty products are often cited as generating more consumer complaints than any other service product on Angies List and other respected resources. Yet Edina Realty pushes them in its listing contract because they collect a portion of the fee. Here are links to two stories in Angies List about home warranties: Why Home Warranties are No Guarantee and Home Warranties.

5.  Edina Realty claims a copyright on their clients’ listing data. By taking a copyright on your data this gives Edina Realty the right to sue third party websites that include your listing information on their websites. We believe this is wrong and that Edina Realty should be doing everything they can to make sure your listing data is widely marketed regardless if they are to get a double commission. Here is an older clause that we saw in their contract. 

6.  A mandatory Arbitration Clause designed to eliminate class action lawsuits and binds clients to arbitration even in claims of fraud. Extremely harmful to consumers:

7. Junk Fees.  Many real estate brokerages started charging junk fees on top of their enormous real estate commissions (we recommend to not agree to pay these). In comparison these fees don’t seem like much. But an extra $400 or more is a lot of money and Edina Realty charges both their buyer and seller clients approximately this much.

 

Thank you Minnesota State Bar Association for making your Forms Free to the Public

The Minnesota State Bar Association just made their purchase agreement forms available free to the public.

Minnesota Standard Residential Purchase Agreement Forms Now Available to the Public (click here to access)– The Minnesota State Bar Association (“MSBA”) just made their Minnesota purchase agreement forms available free to the public. Unlike the local Minnesota Realtor Association forms which are cluttered with self-serving provisions, the MSBA forms are well balanced and thorough. We recommend that you use an attorney to draft it though (it is your house at stake if you do it wrong).

The Minnesota Association of Realtors purchase agreement forms are exclusively available to Realtors and are typically the only form Minnesota consumers ever see (and they are not available to the public). For several decades there has existed a better set of purchase agreement forms that offer better protections to consumers. The Minnesota State Bar Association just made those forms available free to the Minnesota public. Next time you are buying or selling a house, insist that these forms be used. It is likely illegal and a violation of licensing laws for a Realtor to refuse to accept an offer on these forms.

 

CAARE Welcomes NAILTA to Minnesota

NEVER USE YOUR REALTOR’S TITLE COMPANY.  

A title company investigates and examines title and renders important title and closing decisions. Those processes should never be influenced by conflicts of interests like those that exist with builders and Realtors. When the payment of a large commission or profit is contingent upon a transaction closing do you really want your Realtor or builder involved in the title process?

The National Association of Independent Land Title Agents (NAILTA click here) is a trade association dedicated to preserving the integrity of the most important services of the entire transaction: the conducting of the closing and the examination and insurance of the title. CAARE welcomes NAILTA to Minnesota and wishes them luck in starting a Minnesota Chapter.

CAARE advises that you should NEVER use an affiliated title company in real estate, especially if that arrangement is between your title company and your agent, broker, lender or builder. Not only do these affiliated business arrangements eliminate competition and lead to higher prices for everyone, these arrangements also sacrifice the most important safeguards in the real estate transaction. These arrangements are often “sold” to clients as “One Stop Shopping.”

You are not “rocking the boat” by insisting on selecting your own independent title firm. In fact, you are taking away the power of your real estate practitioner to interfere with your transaction and are typically creating a safer closing environment.  

Affiliations in the title lead to price gouging through inappropriate means:

  • Practitioners direct their clients into over-priced and conflicted service providers.
  • Practitioners can eliminate competition among title companies by directing business to their in-house firm.
  • Practitioners cease comparative shopping on behalf of their clients which results in higher prices and poorer title coverage for consumers.
  • Practitioners influence title insurance underwriters to increase title insurance premiums, which results in higher prices.

Affiliations in title lead to higher risk transactions and more liability for home buyers

  • Affiliated title companies are encouraged to close riskier transactions in order to preserve Realtor commissions and builder profits.
  • Affiliated title companies may take their orders from practitioners who have a financial stake in the outcome of the transaction.  

Kickbacks in exchange for referrals of title business have become far more subtle and untraceable.

  • Managers who set commission splits for Realtors are often paid large bonuses based upon their capture rate of title business.
  • Managers who are supposed to be supervising agents, are often pressuring them financially to steer money into their in-house firms.
  • Realtors who pay office rent may receive large discounts on their rent in exchange for directing clients into over-priced in-house title firms.
  • Realtors may have their commission checks paid more quickly if they use the in-house title firm.
  • Realtors may receive higher commission splits if they use in-house title firms.  You are paying for that extra commission.

Tips

Tip: Ask your Realtor if the title company is affiliated with any other real estate service providers like mortgage, brokerage, construction, development, home inspection, etc….

Tip: Realtors are not trained or qualified to advise you regarding title issues. Always hire an independent attorney (one not affiliated with the Realtor or a title company) to review your documents well in advance of closing.

Tip: check with your local regulatory authority to determine that your title company is properly licensed and if they have any licensing complaints.

Tip: Check with the Better Business Bureau to determine if your title company has any complaints.

Tip: Determining marketability or insurability of title requires in-depth knowledge of real estate law. Make sure your title company has an attorney on staff. Tip: Check to see if your title company is a member of NAILTA.

Tip: CAARE’s Executive Director spoke before Congress regarding corruption in the title insurance industry.  Click here to read his testimony.

Tip: It is a violation of federal law (click here) for a title company to give anything of value in exchange for referrals of business.

Tip: CAARE has a webpage dedicated to business affiliations in the residential real estate.  Click here to access it.

 

Minnesota Attorney General’s Office is Misleading Consumers

The Minnesota Attorney General’s Office (“AG”) has got it all wrong on the section of their webpage dedicated to housing.  And apparently, they don’t care as we’ve been trying to call their attention to this problem for over two months. In these difficult times when the housing industry has financially wiped out so many consumers, how is it possible that the AG’s office could be so apathetic about the information they provide to the consumers they’re supposed to be representing.

From dual agency to title insurance, apparently the AG in Minnesota doesn’t understand the consumer housing industry and has no qualms about spreading mis-information to Minnesota consumers.   

For example, shopping and comparing title insurance is a complex and often intimidating process for those consumers who attempt it.  However, if consumers rely upon the AG’s office for advice in this matter, they can expect to over pay for their title insurance.

Here’s mis-information from two different sections on title insurance quoted directly from the Minnesota AG’s website:

“ A savings on the cost of title insurance, when the buyer uses the same title company that the previous owner used. Because the company is “re-issuing” the insurance, it can offer a lower rate.” (NOTE: The Attorney General’s office has removed this miss-information from their book. However, much of their handbook is still out of date and contains other bad information).

“Asking Can Save You $ (click to see page) Be sure to ask for a re-issue credit on your title insurance. If the seller bought an owner’s title insurance policy within the past few years, the same title company the seller used may issue you a new policy without redoing all the paper work. This can save you a lot of money!” (NOTE: The Attorney General’s office has removed this miss-information from their book. However, much of their handbook is still out of date and contains other bad information).

This is important because reissue credits can often save consumers as much or more than $500 on title insurance.   The truth is that reissue credits are available at ANY title company that offers them, not just the own the previous owner used as the AG’s site proclaims.  In fact, today one very large title underwriter, Old Republic National Title, eliminated reissue credits from their rate filing on new purchase transactions, so if a consumer follows this advice they could easily be out several hundred dollars if they select a title company that uses that underwriter, like Burnet Title or Edina Realty Title.  And the discount has nothing to do with “reissuing” the title insurance, it is a discount offered because of the reduction in liability exposure.  Essentially, the new title insurer can “piggyback” upon the coverage offered in the previous policy.

But there’s more…

Reading through the AG’s website on “housing” is almost a lesson on how NOT to buy or sell a house.  Dual agency is explained in impossible to understand and incorrect terms.  The forms cited are all from the Realtor trade association perpetuating the myth that the Realtor forms are the “standard forms.”  We could go on and on…

Here’s the short list of problems with the AG’s website in regards to their “Home Buyer’s Handbook” starting with Section Four:

  1. “Visit Open Houses.”  Very bad advice.  Visiting open houses almost ensures that a commission dispute will arise if you later hire your own agent.   Open houses are traps that lead to dual agency and the listing broker “hogging” the entire commission.   Avoid Realtor open houses.  
  2. “You can also view listings online at:  MLS.com…”   Hang on a minute, MLS.com is a commercial entity – from their website:  “MLS.com is independently owned and operated and is not affiliated with any of the over 900 local MLS systems. We offer the public access to multiple listings throughout the United States by providing advertising services for real estate agents and real estate related industries.”  Since when does the AG’s office offer free advertising to for profit firms?  If you want to search for listings, use a site such as www.zillow.com or www.neighborcity.com that accepts listings from both Realtors and home sellers.
  3. “Understanding the Purchase Agreement.”  Not one mention of using an attorney to draft this form.  Rather, they instruct the buyer to “read the purchase agreement thoroughly.”   This is the most important document in the whole transaction and contains numerous complex legal terms –  HIRE AN ATTORNEY.  And don’t wait until after your Realtor has drafted it – it’s too late then.
  4. “Arbitration.”  There is no mention of the extraordinarily high filing fees if you want to file an arbitration which can often be in excess of $600.   In addition, there is no mention of the boilerplate arbitration clauses that are often contained in listing and buyer representation contracts.
  5. “Title Insurance.”   No mention of the difference in costs or the very large difference in insurance coverage offered by different types of policies.
  6. “Dual agency…The term refers to an agent representing a buyer in an offer on a house when that agent actually owes a duty to the seller of the house.” SERIOUSLY?  Dual agency is an impossible conflict of interest where the agent owes duties to BOTH parties.  This section goes on to discuss “equal” representation and other made up terms that confused even us:  “Unfortunately, not agreeing to dual agency may prevent you from buying a home listed by your agent’s company. You can cancel an agreement to dual agency for a particular property, if you choose.”  None of this is accurate.
  7.  “Business Relationship Disclosure.”   Poorly written, lacking in logic and completely inaccurate.  “Your agent may receive a referral fee or other benefits if he or she directs your business to these companies. Agents can be paid according to the number of referrals they make to an affiliated company.”  Referral fees are ILLEGAL!
  8. “Sample Purchase Agreement.”  It’s an out of date Realtor form on their site…
  9. “Appendix E: Explanation of Closing Costs.”   It is possible that 50% of their quoted fees are completely out of date or inappropriate.  For example, most title companies have bundled all their fees together in an attempt to comply with new RESPA rules.
  10. “HUD-1 Settlement Statement.”  Again an outdated form.

We give Minnesota Attorney General’s website an “F” for causing consumers who rely upon a trusted resource to be terribly misled about the housing industries.

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.