HUD Challenged Over Alleged RESPA Violations

A title insurer advocacy group has challenged the Department of Housing and Urban Development‘s practice of using preferred providers of closing and title services on HUD-owned foreclosed properties, saying this practice rings of “required use” and is therefore a violation of the Real Estate Settlement Procedures Act (RESPA). American Land Title Association (ALTA) — which represents 3,000 member companies that provide more than 100,000 jobs nationwide — sent a letter to Federal Housing Administration commissioner Brian Montgomery signed by ALTA CEO Kurt Pfotenhauer calling for reform and transparency in the issue. The letter argues such a “direction of title services” would be a violation of law in any other circumstance and suggests HUD has overlooked it in its own operations. The letter includes language from HUD regulations on closing costs. “HUD has appointed closing agents on a separate contract to act as their representative in the closing…[and] are assigned HUD properties by county,” the instructions read, in part. “Third-party closing agents may also be used but the closing date must be scheduled with the HUD-designated closing agent and they must be present at the closing. Any additional cost for using a third-party closing agent must be paid by the purchaser.” HUD’s stance on the issue is that it doesn’t ban consumers from shopping for a third-party agent and doesn’t penalize them with fees for doing so, according to spokesman Brian Sullivan. “It’s not as though we would be actively charging [the purchaser] a fee,” he said in an interview. “We have contracts with these closing agents and their fee is built into our contract with them. If someone goes outside of that to get their own closing agent, or exercises their right of selecting their own title company that acts as a closing agent, then they obviously have to bear that cost.” But is that disincentive — the negative incentive built into the system that ultimately leads to the purchaser paying a second time for closing services solicited outside the contract — tantamount to “required use” on HUD’s part? HUD is curious, too, according to Sullivan. “The question is, in the course of using these contracted closing agents, is there any kind of de facto required use in providing title insurance?” he said. “That’s what we’re studying now. We are studying the observations that were pointed out in ALTA’s letter to us.” The fact is, HUD is concerned in this area primarily to recoup losses on FHA-insured properties that go into foreclosures. HUD pays a claim on the outstanding loan balance with the lender and then takes possession of the property, according to Sullivan. “We are not a real estate company, so we try to sell these properties as quickly as possible and for as much as we can get in order to recover the amount we paid on the claim,” he said. Toward that goal, if a property does not sell quickly, HUD may offer it at a discount, drawing purchasers from the marketplace that otherwise might have bought a real-estate owned property sold without stipulations on which closing agents must be used. This is the issue ALTA takes offense with — HUD is taking away competitive advantages of independent title insurers that are losing business to the growing number of foreclosure sales that take place on HUD’s books. “While HUD does not explicitly ban consumers from choosing their own closing agents, the fact that HUD requires them to pay twice for the same service creates such an enormous disincentive that the effect is the same,” Pfotenhauer wrote in the ALTA letter. “As a practical matter, HUD is directing title services and is therefore violating RESPA…. It is hard to reconcile these facts given HUD’s stated goal in its newly-issued RESPA regulations of transparency, clarity and increased shopping opportunities for consumers.” Sullivan was quick to reiterate HUD’s stance that consumers have every right to shop around for title insurance companies, citing the “required use” provision in the forthcoming final RESPA rule. “This new RESPA rule that’s going to be effective Jan. 1, 2010 is all about promoting shopping for consumers,” he said. “So, that’s where our heart is — in choice — because that will bring about market forces — not any kind of HUD price fixing —  but market forces to establish price in the marketplace and will finally return some competitive influences to the marketplace, because those competitive influences do not prevail today.” Read ALTA’s letter to HUD. Write to Diana Golobay at [email protected].