Title Insurance - Homeowner's Right To Choose A Title Insurance Company

Homeowner's Right To Choose A Title Insurance Company

In an April 2007 United States Government Accountability Office (GAO) Report on Title Insurance, the GAO recommended that state and federal legislators and regulators improve consumers ability to shop for title insurance based on price, encourage price competition, and ensure consumers are paying reasonable prices for title insurance.

A federal law called the Real Estate Settlement Procedures Act (RESPA) entitles the individual homeowner to choose a title insurance company when purchasing or refinancing residential property. Typically, homeowners don't make this decision for themselves, instead relying on their bank's or attorney's choice; however, the homeowner retains the right. RESPA makes it unlawful for any bank, broker or attorney to mandate that a particular title insurance company be used. Doing so is a gross violation of federal law and any person or business doing so can be heavily fined or lose its license.

Section 9 of RESPA prohibits a seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance.

The only exception to this rule applies to commercial real estate transactions, which is not within the parameters of RESPA.

The new GFE, or Good Faith Estimate, is the latest step taken by HUD to protect and assist consumers. In the past, lenders had provided potential borrowers with Good Faith Estimates. However, there are major differences between what borrowers have historically received and what they will receive going forward under the new HUD regulation. Four major changes stand out:

1. Lenders are now required to issue the GFE

If a loan originator does not provide a GFE within 3 business days of receiving a completed loan application, they are in violation of Section 5 of RESPA. HUD provides the specific criteria for what constitutes a complete loan application:

• Borrower's Name
• Borrower's Monthly Income
• Borrower's SSN (To obtain a credit report)
• Property Address
• Estimate Value of the Property
• Loan Amount
• Anything Else the Lender Deems Necessary

2. The new GFE is standardized

All lenders must provide consumers with the exact same document. Loan charges, third-party fees, and other costs must be displayed uniformly. Previously, lenders were not uniform in their interpretations of what fees should be included on the GFE and where such fees should be disclosed.

3. The new GFE encourages consumers to shop

Since lenders are now required to issue a standardized GFE in a specific time frame, consumers are provided an opportunity to compare lenders and their products. Further, HUD states that prior to the issuance of a GFE, lenders can only charge potential borrowers a fee to cover the expense of a credit report. The relative low cost of credit reports ($15 - $30) results in consumers' ability to comparison shop many lenders at a minimal cost.

4. Lenders are accountable for their quotes

Each section in the GFE now directly corresponds to a section of the HUD-1. The HUD-1 is a standardized document that lists every expense involved in a real estate or refinance transaction and is presented to the borrower during the closing process. Each section in the new GFE is now designated a tolerance level. There are three different tolerance levels:

a. 0% Tolerance. If at the closing, any item in the 0% Tolerance category is higher on the corresponding section of the HUD-1 compared to the original GFE, the lender is responsible to cover the difference.

b. 10% Tolerance. Unlike the 0% Tolerance category, these items are not compared individually to their corresponding section in the HUD-1. Instead, all items in the “10% Tolerance” are aggregated on the GFE and compared to the aggregated corresponding items on the HUD-1. In the event that the HUD-1 has a total more than 10% higher than the total on the GFE, the lender is responsible for any expense in excess of the 10% increase. This means that any one item in the 10% tolerance category can increase more than 10% from the GFE to the HUD-1 without a penalty to the lender, as long as the sum of all the items does not increase more than 10%.

c. No Tolerance. A few sections of the new GFE fall into the “No Tolerance” section. These quotes can change with no penalty to the lender.

Again, depending on the state, region, and vendor, homeowners can save substantial money by shopping around for title insurance except in some states, such as Texas, in which the rates are codified by law. In light of the changes made by RESPA and those to the GFE, notable consumer and business publications have featured articles about the benefits of shopping around for title insurance, such as The Wall Street Journal, Kiplinger's Personal Finance, Forbes.com, and The New York Times.