The Dirty Little Secret in the Title Industry

By
Services for Real Estate Pros

Tens, even hundreds, of millions of dollars pass through title company escrow accounts each month.   The money technically belongs to consumers in the form of purchase money funds, seller proceeds, payoff funds, or refinance loan proceeds.   The title company is simply the guardian of the funds. The questions at hand: Who is retaining the interest earned on escrow accounts?  Is it the title company?  Have buyers and sellers received a disclosure explaining that the title company is earning substantial additional fees?  The interest retained by a single title company at the end of the year can be staggering as you will soon learn.

 In a broader sense, I'm referring to any office, other than a law office, that routinely holds funds involved in a real estate transaction.  The legal profession dealt with the issue years ago by creating ethical guidelines requiring that law offices direct the funds to trusts established to benefit impoverished classes.  At the same time, the title industry has been somewhat successful in avoiding public scrutiny by keeping this matter a secret.  The state of Maryland passed legislation nearly 20 years that created housing trusts funded solely by the interest on title company escrow accounts.  Noncompliance means the loss of a license.

I recently learned that title agents in the states of Colorado, Michigan, and Illinois can legally retain escrow account interest amounts.  There may be numerous other states as well.  I just haven't had the chance to do the research and thought the issue important enough to immediately bring it to your attention. 

Abuse is a very real possibility when title companies have a financial incentive to hold funds longer than necessary.  Tim Killcoyne, the owner of Town & Country Title Services in Denver, CO, wrote a very informative article for Title-opoly.   I encourage all of you to take the time to read it thoroughly.  Tim raises the possibility of title companies intentionally adding excessive daily interest to seller's payoff amounts.  In Maryland, we had the problem of title companies holding FHA payoffs until the very end of the month and then sending them in too late or not at all due to forgetfulness.  It's a very real problem that needs to be addressed.  As a practical reality, payoff funds can be wired shortly after closing.

Using testimony provided at legislative hearings in Colorado this year, Tim estimates that the largest title company in the state is earning 22.5 million dollars annually in interest earned on escrow accounts.   That number isn't a typo and, worse still, isn't disclosed on any settlement statement.

Real estate agents need to analyze the payoff numbers presented by title companies at closing.  It's not enough to trust someone that you do business with.  You need to know the facts about any particular transaction. 

My suggestions to avoid abuse:

  • Ask for a copy of the payoff statement and determine if excessive interest was added. 
  • Question the closer if more than 1 or 2 days worth of interest is collected in the payoff.  Special consideration has to be given to weekends and legal holidays.  A special note: FHA policy requires that interest is collected in 30 day blocks on payoffs.  Consider this fact when scheduling closings and don't allow the title company to hold the funds for the sole purpose of collecting undisclosed interest income.
  • Request that the payoff funds be wired as quickly as possible to save money for your seller.  To do anything other than wire funds in 2007 is absurd.
  • Demand confirmation that the funds have been wired and received by the lender being paid off.
  • Provide a copy of the confirmation to your seller and keep a copy in your file. 

I'm not comfortable publicly questioning title industry practices.  In this instance, it's matter of conscience because we're talking about undisclosed fees and abuse of money that belongs to others.  I also don't typically use click thru's on Active Rain.  Forgive me this one time by Clicking here to read Tim Killcoyne's post on Title-opoly.  I'm not trying to drive traffic to the site.  Tim's article is too lengthy to include in this post, but it's very well written and a must read.  You might want to pay attention to the comment thread.  Title agents are starting to weigh in.

FYI: My next post will be of a less serious nature.  I was meme'd yesterday ... more than once. 

 

close

This entry hasn't been re-blogged:

Re-Blogged By Re-Blogged At
Tags:
title insurance industry
title industry

Anonymous
Post a Comment
Spam prevention

Accessibility option: listen to a question and answer it!

To submit the form,
drag the leaf to the circle on the side.

Type below the answer to what you hear. Numbers or words, lowercase:

Spam prevention

Accessibility option: listen to a question and answer it!

To submit the form,
drag the foot to the circle on the side.

Type below the answer to what you hear. Numbers or words, lowercase:

Show All Comments
Rainer
99,921
Ed Rybczynski
Havre de Grace, MD

Rob

Reading your comments this morning brought still another question to mind.  We both know that all title insurers have direct operations competing against agents.  I'd love to know how much interest is earned by each underwriter annually.  I'm certain that we'll never hear that number. 

May 26, 2007 04:24 AM #104
Anonymous
Anonymous
Anonymous
Bizzillions I would imagine, versus a smidgen for 'mom & pop" shop.
May 26, 2007 10:18 AM #105
Rainer
99,921
Ed Rybczynski
Havre de Grace, MD

Rob

That's exactly what I'm thinking.  I feel badly for small title operations right now and this is just another example of an unfair advantage in favor of large players. 

May 26, 2007 10:22 AM #106
Ambassador
551,222
"The Lovely Wife" (Broker Bryantnulls Wife) The One And Only TLW.
President-Tutas Towne Realty, Inc. - Kissimmee, FL

Ed and Peekin' (Rob)

Do either of you realize how much you have taught me in the last few days? :)

TLW...ROAR!

May 26, 2007 05:07 PM #107
Rainer
99,921
Ed Rybczynski
Havre de Grace, MD
Well thank you TLW.  That's very kind of you to say.  I was hoping for more input from the title community on Active Rain.  Rob really stepped to the plate on this one and represented his company and his industry very well.  I know an honest and knowlegable title guy when I meet one.
May 26, 2007 05:12 PM #108
Ambassador
551,222
"The Lovely Wife" (Broker Bryantnulls Wife) The One And Only TLW.
President-Tutas Towne Realty, Inc. - Kissimmee, FL

Input is elusive on AR ...

However...Please know that there are many people like me who read every last word on a post like this :)

May 26, 2007 06:02 PM #109
Rainer
99,921
Ed Rybczynski
Havre de Grace, MD

TLW

Again, you flatter me and I love every last bit of it.  Thank you. 

May 26, 2007 06:07 PM #110
Rainer
33,677
Jack Haydon
Charles Rutenberg Realty - Clearwater Beach, FL
Clearwater Beach Condos - Real Estate Homes for Sale

Great post - I'll check into this.

Jack

May 27, 2007 08:36 PM #111
Rainer
99,921
Ed Rybczynski
Havre de Grace, MD

Jack

Thank you.  Please get back to me. 

May 28, 2007 04:11 AM #112
Anonymous
Anonymous
Anonymous

Dearest TLW... please flatter me (I'm over to your right, tall tree)

Ed - Normally I would have expected input from at least two additional Title companies - but perhaps, just perhaps, this subject is like a hot potato.  (Realtors refuse to enter an AfBA discussion on AR I believe for the same reasons). 

It's very difficult for people and companies to look in the mirror and MAKE SURE they are playing the game the RIGHT way, not just per the RULES.

I've enjoyed the subject.  I'm sure we'll be hearing more from the government in months to come.

May 28, 2007 06:18 AM #113
Rainer
99,921
Ed Rybczynski
Havre de Grace, MD

Rob

Thanks for "weighing in" the way that you did.  I'm certain that the Active Rain community recognizes you as a concerned and serious professional.

May 28, 2007 06:34 AM #114
Ambassador
507,532
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life
Not to sound like a total moron, but Rob mentioned something about an AfBA discussion, what exactly does that entail?

I think posts of this nature are vital to the growth of every aspect of the industry.  I would love to see one on Mortgage Companies, Lord knows there are hacks in my chosen profession.
May 28, 2007 07:08 AM #115
Anonymous
Anonymous
Tim Killcoyne

Rob - the genesis of my article was testimony in front of the Colorado Business and Labor Affairs House Committee wherein the owner of the largest title company said he made money on his overnights and that the funds made this way subsidizes his rates and fees (although he is an agency, he owns his own underwriter).  I discussed a way that title companies can increase their float time to increase their profitability which I find objectionable due to the undisclosed nature of that activity. 
It seems odd to me (perhaps it shouldnt) that you are the second person from Pennsyvania who keeps trying to turn this into a referendum on AfBAs when in fact it is something more germane to fair treatment of consumers.  I can only surmise that the marketplace in Pennsyvania is much different than the one here in Colorado.  Our regulators have clearly accepted the propriety of AfBAs and provided guidelines (there are no clear guidelines on the interest question I was discussing).
So, although it is not directly what I was trying to address, I will answer your question regarding rates and fees.
1) An underwriter (who may have multiple agents in the same county) will file PREMIUM (rates).  Since there is no clear actuarial definition of how this number can be arrived at, when one of the underwriters for the big two agencies (the underwriters being FATCO and ORT) files an increase, most other underwriters will shortly do the same (within a few dollars) - "competition" being the most often cited reason.  Every agent for that underwriter must use the same premium and deviation charges.
2) FEES are then filed by the agents for the closing activities, nearly all of which are provided by title agencies.  Again, agencies will look at each others charges and file accordingly.  And again, the market dominating companies pretty much command what everyone else files.
This being said, all charges must be "reasonable" (however that would be determined) and at least cover the cost of providing them.  This is what makes the subsidy comment so revealing.
AfBAs are in no better position to charge more than so-called "traditional" agencies and in fact have reason to charge less (my company does).  Traditional companies, again according to earlier Legislative testimony, spend between 25 and 30% of their budgets on MARKETING, something an AfBA does not.  Here is the secret to the AfBA success - you can capture a market for less to no marketing expense and thereby provide service at more competitive pricing.  Several empirical studies have shown this to be true.
I trust this answers your question - I am available by email or phone should you wish more discussion.

May 29, 2007 09:50 AM #116
Anonymous
Anonymous
Tim Killcoyne
One more thing - PREMIUM in Colorado is "all-inclusive".  It covers the risk and all activities to mininmize that.  There are no charges for the search, the exam etc as there are in other parts of the country.  The FEES filed by agents cover the closing, disbursement and recording of the transaction. 
May 29, 2007 10:26 AM #117
Rainer
6,783
Diane Cipa
The Closing Specialists® - Ligonier, PA

Wow - when did this discussion change subjects?  I think both the original issue of interest on escrows and ABAs are worthy subjects.

Both strike directly at the core issue of CONFLICTS OF INTEREST.

I'm alittle under water today with titles, but I'd love to hear more on the subject and will tune in.

Remember, anytime you put your interests in the position of competing with those of the consumer you are serving, you expose your human frailty.  Better to cushion your business practices with safeguards so you won't have to make those hard choices.

I'd much rather let my bank benefit from the float than have to think about the escrow account as a profit center.

May 29, 2007 10:31 AM #118
Rainmaker
652,646
Bob & Carolin Benjamin
Benjamin Realty LLC - Gold Canyon, AZ
East Phoenix Arizona Homes

All good information.

Carolin Benjamin
Bob and Carolin Benjamin - The Benjamin Team
Keller Williams Integrity First Realty
Gold Canyon Arizona

Jun 04, 2007 05:43 PM #119
Rainer
4,974
Lisa Rozmarniewicz
Capital Title/iTraining and Associates - Brighton, MI
I'm not sure what title companies you are used to dealing with, but that type of account is an in and out account that is a non-interest bearing account.  It would be illegal to be collecting interest on those types of funds.
Jul 24, 2007 03:11 PM #120
Rainer
99,921
Ed Rybczynski
Havre de Grace, MD

Lisa

Escrow practices vary greatly from state to state.  In most states, title companies, are permitted to retain the interest earned on escrow accounts.  In many instances, there's no requirement to disclose to consumers.  Theoretically, funds should quickly clear escrow, but in practice it's simply not the case.

Jul 24, 2007 03:16 PM #121
Rainer
6,783
Diane Cipa
The Closing Specialists® - Ligonier, PA
On the subject of escrow accounts, PA title insurers should check their unclaimed property status.  The Dept. of Treasury is focusing on escheat compliance in title insurance.  They've met with at least one underwriter and a few agents.
Jul 24, 2007 03:22 PM #122
Anonymous
Anonymous
Jennifer Johnson

In the state of Mississippi, it is illegal to have an escrow account that draws interest and the amount that is required to pay off the current mortgage is taken from the payoff and will include a per diem or "interest per day"  according to the instructions given on the payoff!

Jul 18, 2008 01:20 PM #123
Anonymous
Post a Comment
Spam prevention

Accessibility option: listen to a question and answer it!

To submit the form,
drag the truck to the circle on the side.

Type below the answer to what you hear. Numbers or words, lowercase:

Show All Comments
Rainer
99,921

Ed Rybczynski

Ask me a question
*
*
*
Spam prevention

Accessibility option: listen to a question and answer it!

To submit the form,
drag the tshirt to the circle on the side.

Type below the answer to what you hear. Numbers or words, lowercase:

Additional Information