How to change your chosen title company after you have a ratified sales contract

Most homebuyers know by now that it’s their legal right to choose their own title company and that shopping for title services is one of the most effective ways to reduce costs at the closing table.

(For those who haven’t heard this, read our content on Marketing Service Agreements and Affiliated Business Arrangements and see for yourself how these common deals jack up closing costs for consumers.)

But what happens if a homebuyer doesn’t learn about this important right until after her sales contract has been drafted, accepted and signed by all parties? And is it possible to change title companies once a title company has been designated in the contract and an earnest money deposit has been delivered to that designated title company?

The short answer is you can change your mind with the consent of the seller, through a simple addendum to the sales contract. View our a settlement agent-change sample addendum.

Once the addendum is completed and signed by all parties, the homebuyer can then use the new title company listed on the addendum.

Even if the earnest money deposit was already delivered, with the addendum in place, the new title company would simply reach out to the old title company holding the funds and arrange for a wire transfer. That’s it!

How might a homebuyer find herself in a situation where she wishes to change her company after all parties have signed a sales contract with a designated and undesired title company?

First and foremost, we encourage every homebuyer to get closing cost quotes from several local title companies and compare costs and online reputations to avoid this situation. We also remind homebuyers that title companies don’t necessarily include all the same services in their settlement fee. Sometimes additional services, i.e., document fees, processing fees, amount to hidden costs, so it’s important to ask what services are included and what extra costs may be charged.

And while it’s technically illegal for real estate agents to fill in the name of a preferred title company if their brokerage has a professional affiliation with that title company, the practice persists. In these cases, homebuyers may not realize until after they have a ratified sales contract that they could have chosen their own title company.

It’s important to ask your agent if his company has a professional affiliation with the title company he’s listed in your sales contract and what benefits or incentives the real estate agent or brokerage may be receiving by recommending that title company. Sometimes the answer is there is no affiliation; the agent is familiar with a certain company and recommends that company from the perspective of good service and pricing.

There’s nothing inherently wrong with an agent directing their client to use their favorite title company, except that it may lead a homebuyer to falsely believe she does not have a choice, or once a title company’s name is written into the contract and that contract is ratified, the decision is set in stone and the title company can’t be changed.

A homebuyer maintains a right to choose her own title company and also has the right to change her mind and choose a different title company.

This isn’t an invitation to change title companies several times prior to closing or to change for no good reason. Keep in mind any addendum to a ratified sales contract must be signed by all parties, including the sellers. You may risk delaying closing, annoying your sellers or even causing your deal to fall through by abusing your right to change title companies after you have a ratified sales contract.

We put this post together specifically to help those who learned after the fact they could have chosen their own title company and would like to exercise that right. Two primary reasons a homebuyer may choose to change title companies might be she’s found a title company that charges lower prices and/or provides better customer service than the company initially listed on the sales contract.

A wake-up call from CFPB regarding Marketing Service Agreements

If you are an agent, broker, or mortgage lender who has been solicited by a title company to enter into a Marketing Service Agreement (MSA), you would probably be best served to avoid the temptation.

The Consumer Protection Financial Bureau (CFPB) has made it clear that they are actively probing and investigating such arrangements as one of their top priorities. Most recently, an MSA between a top Maryland real estate team and their “partner” title company resulted in a massive class-action lawsuit and, potentially, an enforcement action by the CFPB (see full story here).

Federal Title has actively taken a strong stance against both MSA’s and Affiliated Business Arrangements (ABAs), recognizing that such arrangements only enrich the referral sources at the expense of the consumer and further drive up the costs of title charges. Read our related articles on MSAs and ABAs.

Another driver of increased closing costs - Marketing Service Agreements (MSAs)

Affiliated Business Arrangements (ABAs), once known as Controlled Business Arrangements (CBAs) are becoming a focus of the Consumer Financial Protection Bureau (CFPB).

Recent efforts by the CFPB, evidenced by enforcement actions and resulting settlements, are clear indications of the CFPB’s intent to better protect the consumer against sham ABAs. Many ABAs are nothing more than an arrangement by which title companies and mortgage lenders buy business from a referral source at the expense of the homebuyer. See here and here.

As harmful as ABAs are to the consumer, a little-known but similar arrangement between referral sources and vendors known as Marketing Service Agreements (or, MSAs), may be even more harmful. This article explains the difference between ABAs and MSAs in more detail.

Unlike an ABA, the MSA does not fall under any specific statutory authority and, as such, there is no requirement by the referring party to disclose its business relationship with a participating vendor to the consumer. Rather, a MSA is broadly covered under RESPA Section 8 that states: "No person shall receive and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding – oral or otherwise – that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person." Therefore, fees paid through an MSA must be for actual marketing services performed by the referral source (i.e., real estate brokerage) on behalf of the mortgage or title company as vendor. In other words, the marketing services being performed by the real estate brokerage must be commensurate with the fixed monthly or annual fee paid by the mortgage or title company.

Over the course of the last year, the folks here at Federal Title & Escrow Company have been taking inventory of its competitors who participate in MSAs and their underlying fee structures. What we have learned reveals the harm to consumers. In one case, we learned that a competing title company is paying approximately $5,000 per month to a local real estate brokerage for “marketing services.” Yet, the only so-called "marketing services" being provided are "in-office access to the brokerage's sales associates to the exclusion of other competing title companies," "encouraging sales associates to write in to the sales contract the name of the participating title company," and "allowing the participating title company to set up a kiosk of brochures within the real estate brokerage office locations."

Clearly, for $5,000 per month ($60,000 per year), a title company could hire a marketing firm to provide a whole lot more in the way of marketing its services. This is just one of many instances we have discovered in which the fee being paid is clearly excessive in relation to the marketing services being performed. The truth is that the title company is buying business from a referral source – plain and simple.

So is it really the title company paying the MSA fee to the real estate brokerage? No, it’s the consumer paying the fee since the title company is simply passing on the cost to the homebuyer. Since the real estate brokerage has a vested interest in making sure the transaction is referred to the participating title company, they have little incentive in making the homebuyer aware of his right to shop and select his own title company. As industry insiders, we know for a fact that if a homebuyer shops and selects their own title company, they will pay far less than what they will pay by using the MSA-participating title company.

The homebuyer, as consumer, is also under-served by the inherent conflict of interest created by an MSA. The MSA-participating real estate brokerage is less likely to hold its partnering title company accountable for actions of malfeasance. In other words, they are more likely to “cover” for the title company since the title company is paying a handsome monthly fee to the broker. In the alternative, we are aware of several cases in which a partnering title company, without the knowledge of the homebuyer, has insured over title defects (i.e., unreleased mortgages, etc.) so as to timely complete a closing. Such a maneuver ensures the payment of the real estate brokerage commissions without delay and further solidifies the relationship between the MSA partners.

MSAs are little more than the act of buying business from referral sources – the “marketing service” being performed is only part of the ruse. At the end of the day, the MSA causes the consumer to pay more and corrupts the integrity of client advocacy. At Federal Title, we advocate for all real estate professionals to a transaction to act independently for the benefit of the consumer and not at the expense of the consumer. We don’t buy business – we earn it.

The Closing Costs Calculator Company

With the exception of Federal Title & Escrow Company, nearly all major title companies write a check to real estate brokers or mortgage companies as a "Thank You" for the referral of business. 

In some cases, the payment is made through a Marketing Service Agreement (MSA) in which, ostensibly, the referring party provides marketing services on behalf of the title company.

In other cases, the payment is made through an Affiliated Business Arrangement (ABA) in which a portion of the profits from each transaction is deposited into an entity account commonly owned by both the referring party and the title company.

In either case, such arrangements are very likely nothing more than the title company buying business from a referring party which drives up the costs for the consumer.

If you are a prospective homebuyer or refinancing homeowner and are referred to a title company by your real estate agent or mortgage lender, ask them if his or her company has a MSA or ABA with the title company.

If so, you are likely paying more for title services than if you were to shop and choose your own title company.

Federal Title & Escrow Company does not participate in MSA or ABA arrangements. As a result, we can afford to be completely transparent to our customers.

This is why we offer consumers highly sophisticated online closing costs calculators with guaranteed quotes and other tools such as our new Close It!™ mobile app.

Because we have nothing to hide, we are the only title company that invests heavily in delivering the message to consumers the importance of shopping for and choosing your own title company.

So much so that some have referred to us as the "Closing Costs Calculator Company."

A win for the consumer

We'd like to applaud Wells Fargo for announcing a move toward eliminating their role in the ABA/CBA marketplace. The bank announced last week that it would discontinue 8 joint ventures, according to a report in American Banker.

We’ve repeatedly exposed the truth behind the legal kickback known as the Affiliated Business Arrangements (also known as a Controlled Business Arrangement or CBA), so it's nice to see a big player in the game is moving away from this inherently anti-consumer model. 

A spokesman for Wells Fargo cited increased regulatory pressure by the Consumer Financial Protection Bureau (CFPB) as the reason for its decision to exit the arrangements. Recently, the CFPB has stepped up its scrutiny of these ethically and legally-challenged arrangements, recognizing that consumers are footing the bill for an arrangement that, most of the time, is nothing more than a conduit for illegal payments for the referral of business.

Perhaps Wells Fargo’s honorable and pragmatic decision to stop the kickbacks will inspire other major mortgage-related players to bow out of the kickback game as well.

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