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.

Marketing Service Agreements may be more dangerous than Affiliated Business Arrangements

Federal Title is an independent title company, which means that, unlike most of our competitors, we do not enter into Affiliated Business Arrangements ("ABAs") or Marketing Service Agreements ("MSAs") with lenders and/or real estate agents. 

An ABA is an arrangement where someone who is in a position to refer settlement business has an affiliate relationship with or an ownership interest in a provider of settlement services and refers business to that provider. An example of this would be a real estate brokerage that has part ownership of a title company and refers business to the title company.

ABAs are permitted under the Real Estate Settlement Procedures Act of 1974 ("RESPA") as long as certain requirements are met.

An MSA is an arrangement under which a settlement service provider, such as a real estate broker, agrees to market and promote another provider’s services, such as that of a title company, in exchange for payment. MSAs are viewed as falling under a provision in RESPA that allows for "the payment to any person . . . for services actually performed."

MSAs are becoming more and more popular amongst real estate brokerages and title companies here in the DC area.

We think that these types of arrangements are bad for consumers. Many times homebuyers are not adequately made aware that choosing a title company is their choice. Second, when a Realtor refers their client to the "in-house" affiliate title company, chances are good the client will pay more in settlement fees, since they are not shopping for title services. Third, the affiliate title company is more likely to turn a blind eye and insure over potential title or marketability issues relating to the property, because the affiliate title company’s allegiance extends to the referral source.

We are not alone in our belief that these arrangements are bad for consumers. Consumer advocate groups, such as CAARE, have spoken out against ABAs.

Moreover, the Consumer Financial Protection Bureau ("CFPB"), the government agency that is now responsible for policing RESPA violations on behalf of consumers, has been focusing on ABAs. It recently entered into a settlement agreement with a Texas homebuilder and lender regarding the alleged violation of RESPA rules with respect to ABAs.

In many cases, ABAs are merely shams that operate to allow for payment for the referral of business, which is illegal under RESPA.

What about MSAs? How do they fit under RESPA? In some ways, they may be even more dangerous for the consumer than ABAs. One of the requirements for ABAs under RESPA is that the consumer must be informed in writing of an affiliated business arrangement. In contrast, there is no requirement under RESPA that an MSA be disclosed to the consumer. And MSAs, just like ABAs, can operate as shams that allow for the improper funneling of referral fees.

A federal class action lawsuit filed in March of this year in the U.S. District Court for the District of Maryland sheds some light on these arrangements.

In that lawsuit the plaintiffs allege that a title company paid a real estate brokerage as much as $12,000 a month in exchange for referrals under a sham MSA that was not disclosed to the plaintiffs, which resulted in depriving the plaintiffs of competition between settlement providers.

The plaintiffs were referred to the title company by their real estate agent and used the title company for their home purchase closing. The lawsuit seeks $11.2 million in damages against the real estate company, the real estate brokerage, the real estate agent, the title company and the president of the title company.

With all of the potential dangers of MSAs, you can expect that they will be reviewed by the CFPB in the near future. If you are a Realtor, would your broker’s MSA survive the CFPB’s scrutiny? If you are a homebuyer, did your Realtor just refer you to a title company with whom they have an MSA?

Get what you pay for with national 'bargain' title service providers

I've noticed a trend among homebuyers that I find concerning.

Some are opting for a national title company to handle their real estate closing as opposed to a local title company, being led to believe they can receive the same settlement services at bargain prices.

This is simply not true. It's just another example of that old adage "you get what you pay for" and there are couple flaws in this thinking that I'd like to point out.

What you get for these bargain prices is a title service provider that is unfamiliar with local customs of the subject property. The bargain title service provider is not accountable to its community for the purpose of business referrals either – because the provider is located hundreds of miles away, usually in another state.

Can a homebuyer really rely on a national settlement service provider to possess the same knowledge of the ever-changing local customs as a local title company? In some cases, such as DC Homestead Deduction, the forms and requirements have changed more than once in a single year!

What's more, our office frequently discovers failed recordings and unreleased mortgages/liens among the local land records that were the responsibility of said bargain title service provider, which leads to hardship for the new property owner(s).

Chances are the homebuyer who originally hired them may either never know of the created problem or, like many homebuyers, they will not need to title services again so why worry about repeat business.

When issues have arisen in many of these cases, our office or the property owner will make a request that requires remedial action – the response is highly delayed, if there's any response at all.

A national company doesn't have the same local market pressure to take immediate action.

It's true you may save some upfront costs since the bargain provider's rates often exclude a portion of the commission that otherwise is typically paid by an underwriter to the local title company. But I'd like to highlight a few reasons why the local title company receives this commission.

1) Time – It typically takes 2 hours to order and review title & survey (when applicable)

2) Expertise in local laws – A local title agent possesses the knowledge and know-how to clear title issues prior to closing (i.e., unreleased mortgages/liens, gaining proper signature authority from sellers of entities/estates/trusts, and proper compliance with local recording requirements and affidavit filings)

3) Expertise in local customs – A local title agent understands local/regional sales contract requirements in relation to title matters.

4) Shared liability for Errors & Omissions – Responsible for failures or defects of title caused by negligent title examination/review, meaning if something goes awry the title company is on the hook for the losses.

At Federal Title we're practically blue in the face from all the preaching we do about shopping for title insurance. And for the homebuyer, part of the process includes understanding exactly what services she is paying for (and just as importantly what services she is not paying for).

DC home prices rise. How does that impact cash to close?

DC home prices rise. How does that impact cash to close?

One of the lead stories in the Washington Post's real estate coverage yesterday was the jump in DC metro area home prices – up a whopping 7.7 percent, the biggest increase in seven years. 

For those who own homes in the District and nearby suburbs like Arlington, VA or Bethesda, MD, this is fantastic news. Property values have returned to their 2003 levels and are steadily increasing!

But for the would-be homebuyer, an increase in home prices means the hurdles to becoming a homeowner also increase since the cash required of a buyer to close on a real estate transaction hinges on purchase price. Generally speaking, a higher purchase price requires a larger down payment, a more expensive the title insurance policy, a larger share of taxes to be paid, etc.

In short, higher home prices mean added cash to close.

For homebuyers in the DC metro area, who are thinking about buying a house or condo, there's a free iOS app that very clearly outlines cash to close and presents the expenses (and credits) on an easy to understand and editable HUD-1 Settlement Statement that looks similar to what title companies prepare for closing.

Close It! is like the Turbo Tax of real estate closings. The homebuyer simply specifies a jurisdiction and enters a purchase price on the app's input screen, and the app immediately gets to work determining cash to close as well as monthly mortgage payments. Each homebuying scenario can be saved within the app for later editing or sharing.

So let's say a homebuyer crunched the numbers at a purchase price of $460,000, which was the reported DC median home price in April. Cash to close was estimated at approximately $105,000.

This month, the prices may be a bit higher. Using the purchase price slider feature, the homebuyer can see how her cash to close changes as the slider increases (or decreases) the purchase price value by a thousand bucks at a time. Cash to close at a purchase price of $463,000, for example, inches up a little over $106,000 with everything else still the same.

Close It! can help homebuyers and their agents negotiate the best deal possible in a market that is shifting more in favor of home sellers. Use the app to weigh various homebuying scenarios and come up with the strongest offer possible, all the while knowing exactly how it will impact cash to close.

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