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Are You Designated ?

Are You Designated?

          Being involved in insurance continuing education, I often search the Utah Insurance Department’s web site to determine the title insurance license number of my students. As I review the information available, I am often surprised with the status of an individual’s license. Often a title insurance licensee is listed on a company for which they no longer work, and/or are not listed on the title company’s list where they are currently working.

          The Utah Insurance Code requires an insurance agency to designate all licensed individuals who work for that agency.

31A-23a-302. Agency designations.

(1) An agency shall designate an individual that has an individual producer, limited line producer, customer service representative, consultant, managing general agent, or reinsurance intermediary license to act on the agency’s behalf in order for the licensee to do business for the agency in this state.

          This will require that all those employed and/or working as an independent contractor with a title and escrow company and who have a title, escrow or marketing rep’s title insurance license be designated. If an individual is not designated, they may be subject to an administrative action by the Utah Insurance Company.

          I would recommend that all title insurance licensees double check to make sure they are designated by the title and escrow company for which they are associated. It would also be appropriate to have a designation removed from any company for which you are no longer employed.

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I recently attended the Instructor Development Workshop sponsored by the Utah Division of Real Estate.  During the presentations, Dee Johnson, Enforcement Director for the Division of Real Estate discussed the various types of complaints the Division receives.  While listing the various types of fraud that are being reported, Mr. Johnson spent most of his time reviewing the various types of fraud that are occurring with short sales.  Short sales have become an important segment of real estate transactions.  In a recent article Inman News reported that approximately 50% of current real estate transactions involve either REO or Short Sales.  With the large amount of foreclosures, and the number of properties that have debt in excess of their value, short sales will continue to be a major part of real estate sale transactions.

As with any type of successful transactions, there will be that element that will try to take advantage and which will result in fraud.  I don’t know of an escrow officer in Utah that has not questioned or been concerned with certain elements of a short sale transactions.  Especially when the short sale is also a split closing transactions, there is an open door for successful fraud to occur. As land title professionals, we need to understand the mechanism of a valid and clean short sale, together with those elements that can turn a clean transaction into a fraudulent transactions.

I have development a very extensive seminar on short sales and have been involved with many real estate professionals in reviewing questionable tactics that are occurring in short sales.  From this information and the information provided by the Dee Johnson, I would raise the following issues as red flags of a fraudulent short sale transactions.

First Red Flag: The use of a “facilitator” and the payment of “up-front” fees.  All of the steps necessary to create a successful short sale transaction can be completed by a licensed real estate agent and/or the property owner.  The use of a facilitator, who is not licensed and who has no regulatory controls on their actions, together with the payment of an up-front fee is not a normal or accepted step for a short sale.  In most cases, the payment of “up-front fees” burden an already stressful property owners and will do nothing to facilitate a successful transactions.  If an outside person is involved to help complete a short sale, then their fees should be paid when the transactions closes.

Second Red Flag: The use of a straw buyers or investor.  While it is hard to determine if a person is a straw buyer, an obvious clue is the structure of the transaction as a “flip” or a relatively quick turn around, using an all-inclusive trust deed.  With the decreasing value of real estate, and especially with a short sale, a simultaneous closing is rare, if not impossible.

Third Red Flag: The vacating of the property by the current owners, with the occupancy of a “tenant” and the possible use of a lease option.  Each of these situations is a problem.  A property owner should not be vacating the property until after a foreclosure has occurred, or until the short sale transaction has been completed.  Anyone who is advising the property owner to leave their property should be questioned as to their motives and the reason as to why the owner need to leave.  If a tenant is being placed in the property, then who are payments being made and why is someone will be move into a property that is in foreclosure?

Fourth Red Flag: The recording of additional liens on the property, including mechanic liens and/or new debt instruments.  If the value of the property is less than that owed, why are additional improvements being made.  Why is new debt being recorded when the person is already upside down?  Who would be willing to do that?  Most often, this occurs so that additional funds can be diverted from the first or second mortgage lender.

A short sale is a viable and important element of structuring a real estate transaction. However, care must be take to make sure the transaction is not fraudulent. As land title and escrow professionals, we are the last element to stop fraud from happening.

          The last couple of years have been frustrating, exciting, and down right frightening. We have all seen our business decrease and have had to make major adjustments to our business operations.  One of the things I have learn over the last couple of years is the great variety in attitudes that title company owners and managers have.  Some are frustrated and have a negative attitude which is seen in their company and in their relationship with their clients.  Others just accept the situation, and try to make the best of it, and address problems as they arise.  Finally, there is a small group of individuals who are optimistic and are planning for better times and are make plans to adapt and grow as the market improves.

          Everything I have read says the hay-day of real estate is gone.  The fast growth and inflated real estate values together with the easy at which mortgage funds were available has evaporated, and will probably not be back.  The recovery from the Great Recession will be slow.  From what I have gathered, the real estate market is beginning to improve, but there are still problems which need to be cleared before we see any real growth and improvement.  There needs to be a settling or reduction in mortgage foreclosures and the large inventory of lender owned property needs to be reduced.  But, these event will come and we need to plan now for the future.

          The title and escrow industry has seen a change in business models and relationships with clients, customers and competitors.  First, the searching process has changed.  No longer does a searcher complete an extensive review of land records.  Large title insurance companies are sending their searches off-shore to control costs.  Many companies are completing a “short” search. These practices have been implements to reduce costs and to improve production time.  Second,  the closing process has changed.  Software has improved the production and accuracy of settlement statements and closing documents.   It has also improved the way information is delivered to our clients and customers.  The use of independent notaries has changed the way many lenders and title companies complete the closing process.  Laws and regulations have placed more restrictions and requirements on real estate closings.   Third, employment situations have changed.  Compensation has increase and in many cases has been a burden to many companies. The competition to keep employees and to avoid the pirating of staff has strained the financial ability of many title and escrow companies.  With the reduced number of closings, many of these high priced individuals are no longer affordable.   Fourth, real estate has changed.  In the past, stocks, bonds, and other securities have had problems with fraud.  Real estate was viewed as a stable and secure investment.  However, real estate is now plagued with fraud and questionable tactics.  Each title and escrow company has had to implement a better program to protect itself against these fraudulent transactions.  With the liability of title insurance claims and the fiduciary liability of escrows, there needs to be improved procedures and practices within the title and escrow company.

          Attitude will make a difference when addressing the problems and changes in real estate. Many companies have had minimal problems in the pass and feel that their past operational procedures will continue to provide protection against claims and financial problems in the future.  Some title companies have just increase their reserves to cover the increased claims problems.  No longer can a title company sit back and address problems as they arise.  There needs to be an aggressive plan of attack.  Each title and escrow professional must understand the types of problems associated with real estate transactions and closing today.  The competition for business is huge.  But we cannot let this competitive nature blind us to the problems that our industry is facing.   Let’s all become aware of the problems and do those things than will make the title and escrow industry the respected and professional industry we all know it is.

          The Title & Escrow School has received approval for their online RESPA Reform Seminar. With the new changes to RESPA taking affect on January 1, 2010, it is important that all land title and escrow professionals understand these changes and be able to implement them into their company’s operation.  The new rule requires a new HUD-1 Settlement Statement, with a page 3. This page 3 includes two items.  First, it includes a comparison of information contained on the Good Faith Estimate (GFE) and the HUD-1 Settlement Statement.  Second, it includes a disclosure of the terms and certain provision of the new mortgage loan.

          The Real Estate Settlement Procedures Act (RESPA) has been modified by a rule published November 17, 2008. While certain provisions took affect on January 1, 2009 (delayed until April 16, 2009), compliance with the major provisions, requirements and modified forms will become effective on January 1, 2010.  RESPA is a consumer protection statute that involves most professionals associated with a real estate transaction.  The focus of the new rule supports the concept that a consumer can shop for a mortgage loan among loan originators.  However, the implementation of the new rule’s provision will affect all those associated with the closing of a residential real estate transaction.

          This Online CE course has been prepared to help land title professionals better understand the recent changes to RESPA. As part of the course, you will review the new Good Faith Estimate form and the new HUD-1 Settlement Statement form. This seminar will help those involved in a closing of a real estate transaction to understand the new changes and to be able to prepare the new settlement statement. The seminar has been approved for 3 hours of CE credit by the Utah Insurance Department.

          A RESPA Reform seminar has also been approved for a classroom presentation in both a 2 and 3 hours CE format.  This seminar will be excellent training for a staff meeting or other types of training meeting.  The Title & Escrow School will present this seminar in any appropriate location.  We provide handouts and all the equipment necessary for a professional training seminar.  We can also provide this seminar as a sponsored CE seminar to your clients.  Seminars can be provided to real estate agent and and mortgage lenders.  This seminar has also been approved for CORE CE credit by the Utah Division of Real Estate for both real estate agent and mortgage lenders.  Both a 3 hour and a 2 hour CE seminar is available.

Fraud Prevention

A few years ago I attended a seminar in New Orleans.  A large segment of this seminar concerned the detection of fraud by a title and escrow company.  The presenter, who was an investigator, discussed a number of situations which had resulting in large losses.  In many cases the loss was a direct result of fraud.  The presenter also discussed how in almost every case, the fraud could have been prevented if the title and escrow company would have followed a few basic guidelines.  One suggestion that was make included the review of the endorsements on trust account checks.

Fraud often occurs on multiple transactions.  The fraudsters develop a friendly relationship with others involved in the real estate transaction including the escrow officer or other individual in the title and escrow company.  Over time they develop a relationship of trust.  The title and escrow company is not aware of any problems and may not be held liable for any damages.  However, in many fraud cases, everyone involved in the transaction gets sued.  The cost of defending this type of suit is very expensive.

A review of the endorsements on trust account check will often disclose questionable actions which occur after the closing.  When a trust account check is endorsed over to another party associated with the transaction, or made payable to a third party, it may be a red flag of potential problems.  This is especially true when the endorsement to a third party becomes a regular practice.  It would be impossible to review all the different types of third party endorsements and the problems associated with each.  The closing of a real estate transaction with a title and escrow company should be a safeguard.  Through the review of trust account check endorsements, the habits and practices of your clients can be watch.

A Recent Example:  A New Jersey state grand jury indicted two real estate agents on October 22, 2009 and charged them with first-degree money laundering, first-degree conspiracy, two counts of second-degree theft by deception and third-degree failure to file corporate tax returns, among other crimes.  The state attorney general accusing these individuals and their real estate company of stealing more than $600,000 from home sellers in connection with 11 home sales.  The accused individuals were also charged with defrauding three mortgage companies of $641,800 by falsifying the earnings of applicants for three home loans.  Many of the checks issued by the title companies handling the property sales were written to the home sellers, but these indited individuals convinced the sellers to sign the checks over to them for payment of business expenses and fees.  These activities occurred between August 2006 and February 2008.

If the title companies had been reviewing the endorsements on their trust account check, many of these fraudulent transactions could have been prevented.  Title and escrow companies have a unique position in the transaction.  They have information which is not available to others.  While the review of endorsements on trust account check may reveal a problem that has already occurred, it will give them a better understanding of their client’s practices and may prevent future fraudulent transactions.

Hello All

As a land title professional trainer, the title and escrow industy is special to me. I have been involved in almost every aspect of this industry for over 39 years. Besides being licensed in title insurance, I am also a professional trainer and consultant for real estate, mortgage lending, title insurance and escrow. I hope to make this an important blog for our industry. My postings will include current events, new laws and regulations, changes and updates, concerns, and information about my seminars, together with other pertinent information. If you have any comments or suggestions, I would appreciate them.