ATTORNEY TITLE AGENTS MUST DISCLOSE AGENCY

This article originally appeared in the Vol. 94, No. 7, July 2006 issue of the Illinois Bar Journal, and is reprinted here with permission. While the July-August issue of the ATG concept contained a detailed article on disclosure, we sought permission from the Illinois State Bar Association (ISBA) to reprint its article on this important topic as well.

In real estate transactions, be sure to apprise clients when you also serve as an agent to the title company. In fact, you might want to do so in writing at the outset.

Attorneys who handle residential real estate closings are often also agents for the title company that provides insurance to the buyer and mortgagee. If you're one such attorney, you already know - or should know - that you must disclose your agency. Title agents are subject to other requirements, too, and it doesn't hurt to review them.

Disclose in Writing?

A recent disciplinary matter arose from the respondent attorney's failure to disclose her agency to her clients. In In re Greenberg, MR 20776 (ARDC No 05 CH 26), the administrator alleged that the respondent attorney had represented clients in three real estate closings over three years without disclosing to them that she was an agent for the title company from which she ordered title policies and examined the title reports.

According to the ARDC's petition to impose discipline by consent, the attorney received not only $1,750 in fees from her clients for these transactions, but also more than $8,000 from the title company for her services as agent and approved attorney for the company. The petition alleged that the attorney did not disclose to her clients that she was receiving fees from the title company.

After the third transaction, the attorney's clients learned of her title fees and filed a complaint with the ARDC. The administrator alleged that the attorney had, as a result of her failure to disclose her agency and title fee, failed to explain a matter sufficiently to permit a client to make informed decisions regarding the representation, in violation of Rule 1.4(b) of the Illinois Rules of Professional Conduct. The petition also alleged that she had entered into a business transaction with a client without obtaining client consent after disclosure by purchasing title insurance for her clients from Ticor, in violation of Rule 1.8(a) of the Rules of Professional Conduct.

The administrator further alleged that the attorney failed to respond to its requests for information or to appear at the hearing on the complaint. Ultimately, with the consent of both ARDC and the respondent attorney, the Supreme Court entered an order censuring her.

Chicago attorney Michael J. Maslanka, who handles a number of residential real estate closings each year as an attorney and title agent, says the Greenberg matter has caused him to rethink his own disclosure practices. While Maslanka notes he's never failed to disclose his status as title agent to a client, he says that he, like many other attorneys in that role, has customarily made an oral disclosure at the outset of representation, ordered the title insurance policy upon the client's consent, and then, at the closing, obtained the client's signature on a written disclosure.

In the wake of Greenberg, however, Maslanka has decided to take the precaution of securing his client's signature on a written disclosure as one of his first steps once he agrees to represent the client at the closing. McHenry County attorney Scott Nolan likewise says that he sends a disclosure to his residential real estate clients with his initial letter of engagement.

RESPA Disclosure Requirements

Attorneys who are also title agents should be aware that the federal Real Estate Settlement Procedures Act (RESPA) also requires such disclosure. 12 USC § 2607. This section also prohibits unearned fees.

At the state level, the Illinois Department of Financial and Professional Regulation's Division of Financial Institutions regulates title insurance companies and enforces disclosure requirements. The DFI has, within the last year, issued several bulletins reminding title companies and their agents of RESPA's requirements. In those bulletins, the division has particularly noted that its audits have disclosed that companies and their agents are often not disclosing the portion of the title insurance premium that is paid to the attorney-title agent at closing on the HUD-1 or HUD-1A form. Bulletin 1-05, issued in July 2005, for example, recites the following DFI policy:

In order to give the consumers an accurate disclosure of the fees and parties involved in the real estate transaction, and in compliance with applicable statutes, the HUD-1 or HUD-1A Settlement Statement must disclose the name of the entity/individual receiving the funds. For example, in the case where a registered title insurance agent obtains services from a service company also registered as a title insurance agent with the same licensed title insurance company or receives services directly from the title insurance company, the HUD-1 or HUD-1A Settlement Statement must show the title insurance fees going to the registered title insurance agent, not the service company or title insurance company, regardless of how the collection of fees and payment thereof is actually handled as between the parties. In reviewing several HUD-1 and HUD 1-A Settlement Statements, it was discovered that some of the service companies and title insurance companies show their name as receiving the title fees, not the registered title insurance agent.

Bulletin 1-05 also reiterates that attorney-title agents must actually do work for their fees and not simply rely on support services for the determination of insurability of title.

While the support services can include such functions as obtaining the title search, typing, recording documents, and closings, the registered title insurance agent must perform its own determination of insurability of title. In determining insurability of title, the title insurance agent must utilize all searches necessary for the issuance of a title insurance commitment or title insurance policy. Service companies and title insurance companies are not to send title insurance agents preliminary title commitments or other products which give the information to the title insurance agent in such a manner as to allow the title insurance agent to issue the commitment without having had to examine title and determine insurability of title.

In the same vein, the DFI stated in an informational handout issued in February, 2006, that in reviewing the title searches sent to title insurance agents by the title insurance underwriters and service companies, the Department has found that some title insurance agents are being sent a preliminary title commitment with the heading, "title search', basically requiring the title insurance agent to merely sign and return without doing the proper examination. The issuance of a commitment by a title insurance underwriter or service company in any shape or form prior to the "determination of insurability of title" by the title insurance agent is prohibited.

The Department will be examining/auditing title insurance agents in the near future to establish compliance with the foregoing requirements. Attorney-title agents may also wish to review the cover letter dated February 23, 2006, which the DFI directed to the recipients of informational handouts 1-06 and 2-06. In that letter, the DFI's title insurance section supervisor stated that "[w]hile the Department has no rate regulation authority, the Department, through its recent title insurance agent/service company visits, has reviewed some programs where the compensation in some of the title insurance agent programs could be considered excessive. The Department would strongly suggest that each underwriter review the compensation of its title insurance agents in relationship to the work performed by the title insurance agent in the real estate transaction."

The referenced documents regarding title insurance services are available on the State of Illinois's website. For more on attorneys as title agents, see Title work is lawyer's work (LawPulse, July 2004 Journal) and You, too, can be title insurance agent (LawPulse, August 2004 Journal).

EDITOR'S NOTE:In Re Greenberghighlights how important it is for attorneys who are also title agents to disclose their financial interest in the title charges. There are actually two fee disclosures that must be made. First, the Illinois Title Insurance Act requires that any "producer of title business" must disclose to the parties paying for the title or closing services the financial interest of the producer and an estimate of the charges to be paid (215 ILCS 155/18). A producer of title business is basically defined as a lawyer, Realtor, or lender-a party who has the ability to steer the placement of a title order (215 ILCS 155/3 (4). The State of Illinois has developed a form to handle the disclosure that must be made at the commencement of the transaction so that the consumer paying the title or closing fees has the opportunity to shop for a better price. ATG provides this form to members as ATG Form 3017A: Disclosure Statement - Controlled Business Arrangement. It is also available in ATG REsource® as "DOC - Disclosure Statement." The form shows the buyer and seller the total estimated title and closing fees for the transaction. This disclosure is also mandated by the Real Estate Settlement Procedures Act (RESPA) 12 USC § 2607. The Illinois law and disclosure form were designed to bring Illinois practice in compliance with this federal law, as well.

The second disclosure dates back to the initial American Bar Association (ABA) and Illinois State Bar Association (ISBA) ethics opinions that established the legitimacy of bar-related® title insurance. The ethics opinions placed a duty on the attorney agent to fully disclose to the client that he/she is acting as a title agent, receiving a fee for that role, and disclosing the amount of that fee. See ABA Formal Opinion # 227 (issued 1963) and ISBA Ethics Opinion #304. To comply with this requirement, ATG has always supplied members with ATG Form 1092: Invoice for Title Charges. This form divides the title charges into three separate elements: 1. Underwriting Fee to ATG; 2. Search Fee; and 3. Member's Fee for Examination, Preparation, and Issuance of Policy. This form, which breaks out the member's charge, is also available in several formats in ATG REsource as "DOC Inv for Title BO Chicago Area" and "DOC Inv for Title BO Sep Search." This disclosure requirement only runs to the attorney's client while the state mandated form (ATG Form 3017-A) described in the first paragraph must be given to anyone paying for the services—generally both the buyer and seller.

It is imperative that ATG members comply with both of these disclosure rules. If you have further questions, please contact ATG's Underwriting Department, legal@atgf.com or 800.252.0402.