DISCLOSURE OF CONFLICTS OF INTEREST


ATG members and regional agents have a duty to disclose their relationship with ATG to the parties in real estate transactions. The Illinois Title Insurance Act requires attorneys, as producers of title insurance business, to disclose their financial interest in a title insurance company to both buyers and sellers. 215 ILCS 155/18(b). The Real Estate Settlement Procedures Act (RESPA) also requires disclosure of affiliated business arrangements to buyers and sellers. 12 USC § 2607. Finally, the Illinois Rules of Professional Conduct mandate disclosure to satisfy the attorney's duty to communicate and duty to disclose conflicts of interest to the attorney's clients.

Censure for Failure to Disclose

EDITOR'S NOTE: To properly disclose their financial interest in ATG, members and agents must complete and distribute Form 3017-A, Disclosure Statement (Controlled Business Arrangement), with each commitment they issue. To obtain a copy of this form, visit our website or call our Order Department, 800.252.0402, ext. 2114. Also, see our July 2006 Underwriter's Bulletin article on disclosure compliance for more information.


Recently, an attorney was disciplined for a failure to disclose her relationship with a title insurance company. The Attorney Registration and Disciplinary Commission (ARDC) filed a petition to censure an attorney for a failure to disclose the attorney's interest in a title insurance company. In re Greenberg, ARDC Comm. No. 05 CH 26 (2006) (Petition Allowed by the Illinois Supreme Court and Imposing Discipline on Consent). The ARDC filed the petition after the sellers, who the attorney represented in three real estate transactions, asked the ARDC to investigate the attorney's failure to disclose her relationship with the title insurer. In connection with the investigation, the attorney failed to respond to ARDC letters, failed to appear to give a sworn statement pursuant to a subpoena, and failed to produce documents.


The petition alleged that the attorney did not make the required disclosures under the Illinois Title Insurance Act, 215 ILCS 155/18(b). The attorney did not disclose to the sellers that she was an agent of the title insurer or that she received a financial benefit for issuing the policies. For each of the three closings, the attorney, as an approved attorney of the title insurer, acted as the title insurer's agent. The attorney ordered title reports and received payments from the title insurer. Specifically, the petition alleged violations of the following Illinois Rules of Professional Conduct: Rule 1.4(b) (duty to explain matters to clients so they can make informed decisions regarding the representation), Rule 1.8(a) (duty of disclosure before entering into business transactions with clients), Rule 8.1(a)(2) (duty to respond to lawful requests for information), Rule 8.4(a)(5) (duty to refrain from conduct that is prejudicial to the administration of justice). For these violations, the ARDC recommended censure.


The Hearing Board allowed the petition and censured the attorney. In re Greenberg, ARDC Comm. No. 05 CH 26 (2006) (Supreme Court order).

Disclosure Requirements

Illinois Title Insurance Act

Under state and federal laws, attorneys must disclose their relationships with title insurers. First, the Illinois Title Insurance Act requires disclosure of affiliated title insurance company arrangements when the producer of the title business-the ATG member-has a financial interest in the title insurance company. See 215 ILCS 155/18(b). ATG members must make these disclosures to any party paying for title insurance-buyers and sellers. Members must disclose the interest and disclose the amount of the charges in writing by using ATG Form 3017-A. The Illinois Title Insurance Act disclosure requirement applies only to residential properties of four or fewer units, one of which is owner-occupied. 215 ILCS 155/18(a).

Illinois Rules of Professional Conduct

The Illinois Rules of Professional Conduct also mandate disclosure of an ATG member's relationship with ATG to the member's client. First, Rule 1.4(b) requires an attorney to explain a matter to the client so that the client can make informed decisions about the representation. Ill Sup Ct R Prof'l Conduct, R 1.4(b). This rule mandates disclosure of the member's relationship to ATG so that the client may make an informed decision on the purchase of title insurance. Second, Rule 1.8(a) provides that an attorney may not enter into a business transaction with a client without disclosure of a conflict of interest. Ill Sup Ct R Prof'l Conduct, R 1.8(a). The rule requires disclosure when the attorney has actual or constructive knowledge of the attorney's and client's conflicting interests, or when the client expects that the attorney will use professional judgment to protect the client. Id. Without disclosure, the client may assume that the attorney is choosing the title insurer based solely on the client's interests.

RESPA

Second, the disclosure requirements of RESPA may also apply to ATG members. RESPA regulates affiliated business arrangements in residential real estate transactions with federally related mortgage loans. 12 USC § 2607. Under RESPA, an affiliated business arrangement is:

... an arrangement in which (A) a person who is in a position to refer business incident to or a part of a real estate settlement service involving a federally related mortgage loan, or an associate of such person, has either an affiliate relationship with or a direct or beneficial ownership interest of more than 1 percent in a provider of settlement services; and (B) either of such persons directly or indirectly refers such business to that provider or affirmatively influences the selection of that provider. Id. § 2602(7).

ATG members with more than one percent ownership interest in ATG are subject to the RESPA disclosure requirements. Members must make written disclosures of the existence of an affiliated business arrangement to any person to whom title insurance services are referred-buyers and sellers-and must provide written estimates of the usual title insurance charges. See Id. § 2607(c)(4)(A); 24 CFR § 3500.15(b)(1). The disclosures must be on a separate piece of paper and in the format of the Affiliated Business Arrangement Disclosure Statement:

Notice To:___________________________________


Property:___________________________________


From:___________________________________
(Entity Making Statement)


Date:___________________________________

 

This is to give you notice that (referring party) has a business relationship with [settlement services provider(s)]. [Describe the nature of the relationship between the referring party and the provider(s), including percentage of ownership interest, if applicable.] Because of this relationship, this referral may provide [referring party] a financial or other benefit.


[A.] Set forth below is the estimated charge or range of charges for the settlement services listed. You are NOT required to use the listed provider(s) as a condition for [settlement of you loan on] [or] [purchase, sale, or refinance of] the subject property. THERE ARE FREQUENTLY OTHER SETTLEMENT SERVICE PROVIDERS AVAILABLE WITH SIMILAR SERVICES. YOU ARE FREE TO SHOP AROUND TO DETERMINE THAT YOU ARE RECEIVING THE BEST SERVICES AND THE BEST RATE FOR THES SERVICES.


[provider and settlement service]

_____________________________________________

_____________________________________________

_____________________________________________


[charge or range of charges]

_____________________________________________

_____________________________________________

_____________________________________________


ACKNOWLEDGMENT


I/we have read this disclosure form, and understand that [referring part] is referring me/us to purchase the above-described settlement service(s) and may receive a financial or other benefit as the result of this referral.


_____________________________________________

Signature


24 CFR § 3500.15(b)(1).

RESPA also regulates the timing of the disclosure. "Whenever an attorney or law firm requires a client to use a particular title insurance agent, the attorney or law firm shall provide the disclosures no later than the time the attorney or law firm is engaged by the client." Id. § 3500.15(b)(1)(ii). For referrals to others, if a referral is made in person, by writing, or by electronic media, the disclosure must be made at or before the time of the referral. 12 U.S.C. § 2607(c)(4)(A)(i). If a referral is made by telephone, the written disclosure must be made within three business days of the telephone referral. Id. § 2607(c)(4)(A)(ii).

Conclusion


State and federal laws require ATG members to disclose their relationship with ATG to buyers and sellers in real estate transactions. Although the member represents only one of the parties, the member must make the disclosure to both parties because the member refers ATG to both parties and both parties pay for title insurance. The seller pays for the buyer's title insurance and the buyer pays for the lender's title insurance. Failure to make the disclosures could result in censure or other professional disciplinary action.

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