Dear ATG Member,

I am writing to you regarding concerns we are hearing from some of our attorney members about the practices of some real estate brokerages with regard to their captive title agencies.

Title Orders Made at Listing

The first issue is whether a lawyer, at the client's direction, has the authority to cancel an order for title services made (without advice of counsel) as part of the listing agreement between the seller and the real estate broker ("Broker"). Some Brokers assert that a cancellation is improper and have threatened lawyers with civil or regulatory action.

Several lawyers have also recently inquired about their duties and obligations as they pertain to the selection of title insurers on behalf of their real estate clients. Part of the reason this has arisen is in response to the issues outlined here.

As an attorney for a party in a real estate transaction, you have an ethical duty to "act with reasonable diligence..." in that representation (Rule 1.2, Illinois). It is our belief that this duty includes taking reasonable steps to determine the financial stability, quality of coverage, and services provided by title insurance companies seeking to contract with your client. Based upon your experience, it is your duty to assist your client in selecting the provider of those services. A lawyer acts unethically when he/she "permits a person who recommends ... the lawyer... to direct or regulate the lawyer's professional judgment" (Rule 5.4(c), Illinois RPC).

In addition, a title order made as a result of a boilerplate provision contained in a listing agreement (signed without benefit of counsel) is voidable as a matter of law if the order is shown to be unconscionable or contrary to public policy due to the unequal bargaining position of the parties or on other grounds. In analyzing these issues, counsel should examine the listing agreement and circumstances surrounding its execution, and the client's understanding at the time of listing as to whether a binding contract for title services was formed. Additionally, a title order in a listing agreement between the Broker and the seller is most likely unenforceable as a "contract" as there is no privity of contract with the title agency, which is an entity separate from the Broker, and the seller.

Whatever your recommendation, you should consult with and obtain consent from your client to cancel a title order before conveying such direction to the title company.

Conditioning Client Referrals on the Use of Captive Title Companies

In recent years, several real estate Brokers have established captive title agencies to add an additional revenue source. In order to capture market share, it has become common practice for some Brokers to mandate that lawyers use the Broker's captive title agency in exchange for the lawyer receiving referrals of legal business from the brokerage. A lawyer who refuses to comply is blacklisted and the referrals disappear. If the lawyer agrees, the flow of clients continues. Some of these Brokers maintain lists of "Approved Attorneys," a euphemism for those willing to refer back the title work.

In 1974, Congress enacted the Real Estate Settlement Procedures Act (RESPA) to protect homebuyers in real estate transactions. The Department of Housing and Urban Development (HUD) originally had jurisdiction over RESPA; the administration and enforcement of RESPA has since passed to the Consumer Financial Protection Bureau (CFPB) pursuant to the Dodd-Frank Act. Section 8 of RESPA prohibits giving a thing of value in exchange for the referral of business.

24 C.F.R. §3500.14(e) provides:

"An agreement or understanding for the referral of business incident to or part of a settlement service need not be written or verbalized but may be established by practice, pattern or course of conduct. When a thing of value is received repeatedly and is connected in any way with the volume or value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business." (Emphasis added.)

The referral arrangement discussed above between Brokers and lawyers violates 24 C.F.R. §3500.14(e) because it is based upon the understanding between the lawyer and the Broker to reciprocate these referrals. The conduct also violates Section 8 of RESPA as the referral of the legal representation to the lawyer is made in exchange for the lawyer's referral of title insurance and settlement services to the Broker's captive company. This fact situation was the subject of a successful 2003 enforcement action by HUD against Titleventures.com and Lenders Title and Escrow, LLC.

A Growing Threat to the Integrity of the Real Estate Transaction, Competition, and Consumer Choice

This model, referred to in the industry as, "Realtor®-controlled business," is a growing threat to the integrity of the real estate transaction. Many lawyers are put into a compromising situation because of their significant dependence upon the Broker's referrals to maintain a sustainable real estate practice. Lawyers feel compelled to enter into the referral arrangement with the Broker and captive title company. The mandatory aspects of a referral relationship result in inherent conflicts of interest between the lawyer and the consumer: The lawyers, by agreeing in advance to steer these clients, have abdicated their independent judgment. The Illinois State Bar Association concluded in Ethics Opinion 10-02 that such arrangement violates the Illinois Rules of Professional Conduct.

This business model is also a threat to competition and the ability for consumers to freely shop for services in the market. A real estate transaction is the largest investment of a consumer's life. Broker and lawyers should act in manner that is solely in the best interest of the consumer. In these cases, the consumer is unaware that a side deal exists between the Broker and the lawyer to reciprocate business, putting the lawyer at risk, and causing a disservice to the consumer.

In my 34 years in this business, I have never experienced marketplace shenanigans and misadventure like we see today. This market has gone unchecked and the regulations designed to protect consumers are being largely ignored. As the premier lawyer service organization, we are committed to fight these behaviors and ensure the continued protection of the public by lawyers acting in their capacity as counsel to home buyers and sellers.

We welcome your input (feel free to contact me) as we explore possible remedies to these practices.

Peter J. Birnbaum
ATG President and Chief Executive Officer