CONTRACT & NEGLIGENCE SUITS
AGAINST TITLE AGENTS

LAWSUIT

Because the title agent is typically the last person to touch the deal, the title agent frequently gets blamed for just about everything that went wrong throughout the chain of the real estate transaction. Even though the title agent had nothing to do with the sale of the property, she will often be blamed for conspiring to induce the buyer to enter into the ill-fated transaction or making it possible for the buyer to get swindled in the deal. Though the title agent had nothing to do with obtaining the loan, he will often share blame with the mortgage broker for somehow assisting in concealing from the lender problems associated with the borrower’s credit worthiness. While title agents do not render opinions on real estate values, they are often sued together with appraisers by those who allege that they should have been suspicious of allegedly inflated sales prices. If the borrower was mentally unstable, somehow the title agent should have detected the psychosis and halted the transaction. If certain documents were forged, the title agent should have spotted inconsistencies in handwriting or detected other "red flags" of fraud. As the last person involved in closing these transactions, title agents are often blamed to the same extent that the unwitting driver of a getaway car is blamed for the bank robbery that preceded his involvement. In the view of plaintiff’s lawyers who target title agents, title agents must do more than merely conduct settlements, they must assume the role of handwriting analyst, psychiatrist, appraiser, and all around "fraud detector."

The Title Agent As Psychiatrist?

As farfetched as it may seem, title agents have actually been sued for failing to detect mental incompetence on the part of parties to a settlement. While it is impossible for title agents to render psychiatric diagnoses, and it would hardly be practical to administer a battery of psychological tests at each losing, title agents cannot play ostrich as obviously dazed borrowers stare into space while signing off on comprehensive settlement papers.

Exercising a modicum of common sense, if not psychological expertise, title agents must speak with the parties to the transaction and elicit some confirmation (preferably in writing) that these parties understand the terms of the deal and the settlement papers as explained to them. This is particularly true in a world where borrowers often seek to escape the financial ramifications of their loans by claiming utter ignorance of the terms of the transaction and pleading for mercy as "unsophisticated consumers" who have been exploited by fast-talking title agents in nicely-pressed suits. Jurors inclined to sympathize with these consumers may well find the title agent guilty of negligence or even a conspiracy to defraud such consumers, making it extremely important to pay attention to the demeanor of those coming before you.

The Title Agent as a Fighter of Identity Theft?

Fraud happens. When it happens, title agents are often blamed for failing to detect it. This is increasingly true in the case of identity theft in which parties to take the role of imposters to cash in on the proceeds of a transaction. While most title agents are honest and are willing to assume the honesty of those around them, assumptions create liability. Rather than risk a lawsuit at the hands of fraud victims who must seek recovery from a well-insured title agent, title agents must demand proper identification and be attentive to certain "red flags" of identity theft. Such flags are typically waved prominently in transactions in which not all of the parties to the transaction are present, the disbursements requested at the settlement table differ from those identified on the HUD-1, or disbursements are made to only of two parties entitled to payment. Where these telltale signs of identity theft are present, cautious title agents must take care to examine the facial validity of documents, to compare signatures with other documents in the settlement file, to question those present to determine the legitimacy of their involvement and, when doubt persists, to call their underwriters and lenders for additional guidance and instructions.

The Title Agent as Fraud Detector: The Flipping Cases

The expanding duties of title agents have become painfully apparent in a recent wave of litigation and criminal prosecutions of real estate fraud schemes known as "flipping." In recent years, many title agents have spent many days embroiled in litigation arising out of unscrupulous efforts on the part of land speculators to "buy low and sell extremely high." While many title agents are unjustifiably caught in the crossfire of multi-party litigation as innocent bystanders to deals gone awry, others have been convicted of mail and wire fraud, lost their licenses and now spend their time in federal prison. The consequences of real estate flipping are serious – both for the victims of this fraud scheme and for the title agents who are called upon to close such transactions.

Prevalent in inner cities where property values may differ greatly in a confined area, Baltimore City has become a national hotbed of flipping activity. The scheme is often masterminded by slick real estate investors who buy several distressed houses at rather low cost, obtain the services of unscrupulous appraisers to inflate the value of these homes and promise unsophisticated first time buyers a home of their own by tricking lenders into financing their purchase for far more than the true value of these homes. In a matter of weeks, these con artists can flip homes for cash profits that may triple or quadruple their original investment – profits that come at the expense of first time buyers who incur far more debt than warranted and at the expense of lenders who will never recoup loans that far exceed the relatively nominal value of this real estate.

To illustrate how this scheme works, consider an inner city row house which an investor could buy at a HUD auction for $10,000.00. After spending $1,000.00 on a new paint job and a few cosmetic improvements, the unscrupulous investor persuades an unsuspecting first time buyer than she and her daughter can live in a home of their very own for little or no deposit with the entire purchase financed for them. After signing a contract to sell this home for $75,000.00, the seller enlists the services of a friendly mortgage broker to assist with financing the bulk of this purchase. To do so, the broker retains a similarly cooperative real estate appraiser who renders the dishonest opinion that the home is actually worth the $75,000.00 contract price. Although the buyer is a poorly paid toll clerk, the broker then falsifies information on the Uniform Residential Loan Application and persuades a lender to finance 70% of this purchase for a first mortgage of $52,500.00. Unfortunately, that leaves our penniless toll clerk $23,000.00 short. Fortunately, the seller – feigning concern that this single mom realize the American dream – has two possible solutions to this problem. Either the seller will provide a second mortgage loan for the balance, or the seller will actually provide the buyer with $23,000.00 at closing in order to complete this unscrupulous transaction and convince everyone that he is really selling a home valued at $75,000.00. Following settlement, the seller will have received $52,000.00 cash on an initial investment of $10,000.00 – enough profit to make him forget about that bogus second mortgage he provided to the seller.

In this all-too-common scenario, the culpability of the seller, mortgage broker and appraiser is relatively easy to understand. The seller knew the actual value of the real estate and masterminded the conspiracy to inflate it. The mortgage broker assisted in this conspiracy by engaging an unscrupulous appraiser and by falsifying loan applications and other documents designed to enhance the credit worthiness of the buyer. The appraiser used his license to deceive lenders and other parties as to the true value of the home. While litigation arising out of these schemes typically involves sellers, mortgage brokers and appraisers, the prime targets of litigation are often title agents who entered the scene long after the contract was signed and the loan commitment provided. Considering the title agent’s limited role in passing good title and placing the lender in a first lien position, one is left to wonder about the rationale for suing the title agent and why title agents assume a position of prominence among all co-defendants.

The answer is simple: Title agents are often the best insured, and perhaps the only insured, defendants in these flipping cases. Carrying errors and omissions policies which often provide coverage of as much as $1,000,00.00 for acts of negligence, aggrieved buyers and lenders seek to recover from title agents when the chances of collecting from uninsured or minimally insured sellers, mortgage brokers and appraisers are remote.

Although it is obvious why plaintiffs would want to target title agents and their sizeable insurance policies, these defendants are often the least culpable participants in the transaction. Having nothing whatsoever to do with the sale of the home, its financing or appraisal, title agents are typically brought in to pass good title to the buyer and place the lender in a first lien position. While many title agents hide behind these limited functions to deny liability, pleading ignorance will hardly excuse title agents who acquire knowledge or serious irregularities in the transaction or who look the other way when con artists go to work.

While it may be impossible for title agents to cross-examine the parties at settlement to determine the existence of potential fraud, those who disregard signs of fraud or suspicious activity may be accused of either conspiring to commit fraud, acting in a criminal enterprise, or, at the very least, committing negligence in these transactions. To avoid lawsuits and criminal prosecutions, title agents must pay close attention to the following "red flags":

Beware of Bogus Buyer Contributions

To mask their fraud, flippers often provide their buyers with a check for the difference between the loan amount and the contract purchase price. This way, the deal looks legitimate and it appears to unsuspecting lenders that their borrowers really are paying the full appraised value for their homes. While clever con artists usually use certified funds for this purpose and coach their buyers to hand these checks to the settlement agent at closing, one must not ignore warning signs that may cast doubt on the source of funds. Indeed, there are cases in which title agents have actually accepted personal checks from sellers while misrepresenting these funds as "cash from borrower" in the HUD-1 Settlement Statement. Such misrepresentations assist this criminal enterprise by concealing significant signs of irregularity. At the first sign of such irregularities, title agents must act swiftly to halt the process of settlement until the proper source of funds may be verified and confirmed.

Beware of Seller-Held Second Mortgages

For those flippers who are concerned that a fraudulent shell game of cash contributions may ultimately be detected in later investigations, bogus second mortgages provide an ideal way to make up the difference between the loan amount and contract purchase price. Yet, because such second mortgages are sham transactions, sellers will often ask title agents not to record the corresponding deeds of trust or may even seek to release these mortgages at the settlement table itself. Such requests are nothing more than invitations to commit fraud and should prompt responsible title agents to put a quick end to the transaction. Where there are addenda to the contracts of sale that memorialize the seller’s intention to release the second mortgage following settlement, title agents should exercise similar caution and take this as a sign of potential fraud.

Watch Out for Multiple Conveyances in a Short Time Period

Although it is certainly not illegal to buy low and sell high, one must view great disparities in sales prices on the same parcel of property with suspicion – especially where these sales and conveyances occur within a short period of time. Absent a good reason for a drastic jump in value that quadruples the price of the property, title agents who are called upon to assist in flipping the property to a buyer for substantially more money may find themselves accomplices to fraud. This is particularly true where the title agent conducted the settlement of the flipper’s initial purchase and is then called upon to close the subsequent flip.

Scrutinize Multiple Transactions in the Same Day

Some flipping schemes actually run from start to finish in a single afternoon over a single settlement table! Rather than wait a few weeks to flip the property, some sellers actually fund their purchase of the property with the proceeds of the loan extended on their resale. This way, the flipper does not have to put any of his own money at risk and reaps immediate profits from an unsuspecting lender. For whatever reason, there are title agents who blindly conduct both settlements without even taking a breath between the two. These title agents frequently conceal the fact that the flipper did not actually hold title to the property before settlement on the second sale. Such same day transactions wreak of fraud and should be avoided at all cost. At the very least, prudent title agents must fully disclose the details of these transactions to their lenders and title insurance carriers.

Beware of Multiple Contracts or Last-Minute Deal Changes

There have been some cases in which title agents received two contracts for the sale of a single parcel of property to the very same buyer, one for a lower amount and the other for the higher appraised value. Rather than question such suspicious documents, certain title agents have honored the terms of the latter deal while chanting the mantra, "I’m just a title agent whose job is to convey title." Many of these agents are singing a different tune in federal prison.

While flipping schemes have been known to occur in higher income neighborhoods, they are most prevalent in transactions involving private sales of distressed property and in connection with loans extended by sub-prime lenders as opposed to those with more stringent lending criteria. Yet, regardless of the neighborhood or type of loan, title agents who ignore the red flags of fraud leave themselves open to serious charges at the hands of aggrieved buyers, lenders ... and prosecutors. Even where they do not have actual knowledge of fraud, those who fail to take action in response to these irregularities may be guilty of negligence and subject to enormous civil liability. Where the HUD-1 Settlement Statement and title commitment do not accurately reflect the true terms of the transaction, title agents may be held liable for their intentional or negligent misrepresentations or concealment of material facts – facts that, if disclosed, would dissuade a lender from funding such deals. This is particularly true where the terms of the deal violate the lender’s closing instructions, such as prohibitions on seller-held second mortgages or requirements that the buyer contribute a certain amount of her own money to the purchase.

Title agents must be scrupulously honest and accurate in their preparation of settlement statements, title commitments and other documentation relating to each transaction. All too often, title agents disregard what may seem to be trivial details in an effort to expedite the closure of transactions. To avoid liability in connection with illegal flips or other claims, title agents must take care to disclose all elements of a transaction to the lender and other interested parties. In the case of potential flipping claims, it is good practice to disclose to the lender the date of the prior settlement and prior sales price or even to provide a copy of the previous deed reciting that consideration. Cf. First Guaranty Mortgage Corp. v. Procopio, Civil Action No. WMN-02-326 (D. Md. 2002) (refusing to dismiss claims against a title agent that "certified a settlement statement containing several false statements about the transaction). It is also essential that the title agent disclose the actual closing costs incurred in the settlement rather than estimates that may have changed in the actual transaction. Kerby v. Mortgage Funding Corp., 992 F. Supp. 787 (D. Md. 1998). When in doubt, title agents should communicate potential problems or irregularities to their lenders and their underwriters – warding off claims that they were victimized by title agent’s misrepresentation or concealment.

While many title agents believe that their job is to ensure that settlements proceed smoothly and that deals get done, they often protect parties to a transaction best when they kill, or at least, delay deals where there is evidence of fraud or other irregularities. Though no one wants to lose a fee in a given transaction, one less deal is far superior to one more lawsuit, one less license, or the prospect of time behind bars.

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