In most states, suits by buyers and borrowers against settlement agents arise out of the accusation that the settlement agent has committed misconduct that trial lawyers refer to as "torts," or civil wrongs such as negligence, negligent misrepresentation, or fraud. Maryland actually goes beyond these tort claims and imposes an even broader set of duties which title agents owe to borrowers. In Maryland, the legislature has strongly suggested that a contractual relationship exists between a borrower and a settlement agent.
Generally, under Maryland law governing residential purchase money mortgages, it is the borrower who employs the settlement attorney or title agent – not the lender. Indeed, unless good cause can be shown, a lender may not prohibit a borrower from engaging a licensed settlement agent selected by that borrower. Section 12-120(c) of the Commercial Law Article states in relevant part:
§ 12-120. – Borrower's obligation to pay lender's attorney fee; provision for attorney of borrower's choice.
(a) Applicability of section. — This section applies to any loan, other than a commercial loan, to be secured by a mortgage or deed of trust on a borrower's primary residence.
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(c) Employment of attorney of borrower's choice. —
(1) A lender may not require as a condition of settlement that a borrower employ a particular attorney or title insurance company to perform a title search, examination of title, or closing if:
(i) The borrower notifies the lender, within 7 days after application for the loan, of the name and business address of the borrower's choice of attorney or title insurance company to perform the title search, examination of title, or closing; and
(ii) The lender does not reject the borrower's choice of attorney or title insurance company for good cause within 7 days after the receipt of the notice under item (i) of this paragraph.
(2) Subject to the requirements of subsection (b) of this section, this subsection may not be construed to prohibit a lender from requiring a borrower to pay for:
(i) Preparation of loan closing documents;
(ii) Title insurance;
(iii) Review of documents prepared by the borrower's attorney; or
(iv) Attendance at settlement by the lender's attorney.
Md. Code Ann., Comm. Law II § 12-120(a, c).
While the legal distinctions between tort law and contract law would seem to be technicalities that only trial lawyers should worry about, the imposition of contractual liability is important for at least two reasons. First, if a settlement agent is considered an agent of the borrower, a fiduciary relationship to the borrower may exist. If so, the settlement agent must act in good faith and make full disclosure to the borrower of all facts material to the borrower’s decision to accept or reject the proposed transaction, and must act with care, skill, and diligence for the benefit of the borrower. Arguably, this is a higher standard of care that a tort duty of care. Second, while an error and omissions insurance policy generally provides liability coverage for the negligent conduct of settlement agents, coverage is not typically available for breach of contract claims.
Regardless of the legal source of the title agents’ duties, title agents must make sure that they fulfill them in each and every transaction.
1. Convey Clear Title
While it may be stating the obvious, settlement agents’ failure to convey clear title to real estate invites more lawsuits against agents than any other infraction. It is the duty of all title agents to convey title to the buyer as agreed upon in the contract of sale. Contracts of sale generally require that the seller convey marketable title to the buyer. As a general rule, marketable title is title which a title insurer is willing to insure.
2. Explain the HUD-1 Settlement Statement, Deeds & Loan Documents
Title documents are confusing to most consumers and, indeed, to many business people. Confusion often results in lawsuits in which buyers claim that they were deceived into consummating an ill-conceived purchase. In conducting the closing, the settlement agent should take care to adequately explain the instruments of conveyance and the loan documents. While it is not possible to read each and every document at the settlement table, and few buyers will be fascinated by even the best explanation, the general categories of documents and what they accomplish should be outlined to every buyer. You should begin with the HUD-1 Settlement Statement and explain the mortgage, deed of trust, TILA Statement, and, if applicable, the all-important right of rescission. Yet, no matter how good the explanation, one must be careful not to provide anything that may be construed as legal advice. For this reason, your explanation of documents at settlement should be strictly factual and should not embellish on the nature of the parties legal rights. Frankly, this is easier said than done and the discourse at a settlement table often provides good fodder for subsequent litigation. Caught between the proverbial "rock and a hard place," title agents are either subjected to lawsuits which alleged that they gave insufficient or confusion explanations, or that they made affirmative misrepresentations on the nature of the transactions. While one cannot always avoid baseless allegations that arise after the fact, title agents must take great care to ensure that they do not provide such accusations with legitimacy.
3. Pay Fees to Vendors
Settlement agents wear the important hat of escrow agents in most transactions. Having collected fees from the buyer at settlement, the settlement agent, acting as an escrow agent, has a fiduciary duty to pay the vendor-related fees incurred in preparation for the settlement. Thus, one must pay the real estate appraiser, abstractor, surveyor, and other appropriate vendors.
4. Secure Releases of Mortgage and Liens
The settlement agent is obliged to secure the release of the existing mortgage and obtain the release of other subordinate liens as agreed upon by the parties (IRS, judgment creditors, etc.).
REAL ESTATE TITLE AGENT LIABILITY TO SELLERS
1. Distribute Net Proceeds of Sale
Generally, the seller conveys title to the buyer in exchange for a monetary payment. After settlement, the settlement agent distributes the proceeds of the sale, less any charges, to the seller. While this seems simple enough, the distribution of proceeds must be handled with extreme care, lest funds fall into highly unscrupulous hands.
2. Secure Releases
If contemplated between the parties, the settlement agent should secure the release of the mortgage and any other liens which need to be satisfied from the proceeds of the sale.