Some home buyers and sellers were shocked recently when they learned a Towson-based title company that handled their real estate closings had shut down due to financial irregularities.
The action spawned several questions. What risks do these homeowners run? What should they do to make sure the settlement company has properly completed their purchase, sale or refinance transactions?
Settlement companies usually are responsible for collecting and disbursing all funds involved in the purchase or refinancing of real estate. In a purchase transaction, a settlement company receives money from the purchaser and lender and disburses most of the funds to pay off the seller's mortgage. After deducting the settlement agent's fees and expenses, the balance of funds is paid to the seller. All receipts and disbursements and title company charges are itemized on a settlement statement. A settlement company can get in serious financial trouble when a dishonest owner or employee fails to properly disburse funds received from purchasers and lenders. For instance, a dishonest settlement agent may not remit funds to pay off the seller's mortgages, or may fail to pay real estate taxes on the property or record the purchaser's deed.
The fact that a settlement company acts dishonestly does not necessarily leave its customers high and dry. Settlement companies almost always are agents for major title insurance companies. As agents, these settlement companies have been authorized by the title insurers to issue title insurance policies to homeowners.
Settlement agents usually collect a title insurance premium from the buyer at closing. In most cases, when a charge for title insurance appears on the settlement statement, the title insurance company will be responsible for its agent's dishonesty. Even if the agent never paid the premium, the title insurance company must meet its obligations under the title insurance commitment to guarantee that a deed is validly recorded and that prior mortgages, real estate taxes and other liens have been fully paid.
When financial irregularities in a settlement company are brought to light, parties who have closed transactions through that company should check with the state insurance commissioner to find the name and local address of each title insurer with whom the settlement agent was affiliated.
With this information, a customer can contact the title insurance company and provide the file number and other identifying information shown on the settlement statement. The insurer should be able to locate the file of the customer's transaction and provide complete information. If the title insurer does not satisfactorily address a problem, the state insurance commissioner has authority to investigate and remedy consumer complaints.
Title insurance agents are required to post a $100,000 bond with the insurance commissioner. But in cases involving a pattern of dishonest acts, the bond may be woefully insufficient to cover all potential claims.