HOW TO CHOOSE AN ESCROW COMPANY IN HAWAII

The issue of who chooses a Hawaii title & escrow company or officer, Buyer or Seller, comes up a lot when selling Hawaii real estate. Many clients do not care who they use as title & escrow company. Sometimes, clients have a preference. Often, REALTORS have a strong preference as to which title company and escrow officer are used. Frequently, Seller's agents will claim that it is their "right" to choose the title company in Hawaii.  I have seen some REALTORS will even argue over this to the detriment of their clients. But whose choice, really, is the escrow and title company which is used for a Hawaii real estate transaction and why?

Responsibilities of Title and Escrow.

First, let's look at what these settlement service providers do. Typically, you will have an escrow officer who provides escrow services. This includes holding the funds for the Buyer, keeping a timeline of the transaction in accordance with the purchase contract, arranging the drafting of the deed by an attorney, working with the lenders on both sides, ensuring that the settlement statements are prepared correctly, signing of the closing documents, recordation of the deed, and many other responsibilities in coordination of the closing. The escrow officer is neutral and takes instruction from both parties on behalf of each of the respective parties. An escrow officer has independent fiduciary responsibility to each party in the transaction and should never disclose confidential information of or provide an advantage to one party over the other, though they will communicate regularly with both over the course of the transaction.

In Hawaii, the title and escrow company will typically also provide title services through a different department than escrow, though they work together. They do the title search on the property, review the survey and order title insurance for the parties so that Buyers can be assured that the Seller has authority to convey the property and that the property is being properly conveyed to the Buyer. For title insurance, there is frequently both an owner's policy and a lender's policy, which is required when the Buyer obtains a loan. Title officers and the lawyers in the title department also will review the survey and public records to identify encumbrances on the property, and exceptions to the title insurance policy.

Costs of Settlement Services.

The escrow side of the company and the title side of the settlement services company will charge separate fees to the Seller and Buyer in a Hawaii real estate transaction for what they do.

In Hawaii, it is customary that the costs of the title insurance (owner's policy) are split 60/40 between Seller and Buyer.  The Lender's policy is paid solely by the Buyer.  It is also customary that the costs of escrow are split 50/50 between the Buyer and Seller. While this particular breakdown of settlement costs is the custom in Hawaii, who pays these costs may certainly be negotiated between the parties.  

I recently did a comparison between two companies where there was about a 10% difference in their basic price. Further, sometimes the price for these services will also vary because the Seller has recently used the same title company with the property. In this case, the Seller or Buyer may be getting a discount for using the same company again, which, by default, is passed onto the Buyer who shares in the costs. Some escrow/title companies give discounts for investor buyers and other factors, which will also make a difference. Since the prices from company to company will vary, price very well could be a legitimate consideration in the choice of escrow company.

So you might assume that it would make sense that both parties would simply want to use the least expensive company.... right? Well, not really.  This seems to be a pretty irrelevant concern for a lot of people and most Sellers and Buyers do not even ask about these prices.

The Service Factor.

The reality is that, like in most other service-based industries, not all companies and escrow officers offer the same level of service.  Therefore, to many, price may be only one small consideration. After a spending time working with various escrow companies and officers, REALTORS usually develop a preference for one company or the other, without regard to price.  Agents and Brokers will often focus more on the level of service an escrow officer provides and the level of accountability the company provides in taking care of their clients.

There is one national title/escrow company (with offices here in Hawaii) that I will refuse to use because it has not stood by my clients after a transaction and, as a result, my clients experienced a significant monetary loss.  I've had identical situations with two different clients and two other companies, where both of these other companies stood by my clients and absorbed the loss themselves. The same company I first mentioned, which I will always try to avoid using, has also been a party to ethical violations that I witnessesed but could not prove after the fact. 

I definitely have a preference as to escrow company(ies) and escrow officers. As a REALTOR, I look for impeccable ethics, a lack of bias, accountability and service to my clients, above all else, when choosing an escrow company/officer.  As a result, I may prefer that a certain company is used because of these items and may refer my clients accordingly.

Choice of Escrow Company and RESPA.

Historically, escrow/title companies had offered incentives and freebies to REALTORS who referred business to them. However, the Real Estate Settlement Practices Act (RESPA) is a law, which, among many other things, has outlawed these practices. This law is intended to help ensure that consumers have a choice and are not simply referred by REALTORS to companies (including both lenders and settlement services companies), because of a REALTOR'S own self-interest.

Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or any "thing of value" in exchange for referrals of settlement service business involving a federally related mortgage loan. Essentially, an escrow company cannot give things of value to REALTORS with any agreement or even and unwritten "understanding" that business will be referred.  

"Thing of value," is very broadly interpreted, and includes all types of compensation such as monies, discounts, salaries, commissions, fees, gifts, gift cards, prizes, and preferential bank rates. For example, a bank cannot enter real estate agents in a pool to win a trip to Las Vegas if qualification for the contest is a certain number of referrals. Also, an escrow company can't hold a special cocktail party for its top referring REALTORS only, but they could, however, invite all REALTORS to a such a reception, as a general marketing expense, without regard to whether business has ever been referred.  And, contrary to popular belief, there is no legally OK dollar value exception, such as under $25, for thank you gifts for referrals from REALTORS to lenders and title companies.

RESPA also prohibits escrow companies from providing things to REALTORS for free that would normally be a REALTOR cost of doing business, such as marketing and CE classes.  However, escrow companies can provide things that are normally a business expense for REALTORS when they also participate - for example,  mailing of  joint marketing materials to REALTORS, where both parties pay a reasonable share of the expenses.  It is clearly illegal for marketing services to be given for free.

Title Company as "Seller's Choice".

In some localities, but not Hawaii where it is a 60/40 cost split, it is customary that 100% of the owner's title insurance is paid by the Seller.  In these areas, it is also frequently customary that the Seller would pick the title company to use, as it is paying for the service. This is not prohibited by RESPA.

In Hawaii, licensed agents will often see in the Agent Remarks section in MLS where "Seller requests officer/company xyz" for title/escrow. I've called on some of these in the recent past and have been told that the Seller wants to stick with "xyz" because they did all of their marketing, provided food for their open house, and/or already provided title work.  If these things have been provided free of charge, technically, this is a violation of Article 8 of RESPA to insist on using "xyz" because of these things.

Use of "xyz" or "abc" is totally negotiable by either party and neither "xyz" or "abc" should have provided services free of charge in exchange for the Seller's REALTOR using them for settlement services in a transaction. If the REALTOR did already pay money for the services they mention, since the services were paid for, there should be no actual or moral obligation or implicit "understanding" that a REALTOR would use the title company because of the marketing or other services.

Of note also is that Section 9 of RESPA also requires that a Buyer not be forced to purchase title insurance from any particular title company. As a result, courts have held that if a Buyer pays for the owner policy, then the Seller cannot legally condition the sale of the property on the Buyer purchasing the owner policy from a particular title company. Rather, the Buyer would get to pick the title company or there is a violation of RESPA. Further, the Buyer cannot be forced to buy the lender policy from a particular company. See more in next Section below.

Title Company as "Buyer's Choice".

Here in Hawaii, Buyer and Seller share the costs of the owner policy, so it is a little different, than the facts above where the court considered a Buyer paying for the entire owner policy. However, in my opinion, there is still a pretty good argument that settlement services should naturally be chosen by the BUYER of Hawaii real estate, even if the Seller pays for the ENTIRE owner policy. There are a few reasons for this.

First, as mentioned, RESPA Section 9 prohibits a Buyer from being forced to use a particular title insurance company, which creates the following issues:

a. The Buyer (when not paying cash) is normally required to purchase a lender’s title insurance policy and may also be required to purchase title endorsements required by a lender. If lender’s coverage is provided by the company issuing the owner’s title policy, the cost is only a few hundred dollars, as an add on. If the Buyer purchases a lender’s title policy from a company other than the one issuing the owner’s title policy, he must pay the full premium which will be several hundred to several thousand dollars depending on the price of the property. Is the Buyer then effectively “required” by economic necessity to use the title company selected by the Seller for the lender's policy? 

b.  There is also the fact that in a typical closing the only party writing a check is the Buyer. Wouldn't the Buyer be able to reasonably argue that even though the Seller is paying for the title insurance, that the cost was factored into the sales price which means that the Buyer is actually paying for the owner’s title policy premium? If the Seller did not have to pay the owner’s title policy premium, would he have been willing to deduct that cost from the sales price of the property?  The answer is most likely a yes.

I don't have definitive answers to these questions, so the conservative position, especially when you have a Buyer who is firm about which title company will be used, is to allow the Buyer to select the title company. This is not necessarily the same as picking the closing agent/escrow officer, however. (NOTE: Closing services and title insurance can be provided by two different companies.) Conversely, if the Seller insists upon directing the transaction to a particular title company, it would be prudent for the Seller to agree to pay the premiums for both the owner’s and lender’s title policies. This is what is commonly done with Bank REOs where the bank/Seller insists on a particular title company. To not do so can be a violation of RESPA.

Second, because the title insurance is intended to protect the Buyer, it only makes sense for the Buyer to pick the service provider. Even in escrow, the company is holding the Buyer's funds and not the Seller's. Sellers receive their funds at closing and are paid and gone, typically, before some of the serious title problems may be revealed. Further, as the Buyer receives the coverage, they are the ones who will make the claim and work in the future with the title and escrow company.

To summarize, regardless of why a Listing REALTOR wants to use an escrow company, the choice of settlement services provider is totally negotiable and is not automatically Seller's choice.

Factors like quality of service, ethics, and price may be considered, but whether a company has provided marketing materials, food, or other things of value should NEVER be considered as a reason for making a referral or insisting upon a certain company/officer by any REALTOR.

Conservatively, Seller's brokers in Hawaii should go with the choice of BUYER for title and escrow, as RESPA prohibits a Buyer from being forced into a particular company for title insurance, unless Seller is willing to pay for both the owner's and lender's title insurance policies.

All of this said, a Seller agent will often view an offer using the requested escrow officer as more attractive than an offer that does not use the requested escrow officer. So if a Buyer is trying to be more competitive and does not have strong feelings either way about the choice of escrow/title, it might be in the best interest of your Buyer client to use an escrow company specificed in the Seller agent MLS remarks. 

All information on this site is believed to be reliable but is expressly not guaranteed. Blog Posts by various authors are the opinions of the author only and do not necessarily reflect the position of Home Shoppe Hawaii or other contributors. This blog does not give legal or tax advice and readers are encouraged to check with licensed professionals for advice on any specific topic and to verify any information herein. Questions? Please contact Yvonne Jaramillo Ahearn at 808-721-8088.