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“Tiptoeing” through ethical minefields August 22, 2006

It’s getting a little warm in the kitchen of Real Estate

Two questions have been eating at me for some time.
First, one of the most difficult questions to answer deals with my own brethren in the escrow industry. Why is it that a traditionally transaction “neutral escrow company or service” only receives compensation if a transaction successfully closes?

To me, at least in the realm of escrow, this is the mother of all potential conflicts of interest. Isn’t it a conflict of interest to the parties involved and our fiduciary duty to the lender (yes, folks we do have a duty to protect the lender from potential fraud, which is clearly stated in escrow instructions from some lenders) if we are only paid if the deal closes? Wouldn’t that create a lot of problems, particularly if you have pressure from loan officers or Realtors to “just get it done” because the Broker (real estate or mortgage) has an ownership stake in the company?

One of the LPO’s in our office who used to work for an escrow firm owned by a now spectacularly bankrupt Eastside mortgage company, discusses this issue at length with me. The conflict of interest was real and it made for a difficult employment environment.

If escrow does not close a transaction, we don’t get paid.

Wearing multiple hats

The second issue is that of the ethical and legal landmine of having a Realtor who is also the loan officer in the transaction. To this day, I don’t know how this can be. I suppose I’m too green to see how this got under the radar. With this in mind, in the very near future, I will post about problems encountered with this scenario and arranging 100% no-skin-in-the-game financing for their “client”. Specifically, I’ll touch on the problem associated with increasing the sales price to offset seller contributed closing costs to create a truly nothing down scenario. Never mind the issue of artificial appreciation, I think this is dripping and oozing red flags.

As you can imagine, some problems and subsequent claims with this scenario will inevitably land in the likes of Russ Cofano’s lap. And, I’ll be there to listen to the opening arguments. Save a seat for me.

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Comments»

1. Pat - August 25, 2006

I’m not a real estate professional, just someone who recently sold my home. The buyers of our home were represented by an agent who was also acting as their loan officer. I’m not entirely sure who usually gets the raw end of the deal in this case, I suspect it is the buyer though based on my experience. This agent/LO was so heavily invested in the sale going through that I don’t really believe he represented them very well. We are honest people and didn’t take advantage of them, but I could see where we easily could have.

2. Diane Cipa - November 18, 2006

Pat: Before commenting on the conflicts you raise, I’m new to blogging. I’d like to link to just your escrow area without linking to the whole raincityguide blog. Is that possible? Please send me an e-mail dcipa@tcsclosing.com.

I hope that real estate agent who was also the loan officer gave all of his customers a RESPA disclosure so they could decide if they were comfortable with the potential conflicts of interest.

What happened to the good old fashioned concept of avoiding the appearance of impropriety?

My mother taught me that healthy competition was a good thing but to remember pigs get fat but hogs get slaughtered. What does that mean? It means do a good job competing to get your bigger market share but don’t try to take it all.

Companies or individuals who compulsively seek to squeeze every available drop of potential cash from a transaction, wearing as many hats as possible to get it, no matter how unethical - have simply lost their way. We need to help them find once again, the ethical high ground or at least we can educate consumers to avoid the hog who wears too many hats to serve anybody well.