What is escrow’s role when agent & loan officer are present at difficult signing August 13, 2007
In light of all the mortgage turmoil going on in the sub-prime arena I thought that it may be meaningful to address the awkward situation when a borrower is showing clear signs of “discomfort” with the loan terms presented by the escrow staff during a signing.
I believe that giving real and true versions of what escrow goes through helps everyone with understanding escrow’s role in a difficult situation, particularly when both the agent and loan officer are present during a difficult signing. We enjoy and encourage participation by Realtors and Loan Officers, although it is infrequent. Here is a real situation as it unfolded:
- Purchase transaction (sub-prime lender).
- Borrowers were showing visible signs of being very uncomfortable with the loan terms while both the Realtor and Loan Officer are present at the closing table. Having both present is unusual. Usually, if attended at all, it is the agent or the loan officer, but not both.
- Borrowers were told by escrow that if they had any questions, to please bring them up so they could be answered.
- Borrowers indicated that the terms were not what they expected and the payments were not what they expected.
- This elevated the escrow response to “if you are uncomfortable, you do not have to sign these documents.”
How would you react if you were presented with a similar situation and your escrow officer said those same words?
Under these circumstances, with both the Realtor and the Loan Officer present, it made for a very awkward situation. Escrow’s role is that of a neutral party, so our stance was to remove ourselves from the situation by inviting the borrowers to discuss the transaction in privacy and let escrow know if they elected to move forward or pause. They chose to discuss the situation with their Realtor and Loan Officer.
We wonder what the agent or loan officer said to our clients (buyers) that convinced them that their payment would be manageable.
I illustrate this to make the point that escrow is in a very difficult position when that neutrality is tested, particularly when the neutrality opens the door for consumers to walk away from a transaction. That being said, it is clearly not the intent of escrow to produce situations that encourage consumers to walk away. It is the job of escrow to maintain neutrality, but make certain that consumers understand the documents they are signing while at the same time fulfilling our obligations under the guidelines of the Washington State Escrow Act.
Sphere: Related Content- Posted in : General Real Estate
- Author : Lynlee Kane
Comments»
Lynlee, escrow is tough and I’m glad I have a background that includes a history of managing and signing clients in a transaction. Did you state “you don’t have to sign” in front of the agent and LO? It’s been so long since I was in escrow/title, I cannot remember having a situation with both. It would be extremely uncomfortable if you would believed you were witnessing someone being coerced.
If a client arrives at escrow and they do not understand their mortgage program, the LO has failed.
How incredibly awful to be put into that postion Lynlee. Both as a person and an escrow professional, you can’t help but be affected by the postition those buyers were put into.
I have not had that situation occur, where my buyer clients are surprised and uncomfortable with the loans terms reveiwed over the escrow table at signing. That should not ever happen, Rhonda is right, the LO has failed their clients.
The buyers should have already been educated as to their monthly mortgage payments, and feel comfortable with how it fits into their monthly budget and financial goals. The borrowers should also already understand their overall loan costs from their earlier meetings with their lender.
This is a good reminder while working with my buyer clients throughout their home buying process, to continue asking about their loan, it’s terms and how it fits into their financial plans . And especially to continue to take extra care when my buyer clients are working with a lender who I don’t know, to make sure that they are not in that position when we meet at the escrow office for their signing.
Rhonda,
Their payment was several hundred dollars more than expected, so yes, I did tell them that I was not there to make them sign. I told them that they should not sign the documents if they were uncomfortable with the payment but should talk to their loan officer. That’s when I left the room.
Deborah, you would be surprised at how many borrowers do not know in advance about their loan program, terms, payment, etc.
I think escrow is the toughest job in the real estate industry. Hats off to you!
Deborah, Lynlee is right on. The reason I grew to have respect for just a handful of LOs is because consumers would show up at signing without knowing much about their new mortgage. Sometimes they would be surprised at the program (ARM vs Fixed or whatever), by a prepay, interest rate, payment…you name it! And, they would expect the signer to explain how their program works.
Really, the Loan Originator should make sure the borrower understands the terms and mechanics of their mortgage. I understand if the borrower needs a “refresher” or if they’re “confirming” what their program is with the signer. It’s not fair or right for the signer/EO to have to EDUCATE the borrower of what their new mortgage is.
This illustrates nicely the conflicts of interest inherent to a situation where the professional is paid only upon closing. The LO (and the agent as well) are paid to provide professional guidance to the buyer about the significant liability the buyer is about to assume. However, those professionals only get paid if the buyer in fact asssumes that liability. Given this intense personal interest, the professional guidance may be suspect — thus a major downside to this method of compensation.
Craig, when Lynlee and I were discussing this last night, the potential conflicts of interest issue was front and center. In escrow, being compensated only if the transaction closes is one of the larger issues I’ve always had a hard time with. And, when you have the referring agent or LO right in front of you and you have to make a decision that is not popular or politically incorrect or will probably cost you future business, it is tough.
The system is dysfunctional and full of conflicts, and yet, it operates arguably quite efficiently.
Tim — I’m less concerned with the conflict of interest inherent with escrow given that escrow has only a limited duty to the parties to the contract. Your own strong sense of personal ethics makes these situations difficult, but from a legal perspective I don’t think the conflict of interest is so significant that it undermines your role in the transaction. The same cannot be said for the conflicts of interest involving the LO and agent.
Craig, I would LOVE to be paid like an attorney instead of a LO.
Yes, please sign me up for that method of compensation.
No, really, I’m fine with my own as it is. I’ve spoken to many an attorney who tells me that people skip on their bills to them all the time or who dispute the charges. A large number of attorneys don’t even chase after their own unpaid bills.
Regarding the situation you describe here, I have been present at almost every closing that a client has had with my team and we aren’t there to “make sure we get paid” but rather to make sure our client receives the loan documents they expected and to help manage any last minute “bumps” that might come up. We’ve left escrow before with a client not signing when there has been a question about the loan docs and in that one instance the client just had had bad memory and when he referred to his GFE and other preliminary info from the lender it was all okay and he went back to finish signing the next day.
I personally like how you handled the situation by putting it back into the consumer’s hands. We will never know what the conversation was that happened when you left the room and we can only hope for that consumer that coercive tactics were not involved if they truly were in a bait and switch scenario with the loan.
Helping clients understand their financing is part of our everyday job but this is also a cautionary tale to all to alert buyers that they really do need to become financially competent BEFORE buying so they understand what is happening throughout the process.
Craig,
Do you know why the Seattle Area doesn’t have rate caps in the Finance Addendum, the way other areas do, to protect buyers from getting into sub-prime situations? In most areas the rate cap in the finance contingency is slightly higher than the 30 year fixed rate. This way if it spills over into sub-prime financing, the buyer is not obligated to proceed, and their Earnest Money is protected.
I heard that protection used to be in the Finance Addendum, but was removed in this area. Do you know why that was? Craig or anyone?
There is a Usury Rate which is 12%, but, BUT…..
These rates are exceeded in many of the financing programs we see. Dept. of Financial Institutions says there has been no determination or litigation to establish if the Usury Rate that applies is enforceable in the state where the lender is based or where the property is located.
Washington State also has a high risk exception where the rate is allowed to be higher than 12%. At least this is my understanding.
I can’t remember off hand if the NWMLS FInancing addendum had a spot for it in the past, but there is nothing preventing a borrower to insert language to that effect. I would think that borrowers and their LO know their FICO score prior to an offer and whether or not they are subprime candidates.
Lynlee,
At what point does an escrow officer/LPO advise the consumer of his or her rights to seek legal counsel? Is it when the consumer receives the APR 12 disclosure form?
Companies licensed under the consumer loan act are able to make loans in excess of the state’s usury limits.
http://www.dfi.wa.gov/cs/loan.htm
There are many mortgage companies out there who are licensed under the consumer loan act.
Jillayne,
We mail our escrow instructions to the buyer and seller when the Purchase and Sale Agreement is received and escrow is opened. The escrow instructions contain the following APR Rule 12 Disclosure:
(i) that the closing officer is not acting as the advocate or representative of either of the parties;
(ii) that the documents prepared by the closing officer will affect the legal rights of the parties;
(iii) that the parties’ interests in the documents may differ;
(iv) that the parties have a right to be represented by lawyers of their own selection; and
(v) that the closing officer cannot give legal advice as to the manner in which the documents affect the parties.
In addition, if the transaction contains any unusual provisions or potential legal probems we send out additional escrow instructions which identify the specific issue and strongly urge the parties to seek legal counsel.
Ardell, if the buyer is meeting with a qualified lender BEFORE shopping for a home; wouldn’t they know what they qualify for and what their interest rate should be? I don’t understand the need for a rate cap addendum in a “normal” market if the buyer all ready knows and understands the terms of their mortgage and what they are approved for. Maybe this is because I’ve only been in real estate in Washington State and I’ve never done bait and switch.
IMO ESPECIALLY IN THIS MARKET, buyers should be meet with a lender, understand their options and get preapproved well before writing offers on homes/property.
Ardell
Even though the finance contingency does not have a rate cap, In this period of significant rate fluctuation, it seems to me that any buyer’s agent worth their salt would insert one in every deal, especially in what appears to be an increasingly buyer’s market.
Russ
Russ,
It would be nice. But if it’s not part of the form, not likely it will be as well recieved by the other side. Better if the form accommodated it with one of those favored blank spaces. Seems if you fill in a blank, eveyone accepts that it belongs as part of the offer, don’t you think?
Were you around when the blank was removed? Do you know what the rationale was for removing it?
Ardell — I have no idea about the timing of things, as I’ve practicing in the area of real estate for two years, so I’m not aware of the change. As to whether or not an agent should insert a “rate cap” in the financing contingency absent a blank space in the form for such info, presumably that would need to be done on a Form 34, and I’m always concerned when agents draft additional clauses to the contract.
I have not yet had the opportunity to fight a battle over the issue: When does a buyer satisfy her obligation under the contract to make a good faith effort to obtain financing? There is some confusion, as at least arguably absent a rate cap the buyer is obligated to seek a sub-prime (sub-sub-prime? a guy-on-the-corner?) loan, and be unsuccessful, in order to get a return of the earnest money under the financing contingency. On the other hand, the law requires a reasonable, good faith effort by a party to a contract to satisfy the terms of a contingency. Plus, the contingency itself references “Buyer’s lender,” thus implying that buyer can work with a single lender. So, I suspect that the law (as applied to the existing contingency language) requires a buyer to apply for a loan from one lender and, if the buyer does not qualify for a “reasonable” loan, the buyer satisfies her obligations under the contingency and would get the earnest money back.
Wait a sec — this would be a good post topic…
Anyone have a guestimate as to how often a RE lawyer is retained be the buyer in a standard SFH transaction? The seller?
Thanks.
IMO? Not nearly often enough…
In all seriousness, if agents are involved, almost never. If a party is not using an agent, they are far more likely to hire an attorney such as myself who can provide counsel on a flat fee basis. However, I suspect that it is still the exception rather than the rule.
Philosophically speaking, it boils down to the idea that there can in fact be a ‘neutral party’. Sadly, this idea is the ’sine qua non’ of our industry, in other words, it’s the cornerstone, the foundation.
This fails.
No on is absolutely neutral (i.e. objective). We are humans, that means we have emotions. Only computers are neutral, and objective…they have no emotion.
However, I don’t know escrow law….or much of any law for that matter! If the law requires you to be ‘neutral’ or ‘objective’, then I would argue that that law is ‘non sequitur’, it does not follow. Arguably, the law is unfulfillable.
David — that approach takes you directly to one destination: anarchy. The law imposes obligations and provides a mechanism to create and enforce rights. Yes, people are inherently biased, and yes the law is the creation of people. Nonetheless, the law is the only method by which we can strive towards fairness and justice.
The law requires escrow to be neutral. If escrow fails in that duty and causes harm to a party, then the party has a remedy through the law. It may be flawed, but its the only system we have. By your logic, we should give up on that system and… what? Anarchy, I assume. Given that we are in the business of “property,” I think anarchy would be a bad career move.
Thanks, Craig. So maybe10% of all buyers?
How about sellers? I heard some dude talking on the radio a few years back, and his recommendation was that if you knew a reasonable amount about the market then a decent option for a seller would be to hire a lawyer, pay a flat fee for an MLS listing, offer full fee to the buyer’s agent.
Is that an option many sellers take?
Again, IMHO, not nearly enough. That is basically my business model, although I also encourage people to forego the MLS entirely, particularly if they have some time in which to find a buyer. I charge a flat fee of $795, which is a lot less than 3%, plus you get better legal counsel than you do from an agent (with all due respect, agents aren’t lawyers).
An unfortunate, yet all too common occurrence. In a perfect world the closing or “signing appointment” shouldn’t take more than 20-30 minutes to complete (sign and initial the pertinent docs). Prior to arriving @ closing/signinng appointment all of the items should have been discussed and reviewed etc.
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