Mortgage Fraud: Title Company Disclosure Duty
A Texas court of appeals, overruling summary judgment for a title company, held that a genuine issue of material fact existed as to whether the title company had a duty to disclose to the mortgage lender facts that may indicate possible fraud. Home Loan Corporation v. Texas American Title Co., 191 S.W.3d 728 (Court of Appeals of Texas, Houston 4th Dist.).
Background
Texas American Title Company (TATCo) acted as settlement agent for the
closing of a home mortgage loan funded by Home Loan Corporation. Home Loan
then sold the loan in the secondary market, but the borrower made no
payments
on it and Home Loan was obligated to repurchase it. It then filed suit
against TATCo, alleging that TATCo breached its fiduciary duties to Home
Loan by failing to: (1) inform Home Loan that the seller of the loan had
requested that over half of the seller's proceeds be paid to the mortgage
broker; (2) inform Home Loan (after the preceding request was denied by
TATCo) that the seller had asked TATCo to pay the proceeds directly to the
mortgage loan broker and that TATCo had agreed to comply; and (3) accurately
disclose on the HUD-1 settlement statement how the proceeds had been
disbursed. The parties filed cross-motions for summary judgment, disputing
whether such duties were owed or
had been breached. The trial court granted TATCo's motion and dismissed the
action.
The appellate court noted that the parties treated TATCo as if it were an escrow agent rather than a settlement agent in the transaction, even though no formal escrow agreement was entered into. However, the court said for purposes of this case, no legal distinctions exist between the two types.
The court also said that a title company that accepts funds for disbursement in a closing transaction for a fee owes the party remitting those funds a duty of loyalty, a duty to make full disclosure, and a duty to exercise a high degree of care to conserve the money and pay it only to those persons who are entitled to receive it.
TATCo Position Rejected
TATCo argued that it was not required to disclose the seller's requests as
to disposition of the funds, as TATCo was to remain impartial without
favoring either party. It further argued it had no obligation to police the
affairs of the parties or report suspicious circumstances unless it had
actual knowledge of fraud.
The appellate court rejected these arguments, noting that no Texas decision had directly addressed limits on the scope of an escrow or settlement agent's fiduciary duty of disclosure. Further, no rationale supported limiting an escrow agent's fiduciary duties to the terms of the contract. The court said that full disclosure is required for all material facts known by the title company that might affect the rights of the lender, buyer and seller. In short, under current Texas law, a title insurer's fiduciary duty of disclosure is broadly interpreted.
The court reversed the trial court's summary judgment on Home Loan's claim for breach of fiduciary duty, but remanded that portion of the case to the trial court on the issue of damages.
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This article was written by and published herein with the permission from professionals of BDO Seidman, LLP. Alvin Arnold is the editor of the Real Estate Monitor. BDO Seidman’s newsletter. Somerset is a member of the BDO Seidman Alliance, a nationwide association of independently owned accounting and consulting firms.
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