1. Chapter 16 Closing the Deal Paper Due Date: December 9 4-5 pages Real estate law Two sides to the issue/law Possible organization Introduce paper Overview of law Analysis of both sides Your position Conclusion

2. What is “escrow” The process of “closing” or completing the sale of property. Escrow describes the process of putting the money and other documents into the hands of an escrow agent for processing and holding until closing. The escrow agent is independent. 2

3. Delivery Requirements by Seller for Closing 1. Title documents: abstract, opinion, and insurance 2. Most recent tax bill 3. Insurance policies 4. Plans and specifications for original construction and modifications 5. Warranties on any appliances, heating systems, and so on., 6. Uniform Commercial Code (UCC) bulk sale affidavit for business transfer (where applicable—Article 6 on Bulk Sales has been repealed in some states) 7. Soil, termite, and other property condition reports, including reports from environmental agencies 8. Keys 9. Notes, mortgages, deeds of trust, UCC Article 9 security agreements and financing statements 10. List of tenants and copies of leases 11. Building code inspection and compliance

4. Delivery Requirements for Escrow for Buyer 1. Earnest money check 2. Loan commitment 3. List of defects to be remedied prior to closing 4. Corporate authorization if corporate buyer is involved

5. Delivery Requirements for Lender for Escrow 1. Mortgage, deed of trust, and promissory note 2. Truth-in-lending statement (see Chapter 15) 3. Real Estate Settlement Procedures Act (RESPA) statement (see later for discussion) 4. Required forms if Federal Housing Administration (FHA) or Veterans Administration (VA) loan is availed 5. Required inspections if FHA or VA loan is involved

6. Requirements for Closing Underlying purchase contract Deposit of deed with agent Valid escrow instructions

7. Requirements for Escrow Instructions 1. Name of the agent, third party, or depository 2. Names of the buyer (buyers) and seller (sellers) and their proper designation (partnership, corporation, married couple, single person, and so on) 3. Legal description of the property to be transferred 4. Purchase price of the property 5. Conditions of transfer and payment 6. Allocation of expenses, costs, insurance, taxes, assessments, and so on 7. Signatures of the buyer and seller Consider 16.1 - how to pro-rate expenses.

8. Allan v. Martin (#5) Purchase Agreement v. Escrow Agreement 574 P2d 457 (Az 1978), p. 457 Buyers Bought Home Subject to Closing by a Certain Date. Allans bought a home from the Martins and signed a purchase and sales contract. The agreement required closing by July 31. Separate Escrow Agreement Signed. Both parties also signed an escrow agreement to prepare for closing. Buyers Failed to Deposit Money in Escrow. The sellers agreed to a 15 day extension. The buyers had still not placed money in escrow by the end of the 15 th day and sellers sent a notice cancelling the contract. Sellers Sent 13-Day Escrow Cancellation Letter. The escrow agreement required a 13 day cancel period. During that 13 days the buyers put the money in escrow and were ready to close. The sellers no longer wanted to sell. What clause applies? The deadline in the sales contract or the 13 day deadline in the escrow contract? 8 Start here on Tuesday after break – skip next sliede

9. 9 Consider 16.2 p. 454 Escrow Release Signed Contrary to Contract Buyers signed a contract to purchase a home with $25,000 in escrow. The buyers signed an escrow release, but the contract provided that the money would be released from escrow only upon meeting certain work requirements. Builder went bankrupt. Issue: Is the escrow release a valid reform of the contract? End-of-Chapter Q1, p. 479 Escrow Contract Without Purchase Agreement Walsh has property for sale. Stanton tells Walsh he wants to buy the property and has put $25,000 with First American Escrow, along with signed escrow instructions to purchase the property for $750,000. Walsh signs the escrow agreement. Was a contract formed? Escrow instructions were clearly signed. Additional Escrow v. Purchase Agreement Examples

10. Regal Realty Services v. 2590 Frisby, LLC (#6) Parol Evidence Rule - 878 NYS2d 363 (2009) Contract for Sale of Commercial Building. Regal contracted to buy 2590 Frisby for $3,050,000. Paid $152,500 Down. Contingent on Financing. The deal was contingent on obtaining financing. Regal could terminate for lack of financing if it did so within 30 days of signing the contract. Financing Rejected. Regal’s financing was rejected within the 30 days and Regal wanted to cancel the contract. Frisby suggested it talk to the bank that currently held the mortgage. New Bank Issues Mortgage But For Low Amount. The new bank did allow a loan but at an amount that was not acceptable to buyer. Buyer Seeks to Cancel Deal for Lack of Financing. However, the term to cancel had passed. The buyer argues that the seller worked “hand-in-hand” with the buyer and the bank on financing and knew every step of the way what was happening. This should constitute a waiver of date for the contingency clause. Seller argued that the contract also had a clause that said all changes must be made in writing. Buyer is not going to buy the building but seller wants to keep the $152,500 as liquidated damages. 10 Consumer Financial Protection Bureau http://www.consumerfinance.gov/askcfpb/search?selected_facets=ta g_exact%3AGFE&selected_facets=tag_exact%3AGood+Faith+Esti mate

11. Purposes of RESPA 1. Disclose Settlement Costs. To provide more effective advance disclosure to home buyers and home sellers of settlement costs. 2. Prevent Kickbacks. To eliminate kickback or referral fees that tend to increase the costs of settlement services. 3. Reduce Tax & Insurance Amounts. To reduce the amounts buyers are required to pay into escrow for taxes and insurance. 4. Reform Recordkeeping. To reform local record keeping and land title information.

12. RESPA Requirements 1. Handbook. Buyer must be given a Special Information Handbook 2. Good Faith Estimate (GFE). Buyer must be given a good faith estimate of closing costs (GFE) within three days. 3. 10% Variance on GFE. GFE cannot be off by more than 10%. Zero variance for the origination fee and interest if the lender has locked the loan interest rate. 4. Three Day Period. Buyer has three days to shop around for better terms 5. Three Page Agreement. Former one-page form is now three pages (See Figure 16.1) 6. Yield Spread Premium disclosures (YSP). Difference between the lowest rate the buyer qualifies for on the mortgage and what the broker actually got as an interest rate: the disclosure of the incentive to have a higher rate. 7. Volume Discounts. Volume discounts for builders are not considered RESPA violation. Litigation pending on these discounts and buyers’ right of recovery under RESPA 8. HUD Enforcement. HUD generally handles enforcement on RESPA GFEs and violations: Private right of action by buyers is curtailed End-of-Chapter Q3, p. 479 Kickback? Title company paid “rent” to lender to use its space and rent was $100 if it used that lender and $300 for other lender. Is that allowed?

13. 13 Good Faith Estimate – HUD Form

14. Freeman v. Quicken Loans (#X) – RESPA – High Loan Fees 132 S. Ct. 2034 (2012) Quicken Charged High Fees. $980 and $1,100 for discount fees but not used to reduce interest rate. RESPA – Share a Portion. Quicken took all the money and did not share. RESPA prohibits sharing of these sort of fees. If it’s unearned but kept by the lender it’s not a violation. 14 Consider 16.4 – Kickback? Bank of America disclosed fees for $50 for a credit report, $300 for an appraisal and $25 for document delivery, but actually obtained those services for less. Is this a kickback?

15. East Hills Condominiums Ltd v. Tri-Lakes Escrow (#X) 280 SW3d 728 (Mo App 2009) Complex Escrow Agreement to Disburse Construction Loan. The agreement required the escrow agent to get lien waivers as it disbursed money to construction companies. Escrow Agent Claims to Have Paid. She paid all disbursements to the general contractor, Killian, who in turn was supposed to have paid the subcontractors. She had lien waivers but lost them (or this issue is in dispute). Escrow Company Sued. It did not follow its agreement. Should it have to pay for money disbursed without receipts/lien waivers? 15 End-of-Chapter Q: Escrow Agent Duty To Follow Instructions/Agreement Escrow agreement called for one lump sum payment for satisfaction of certain contingencies. Shorty after instructions were executed, the party making the payment requested more time and that three payments be made rather than one. – escrow agent complied Is that okay?

16. Fees in Escrow 1. Escrow fee 2. Fees for title search, title abstract, title insurance, and attorneys’ work associated with such 3. Recording fees for the deed, mortgage, deed of trust, and any other documents required 4. Mortgage transfer or release fees 5. Loan origination fees 6. Termite inspection report 7. Appraisal or survey fees 8. Credit report fees 9. Loan discount points 10. Other attorneys’ fees such as for drafting documents Consider 16.3 p. 465 Kickback Security Escrow maintains a $250,000 zero interest deposit with Southwestern Savings. Southwestern Savings is a substantial residential lender and uses Security Escrow’s services. Violation?

17. Escrow - Deposits 1. RESPA eliminates excessive pre-paids and deposits 2. Actual amount plus 2 months for closing 3. After closing/settlement, then the monthly escrow can only be 1/12 of the actual fees.

18. Cancellation of Escrow 1. Follow terms of the contract 2. Be careful of waiving time limits 3. Follow notice procedures 4. Document waivers 5. Restate terms when there has been a departure from original contract and instructions 6. Be careful of oral agreements

19. Boatright v. Texas American Title Co (#2) 790 SW2d 722 (Tex 1990) Escrow Agent Failed to Record Deed of Trust (Mortgage) Property Flipped. Boatrights bought a property and flipped it right away. Sold for Cash and Two Promissory Notes. The property was sold for cash and two promissory notes: (1) $63,200 and (2) $36,025. Escrow Agent Recorded Deed of Trust for One Promissory Note. The agent forgot to record the deed of trust in the other. Borrower/Buyer Defaults. The buyer defaults and it is discovered that only one deed of trust is recorded. Fiduciary Duty. Escrow agent has a fiduciary duty. Is escrow agent responsible for failing to file a deed of trust? 19

20. Baker v. Stewart Title & Trust of Phoenix (#7) 5P3d 249 (Az App 2000) Title Company Liable for Torts/Crime of Agent/Employee? Attorney’s Fraud. An attorney bought properties and then sold them into a partnership for more money. The fraud was that he did not tell the investors he was profiting from the sale to the partnership, the investors thought he was buying the properties from independent third parties. They thought this because the attorney set it up that way. Escrow Agents Involvement. The escrow agent had to convey the property from the attorney to the new partnership. In order to keep the fact that the attorney owned it a secret, the escrow agent had to notarize signatures that the agent knew to be false. The agent may or may not have been aware of the fraud, but the agent’s actions enabled the attorney’s scheme to work and he paid her several hundred dollars separately after each transaction. Title Company Liable? Is escrow company responsible for fraud/crime of employee? 20 End-of-Chapter Q8, p. 480 Embezzlement Is an escrow agent liable for embezzlement of an employee? Did this slide