SACRAMENTO, CA -- Title insurance and escrow companies owe California home owners hundreds of millions of dollars the industry appropriated by charging them fees for services never provided and by failing to return money placed in escrow, according to a lawsuit filed May 21.

Because escrow and title services and fees are also governed by federal law, the suit raises the possibility that the companies could be charged with violating the 1974 Real Estate Settlement Procedures Act (RESPA) designed to protect consumers against just the kind of charges found in the suits.

Hundreds of companies named

In the latest action, California's Controller Kathleen Connell filed the class-action suit against the title and escrow segment in Sacramento Superior Court on behalf of Californians who purchased homes since 1970.

The suit names only Fidelity National Title Insurance Co., Spring Mountain Escrow Corp. and West Coast Escrow Co., but seeks damages and penalties against 200 title insurance and escrow companies that have conducted business in the state since 1970.

Connell has scheduled a news conference May 24th, in Sacramento to further discuss the lawsuit and her plans to audit the entire industry.

According to the suit, after escrows closed, the title and escrow companies retained possession of millions of dollars of unclaimed escrow funds, a violation of California's Unclaimed Property Law. The companies should have turned over any unclaimed funds to the state so it can attempt to locate those owed the money. If the consumers don't claim the money it becomes state property.

The suit also says the companies charged home buyers and others fees for services the companies never planned to provide and levied "illegal administration fees" supposedly for other charges, but kept the payments as company income, the suit says.

Similar case in mediation

In a similar case filed in July 1998, San Francisco District Attorney Terence Hallinan and City Attorney Louise Renne sued Old Republic Title Co. for allegedly bilking California real estate consumers out of $50 million in title and escrow fees since the 1970s.

The case went to mediation a few weeks ago. Clarence Johnson, a Hallinan spokesman said he had not heard of Connell's suit.

Charges against Old Republic said it illegally collected $23 million in interest on escrow accounts, charged home buyers more than $4 million in bogus reconveyance fees, and kept some $10 million to $15 million in funds that should have been returned to consumers or to the state.

What are title and escrow fees?

Title and escrow fees, among others, come into play when the seller accepts a buyer's offer and the two "open escrow" with a title company in Northern California or an escrow company in Southern California.

The escrow account holder is supposed to be a neutral third party that holds onto, and then exchanges, disburses and transfers deeds and other documents and money, it pays off existing loans, records deeds, prorates property tax payments and interest and it helps with the transactions other transfer details, according to "How to Buy a House in California," (Nolo Press, $24.95) a legal self-help guide for home buying in the Golden State.

Most of the monies associated with the home purchase is funneled through the escrow account including the buyer's deposit, money for the account itself, title insurance and title search fees, the mortgage money and associated fees, the REALTOR's commission, recording fees, filing fees, transfer fees, notary fees, courier fees and a host of others.

All these costs become "settlement costs" recorded on the U.S. Department of Housing and Urban Development's HUD-1 "Settlement Statement" or a reasonable facsimile which discloses all of a housing transaction's costs for both the buyer and the seller.

California's suits could bring federal charges because the 1974 Real Estate Settlement Procedures Act specifically prohibits settlement-related charges for services that are not performed. RESPA prohibits kickbacks and referral fees that unnecessarily increase the costs of certain settlement services. It also requires that borrowers receive disclosures at various times in the escrow process, among a host of other requirements associated with settlement costs, including title and escrow costs.

See Part II: How To Keep Title And Escrow Companies Out Of Your Wallet

Published: May 24, 1999

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