This month’s edition of Tales from the Dirt looks at the issue of controlled business.  As always, this is an event that actually occurred, but the names of the parties have been changed.

Mr. and Mrs. Thomas found the home they wanted to purchase and engaged their attorney to perform a title search.  The bank they were getting their loan from told the Thomas’ not to bother getting the title search done through their attorney, because the bank had their own title company.  The Thomas’ replied that their attorney had always done their work, and they preferred he be involved.  The bank insisted saying that it was a requirement that they use their title company, and, besides, they could get everything done cheaper and faster.  The Thomas’ agreed to let the bank handle it since it was one of their requirements. 

A few months after closing and moving into their new house, they were notified of a foreclosure proceeding that had been instituted on an old deed of trust back in the title.  This time they took the foreclosure documents to their attorney.  Their attorney inquired as to whether they had had a title search performed and had gotten an owner’s title insurance policy.  The Thomas’ were sure they had, since the bank had handled everything through their title company.  However, when they brought all the papers they had received from their closing, the attorney discovered from the settlement statement that the title company had only issued a policy to the bank for the loan.

This situation raises two issues.  First is the idea of the bank requiring the Thomas’ to use their title company.  Controlled business, as this is called, is becoming more commonplace, and in many instances such as this one can be problematic.  The average consumer is not familiar with the closing process and with title insurance products and, therefore, must rely upon the professionals they deal with in the process, their real estate broker and their lender to advise them.  The need to have an independent attorney who will represent them and look after their interests is of utmost importance.  A bank cannot force a consumer to use their title insurance company under North Carolina law.  NCGS 7§5-17 speaks to this issue and reads:

§ 75­17. Lender may not require borrower to deal with particular insurer. No person, firm, or corporation engaged in lending money on the security of real or personal property, and no trustee, director, officer, agent, employee, affiliate, or associate, of any such person, firm, or corporation, shall either directly or indirectly require or impose as a condition precedent

(1) To financing the purchase of such property, or (2) To lending money upon the security of a mortgage, deed of trust, or other security instrument, or (3) For the renewal or extension of any such loan, mortgage, or deed of trust, or (4) For the performance of any other act in connection therewith, that such person, firm or corporation a. For whom such purchase is to be financed, or b. To whom the money is to be loaned, or c. For whom such extension, renewal, or other act is to be granted, negotiate, procure, or otherwise obtain any policy of insurance or renewal, or extension thereof, covering such property, or a security interest therein, by or through a particular insurance company, agent, broker, or other person so specified or otherwise designated in any manner by the lenders, or their agents or employees or affiliated or related companies. (1969, c. 1032, s. 1.)

Attorneys reading this article may want to keep this reference on hand and supply a copy of the statute to those lenders insisting their title company must be used.

The second issue raised here again underscores the need for the consumer to always have independent counsel retained so that their interests will be looked after.  Under the Simultaneous Rate provision as set out in GS §58-26-1(d), an owner’s policy of title insurance can be issued for no additional premium up to the amount of the loan policy.  In the case at hand, there was no reason why the Thomas’ did not have an owner’s title insurance policy issued to them since they had paid for it.