You asked what disclosures are required in a residential real estate transaction. Your question arises from two scenarios. In the first, a person was not told that she was entitled to a discount on a new lender's title insurance policy when refinancing her home. In the second, closing documents included a charge for an optional owner's title insurance policy that the client did not want to purchase.

Because of the nature of these scenarios, this report provides (1) background on title insurance, including related disclosures, (2) other disclosures state and federal laws require in residential real estate transactions, and (3) general information regarding attorney responsibilities in such transactions, including disclosing dual representation.

State law requires title insurers to file their premium rate schedules with the insurance commissioner, who must approve them in order for them to take effect. Title insurers and their agents must make the premium rate schedules and charges publicly available.

In a transaction involving the purchase of residential property where an owner's title insurance policy has not been ordered, Connecticut law requires a title insurer or agent to inform the borrower in writing that the lender's title insurance policy does not protect the borrower and that he or she may purchase an owner's policy. If the borrower declines an owner's policy, the title insurer or its agent must obtain a written statement from the borrower that the notice was received and the borrower is waiving his or her right to purchase an owner's policy. Failure to provide the notice or obtain a waiver may result in a fine of up to $7,500 ($15,000 beginning October 1, 2008).

When a person refinances a mortgage loan, he or she obtains a new loan, even if the refinancing is through the original lender. Thus, when refinancing, a lender will again require a lender's title insurance policy to protect its investment in the property. However, a person will not need to purchase a new owner's title insurance policy because the one bought at the original closing remains in effect for as long as the person (or an heir) has an interest in the property.

According to the American Land Title Association (ALTA), a person should ask for a “reissue” or “discount” rate on the new lender's policy when refinancing. While title insurance companies do not make these available in every state, they are available in Connecticut. Historically, title insurers required a person to meet eligibility criteria to qualify for a reissue rate (e.g., no more than 10 years have passed since the current lender's policy was issued, the title insurer issuing the new lender's policy had issued the previous lender's policy).

More recently, because of a federal class action lawsuit filed in Connecticut against a title insurance company, we have been told from people who work in the industry that some title insurers are considering revising their premium rate schedule to eliminate eligibility requirements for discount rates connected to a refinancing. Thus, if a person is refinancing a mortgage loan secured by his or her residential property, the title insurer would issue the new lender's policy for a discount rate without having the person prove that he or she satisfies other eligibility criteria. However, at our request, the Insurance Department reviewed title insurers' more recent rate filings and informed us that the filings do not reflect this new method. Rather, the filings offer a discount rate on a new lender's policy in connection with a mortgage refinancing if the borrower meets certain other eligibility criteria (e.g., the policy being replaced must be less than 10 years old).

In a residential real estate transaction, state and federal laws require a number of disclosures. State law requires a real estate agent or broker to disclose whom he or she represents and if he or she is acting as a mortgage broker. The law requires a broker to also disclose his or her compensation, subagency, and dual agency. A real estate seller must give prospective purchasers a residential condition report (a copy is enclosed), which discloses information about the property and environmental matters, such as lead and radon. State law specifies that if a seller informs the prospective purchaser that he or she may obtain from the town clerk's office lists of hazardous waste facilities and properties where hunting or other shooting sports occur, then the seller and real estate licensee are deemed to have satisfied any duty to disclose the presence of such properties.

The federal Real Estate Settlement Procedures Act (RESPA) requires mortgage brokers or lenders to provide a mortgage loan applicant a good faith estimate of settlement (i.e., closing) costs and information about (1) settlement services if the applicant is purchasing property and (2) whether the lender intends to service the loan or transfer it to another lender. Among other things, RESPA requires the use of a standard form called the HUD-1 Settlement Statement (HUD-1) (a copy is enclosed), which itemizes the costs to the seller and the purchaser related to the transaction, including title insurance. The federal Truth in Lending Act (TILA) requires lenders to fully disclose the costs and terms of credit being extended, including, for a residential mortgage transaction that is subject to RESPA, the principle amount of the loan, finance charges, the loan period and number of payments, and any prepayment penalties.

Federal law permits a consumer the opportunity to review the HUD-1 one day before the actual closing date. If the borrower makes such a request, then the settlement agent, which may be the purchaser's attorney, must provide him or her with a completed HUD-1 based on the information known at that time. At the closing, the HUD-1 must reflect the actual settlement costs of the transaction, including any costs related to title insurance, and be signed by the seller, purchaser, and closing attorney.

We found no explicit requirements for an attorney representing a client in a real estate transaction. However, the Rules of Professional Conduct, which apply to attorneys generally, specify that an attorney has a duty to (1) charge, and fully disclose, reasonable fees; (2) keep a client reasonably informed; and (3) disclose conflicts of interest. An attorney is also prohibited from allowing his or her own interests or obligations to third parties to adversely affect a client. The rules are available from the Statewide Grievance Committee's website (http://www.jud.ct.gov/SGC/) under legal and educational resources.

In matters involving real estate, some attorneys represent mortgage lenders and buyers and are the title insurer's agent. In such a situation, the attorney must advise each client of the implications of dual representation and obtain each affected clients' informed consent in writing before providing representation (Rules of Professional Conduct, Rules 1.7 and 1.8, Connecticut Bar Association Committee on Professional Ethics Informal Opinion 87-6).

For your reference, we are including a copy of OLR Research Report 2006-R-0585, which discusses the statute of limitations on lawsuits involving real estate sales.

Title insurance is a unique and complex insurance product.  It indemnifies for existing (but unidentified) or specifically underwritten defects in a property's title.

The Connecticut Title Insurance Act is Chapter 700a of the Connecticut General Statutes (CGS §§ 38a-400 through 38a-425). Connecticut law defines “title insurance policy” as a contract insuring or indemnifying against loss or damage arising from (1) existing (i.e., present on or before the policy effective date) defects in, or liens or encumbrances on, the insured title; (2) an unmarketable title; or (3) invalid or unenforceable liens or encumbrances on the property (CGS § 38a-402(15)).

Connecticut law requires each bank to annually adopt a policy describing its standards for accepting loan applicants and issuing loans, including title insurance requirements (CGS §§ 36a-260(b) and 36a-261(d)).

There are two types of title insurance: (1) lender's title insurance and (2) owner's title insurance.

A mortgage lender usually requires title insurance to protect the lender against loss resulting from claims by others against the mortgaged property. Thus, it requires a borrower to purchase a lender's policy when taking a mortgage loan. The coverage afforded under a lender's policy is usually based on the dollar amount of the loan. It protects the lender's interests in the property should a problem with the title arise. The coverage amount decreases each year and eventually disappears as the loan is paid off. RESPA prohibits home sellers from requiring home purchasers to purchase title insurance from a particular company. The premium for the lender's policy will be listed on the HUD-1.

Owner's title insurance is optional and usually issued in the amount of the real estate purchase. Coverage lasts as long as the purchaser or the purchaser's heirs have an interest in the property. The American Land Title Association (ALTA) indicates on its website (http://www.alta.org/consumer/questions.cfm) that “only owner's title insurance fully protects the purchaser should a problem arise with the title that was not uncovered during the title search.” An owner's policy also pays for legal fees incurred in defending a title claim. If the purchaser agrees at the closing to buy the optional owner's policy, then the premium will be listed on the HUD-1. It is less expensive to buy an owner's policy at the same time, and through the same insurer, as the lender's policy. 

If a title insurer or agent issues a loan policy simultaneously with the purchase of residential property securing the mortgage loan and an owner's policy has not been requested, the insurer or agent must inform the borrower that the loan policy does not protect the borrower and that he or she may obtain an owner's policy. This notice must be provided in writing before loan proceeds are disbursed and before the loan policy is issued (CGS § 38a-423(a)).

If the borrower elects not to purchase an owner's policy, the insurer or agent must obtain a written statement from the borrower that he or she received notice and waives the right to purchase an owner's policy. If the borrower refuses to provide the statement, the insurer or agent must note that in the file. The statement and waiver must be (1) on a form that the insurance commissioner prescribes and (2) retained by the insurer or agent for at least five years (CGS § 38a-423(b)).

The law does not provide a specific penalty for failing to provide the notice or to obtain a waiver. Thus, the insurance law's general penalty applies. Any person or corporation violating any provision of Title 38a of the Connecticut general statutes for which no other penalty is provided will be fined up to $7,500 ($15,000 beginning October 1, 2008) (CGS § 38a-2 and PA 08-178, §1).

Under Connecticut law, a title insurance agent must be a practicing attorney, unless he or she held a valid title insurance license on or before June 12, 1984. An agent is:

any person authorized in writing by a title insurer to (A) solicit title insurance business, (B) collect premiums, (C) determine the insurability of a risk in accordance with underwriting rules and standards prescribed by the title insurer or (D) issue policies of the title insurer. Title agent does not include officers or employees of a title insurer (CGS § 38a-400(13)).

A title insurance agent's responsibilities include a thorough title search by reviewing documents affecting a particular property, including affidavits, hold harmless agreements, liens, land surveys, zoning permits, among others. The agent examines the condition of the title, evaluates the insurability of the property, and attempts to clear any defects. The agent often transcribes the property's legal description and enumerates easements and other special property rights for inclusion in the policy. Because the policy insures against unknown defects at the time title is transferred, the title search and evaluation are extremely important for mitigating future claims under the policy.

Connecticut law prohibits an insurer from paying a title insurance agent more than 60% of the gross policy premium:

For any title insurance policy issued after October 1, 1990, no title insurer shall pay to any title insurance agent or permit such agent to retain any amount exceeding sixty per cent of the gross premium for any policy of the title insurer issued by such agent. The maximum commission to a title insurance agent shall not be increased directly or indirectly by an insurer providing anything of value, including services, to an agent for less than the actual cost or fair market value (CGS § 38a-415(b)).

Title insurers must file proposed premium rates with the insurance commissioner for his approval (CGS § 38a-419). Each title insurer and title agent must make currently effective premiums and charges available to the public (CGS § 38a-420).

By law, the rates must comply with the following standards (CGS § 38a-418):

1. rates cannot be inadequate, excessive, or unfairly discriminatory;

2. rates are excessive if, in the aggregate, they are (a) likely to produce a long run profit that is unreasonably high in relation to the business risk or (b) unreasonably high in relation to the services rendered;

3. rates are inadequate if (a) they are clearly insufficient, together with investment income attributable to them, to sustain projected losses and expenses or (b) their continued use will unfairly have the effect of substantially lessening competition or creating a monopoly;

4. rates are unfairly discriminatory if the premium charged for any classification is not reasonably related to the services performed or risks assumed by the insurer (but within rate classifications premiums may, to a reasonable degree, be less in the case of smaller insurances and the excess may be charged against larger insurances, without rendering the rate unfairly discriminatory); and

5. in making or reviewing rates, due consideration must be given to (a) past and prospective loss experience; (b) exposure to loss; (c) underwriting practice and judgment; (d) past and prospective expenses, including amounts paid to or retained by title agents; (e) investment income; (f) a reasonable margin for profit and contingencies; and (g) all other relevant factors both within and outside of Connecticut. A five-year experience period is required for all filings of rates, but a filing from an insurer that has been in existence for less than five years must be supported by experience consistent with the period of its existence.

The law authorizes the insurance commissioner to adopt regulations setting forth guidelines for evaluating rates, although none have been adopted to date. Regulations may include consideration of (1) costs of underwriting risks the insurer assumes; (2) amounts title agents are paid or retain; (3) the insurer's operating expenses, other than underwriting and claims expenses; (4) claim-related expenses; (5) investment income; (6) reasonable profit; (7) premium taxes; and (8) any other factors the commissioner deems relevant (CGS § 38a-418(f)).

When a person refinances a mortgage, he or she obtains a new mortgage loan. Thus, a lender will again require a lender's policy to protect its investment in the property. However, a person will not need to purchase a new owner's policy because the one bought at the original closing remains in effect for as long as the person (or an heir) has an interest in the property.

According to ALTA, a person should ask for a “reissue” or “discount” rate on the new lender's policy when refinancing. While title insurance companies do not make these available in every state, they are available in Connecticut. A title insurer must include discount rates (and presumably any related eligibility criteria) in its premium rate schedule filed with the Insurance Department and made publicly available, which state law requires.

Historically, title insurers required a person to meet eligibility criteria to qualify for a discount rate (e.g., no more than 10 years have passed since the current lender's policy was issued, the title insurer issuing the new lender's policy also issued the previous lender's policy).

More recently, spurred by a federal class action lawsuit (Lentini v. Fidelity Nat'l Title Ins. Co. of N.Y., 479 F. Supp. 2d 292 (March 23, 2007)), some title insurers may be revising their premium rate schedule to eliminate some or all eligibility requirements for discount rates connected to a refinancing. At our request, the Insurance Department reviewed title insurers' more recent rate filings and informed us that the filings still contain eligibility criteria (e.g., the policy being replaced must be less than 10 years old).

The plaintiff (Salvatore J. Lentini) filed a class action lawsuit against Fidelity National Title Insurance Company of New York on behalf of himself and others who, since 2000, (1) paid Fidelity premiums for title insurance in connection with refinancing transactions, (2) qualified for discount title insurance rates, and (3) did not receive the discount rates. The plaintiff claimed that Fidelity gave false, misleading, inaccurate, and incomplete information about cost of the title insurance by charging him $650, the amount listed on the HUD-1 (an amount that exceeded the filed discount rate).

Fidelity's premium rate schedule filed with the Insurance Department in 2002 and amended in 2006 set forth a “regular rate” and a “reduced rate” for refinance mortgages. The rate filings specified that if insurance is applied for within 10 years from the date any Connecticut-licensed insurer issued a policy on the identical premises and there is no change of ownership, Fidelity may accept the application and charge 60% of the scheduled rate up to the largest amount of existing insurance plus the full schedule rate on any excess insurance.

Fidelity argued that the case should be dismissed because the plaintiff did not allege sufficient facts to demonstrate that he was eligible for the discount rate. He alleged that he was refinancing the same property; he did not allege that he was refinancing within 10 years, that the former policy was issued by a Connecticut-licensed insurer, or that there were no changes in the property ownership in the intervening years.

The court agreed that the plaintiff's eligibility is a prerequisite to a finding of liability. It held that the plaintiff met his burden to evidence an affirmative misrepresentation (e.g., charged the regular, not the discount, rate), but failed to provide facts showing that Fidelity had a duty to disclose his eligibility for the discount rate. Thus, it denied Fidelity's motion in part, upheld it in part, and granted plaintiff permission to amend the lawsuit.

To the best of our knowledge, the case remains on-going. Thus, it is unclear whether a title insurer or its agent has a duty to disclose to an applicant that he or she qualifies for a discount rate.

Connecticut law contains a number of disclosure requirements related to real estate transactions. Table 1 provides a brief summary of these.

Table 1: Real Estate Disclosures Under Connecticut Law

RESPA became effective December 22, 1974 (12 USCA § 2601 et seq.). The law required the secretary of the U.S. Department of Housing and Urban Development (HUD) to develop a standard form for the statement of settlement costs. It requires this standard form to be used in all transactions in the United States involving federally-related mortgage loans, which cover almost all residential real estate transactions involving institutional loans. It also prohibits kickbacks and unearned fees in connection with such transactions. HUD's Office of RESPA and Interstate Land Sales is responsible for enforcing RESPA.

RESPA does not allow state law to supersede it, allow states to opt out of it, or require states to adopt it in order for it to take effect. Thus, RESPA fully applies in Connecticut. But RESPA specifies that it does not annul, alter, or affect any state law, or exempt any person subject to RESPA from complying with state law except to the extent that these laws are inconsistent with any provision of RESPA. The HUD secretary is required to determine whether an inconsistency exists, but may not determine that state laws providing consumers with greater protection are inconsistent with RESPA.

RESPA applies to loans secured with a mortgage placed on a one-to-four family residential property, including most purchase loans, assumptions, refinances, property improvement loans, equity lines of credit, and reverse mortgages. The required disclosures relate to the costs associated with the transaction, lender and escrow account practices, and business relationships between settlement service providers.

When a borrower applies for a mortgage loan, mortgage brokers or lenders must give him or her, at the time application is made or within three business days, a:

1. Special Information Booklet, which contains consumer information about real estate settlement services (required for purchase transactions only);

2. Good Faith Estimate (GFE) of settlement costs, which lists an estimate of the charges the borrower is likely to pay at settlement and, if a lender requires the use of a particular settlement provider, that must be disclosed on the GFE; and

3. Mortgage Servicing Disclosure Statement, which discloses whether the lender intends to service the loan or transfer it to another lender and provides information about complaint resolution.

An Affiliated Business Arrangement Disclosure is required whenever a settlement service provider involved in a RESPA-covered transaction refers a borrower to a provider with whom the referring provider has an ownership or other beneficial interest. The referring provider must give the disclosure to the borrower when, or before,

making the referral. The disclosure must describe the business arrangement between the two providers and give the borrower an estimate of how much the referred provider will charge.

Except when a lender refers a borrower to an attorney, credit reporting agency, or real estate appraiser to represent the lender's interest, the referring provider may not require the borrower to use the particular provider being referred.

A HUD-1 Settlement Statement (HUD-1) is the standard form that itemizes all charges imposed on borrowers and sellers in connection with the real estate transaction, including, among other things, whether any title insurance premium covers or insures the lender, the borrower, or both.

RESPA permits a borrower to request to see the HUD-1 one day before the actual closing date. If the borrower makes such a request, then the settlement agent must provide him or her with a completed HUD-1 based on the information known at that time. At the closing, the HUD-1 must reflect the actual settlement costs of the transaction.

Instructions for completing the HUD-1 include “line item” requirements, which state that “for all items except for those paid to and retained by the lender, the name of the person or firm ultimately receiving the payment should be shown.”

The lender, or other entity that will be servicing the mortgage loan, must give an Initial Escrow Statement to the borrower at, or within 45 days of, the closing. This statement itemizes the estimated (1) taxes, insurance premiums, and other charges that the borrower must pay into escrow and (2) disbursements to be paid from escrow for the first 12 months of the loan. It lists the escrow payment amount and any required extra (“cushion”) payment. RESPA limits the cushion to a maximum of two months of escrow payments.

Additionally, the mortgage loan servicer must send the borrower an Annual Escrow Statement that summarizes the past year's escrow account activity. It also explains any escrow account shortages or surpluses and any adjustment to the escrow payment required for the following year. (Any surplus of $50 or more must be returned to the borrower.)

The loan servicer must send a Service Transfer Statement to the borrower if it sells or assigns the servicing of the borrower's loan to another servicer. The statement must be sent at least 15 days before the transfer takes effect and include the new servicer's name and address, toll-free telephone numbers, and the date the new servicer will begin accepting payments.

The federal Truth in Lending Act (TILA) is included in the Consumer Credit Protection Act (15 USCA § 1601 et seq.). TILA was enacted to promote informed borrowing and requires lenders to fully disclose to borrowers the cost and terms of credit being extended. The Federal Reserve administers TILA and adopted “Regulation Z” (Reg. Z) the implementing regulation that contains specific requirements.

Among other things, TILA and Reg. Z requires clear and conspicuous disclosure of the annual percentage rate and any finance charges in connection with a residential mortgage loan be clearly and conspicuously disclosed to the purchaser (15 USCA § 1632(a) and 12 CFR § 226.18). “Finance charges” are the sum of all charges directly or indirectly (1) paid by the borrower and (2) imposed by the creditor. But they do not include third party closing agent fees (including settlement agents, attorneys, and escrow and title companies) if the creditor does not require the charge or the service and does not retain the charge (15 USCA § 1605(a)).

TILA prohibits the following items, when charged in connection with a loan secured by real property, from being included in the finance charge computation:

1. fees or premiums for title examinations, title insurance, or similar purpose;

2. loan document preparation fees;

3. escrows for future payments of taxes and insurance;

4. notary fees;

5. appraisal fees, including fees related to any pest infestation or flood hazard inspections; and

6. fees to obtain credit reports (15 USCA § 1605(e)).

TILA requires, for a residential mortgage transaction that is also subject to RESPA, a lender to provide a borrower a good faith estimate of charges related to the transaction and disclosure of other information, such as:

1. the principle amount of the loan;

2. the number, amount, and due dates of scheduled payments and the sum of the amount financed and the finance charge (i.e., the total payment);

3. whether or not prepayment rebates or penalties apply;

4. whether a subsequent purchaser may assume the mortgage on its original terms and conditions;

5. in the case of a adjustable rate mortgage, that the periodic payments may increase or decrease substantially (an example must be provided); and

6. in the case of a loan secured by the borrower's principal dwelling and the loan exceeds the fair market value of that dwelling, that the amount above the fair market value is not tax deductible for federal income tax purposes.

The good faith estimate and disclosures must be provided before credit is extended and within three days of receiving a consumer's loan application, except the disclosure regarding the tax implications of a loan that exceed a dwelling's fair market value must be given at the time of application (15 USCA § 1638).

With respect to a reverse mortgage, a lender must also disclose, at least three days before the closing, a (1) good faith estimate of the projected total cost of the mortgage expressed as a table of annual interest rates and (2) statement that the borrower is not obligated to go through with the transaction merely because he or she received the disclosure or signed an application (15 USCA § 1648).

A “reverse mortgage” is an arrangement under which a homeowner borrows against the equity in his or her home and receives regular periodic tax-free payments from the lender. The principal and interest is payable (other than in the case of default), when the homeowner (1) sells the dwelling, (2) stops occupying it as his or her primary dwelling, or (3) dies (15 USCA § 1602(bb)).

We found no explicit requirements for an attorney representing a client in a real estate transaction. However, the Rules of Professional Conduct apply to attorneys generally. The rules are available from the Statewide Grievance Committee's website (http://www.jud.ct.gov/SGC/) under legal and educational resources.

The rules (1) specify that an attorney has a duty to charge, and fully disclose, reasonable fees (which, in a real estate transaction, must be included on the HUD-1); (2) prohibit an attorney from allowing his or her own interests or obligations to third parties to adversely affect a client; and (3) require an attorney to (a) keep a client reasonably informed and (b) disclose any conflicts of interest.

According to HUD, settlement practices vary throughout the country. Real estate settlements may be conducted by lenders, title insurance companies, escrow companies, real estate brokers, or attorneys for the buyer or seller. HUD also indicates on its website that in some states, attorneys offer title insurance as part of their services in examining title and providing a title opinion. In other states, a title insurance company or title agent directly provides the title insurance.

In Connecticut, it is common for the buyer's attorney to facilitate the closing, making sure that his or her client understands the numerous documents and settlement charges, including those related to title insurance. The attorney obtains the necessary signatures on the documents and collects and disburses applicable payments.

In addition to the buyer, some attorneys also represent the mortgage lender at the closing and also act as the title insurer's agent. In this case, the attorney must advise each client of the implications of dual representation and obtain each affected clients' informed consent in writing before providing representation (Rules of Professional Conduct, Rule 1.7(b)). An attorney is prohibited from entering into a business relationship with a client when the attorney has a pecuniary interest adverse to the client unless, among other things, the attorney discloses the interest, advises the client in writing that he or she should consider seeking the advice of independent counsel in the transaction, and gives a reasonable for the client to do so (Rules of Professional Conduct, Rule 1.8(f)).

However, dual representation does not necessarily mean there is a conflict of interest. The Connecticut Superior Court has noted that, generally, a conflict of interest does not arise when there is dual representation unless the representation of one client would be directly adverse to another client (Ayalon v. Breakstone, No. CV020078878S, 2003 Conn. Super. Ct. LEXIS 2787 (Oct. 14, 2003) (citing Rules of Professional Conduct, Rule 1.7(a)).

The Connecticut Bar Association's (CBA) Committee of Professional Ethics addressed the question of an attorney's obligations of disclosure when the attorney asked to represent a client (borrower or mortgage lender) at a real estate closing is also an agent for the title insurer. As agent for the title insurer, the attorney is entitled to commissions. According to the committee, because this pecuniary interest could affect the attorney's objectivity, he or she must fully disclose the relationship with the title insurer to borrowers and mortgage lenders. “Only after disclosure and the clients' informed consent can the lawyer represent a borrower or lending institution while simultaneously serving as a title agent”(CBA Committee on Professional Ethics Informal Opinion 87-6).

To file a grievance (complaint) against a Connecticut attorney, complete and sign a Complaint Against Attorney form, which is available at each Clerk's Office of the Superior Court and on the Judicial Branch's website (http://www.jud2.ct.gov/webforms/forms/gc006.pdf). There is no charge for filing a grievance complaint. Once completed, mail it to:

Statewide Bar Counsel

287 Main Street, Suite 2, 2nd Floor

East Hartford, Connecticut 06118-1885

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