Three Strikes And You're Out!

The sellers and listing agent presented false identification at three different signing appointments. Liz Kalodemas, certified escrow officer and notary extraordinaire at Fidelity National Title in Santa Rosa, Calif. "gave 'em three strikes" and they were OUT!

Liz's transaction was a short sale. She spent months working on the file, coordinating with the seller's payoff lender and then the buyers' lender to make sure everyone was on the same page. It appeared everything was coming together. The buyers' loan package arrived and they signed their documents. Then the three sellers came in to sign their closing documents with their listing agent. The listing agent was required to sign an affidavit for the payoff lender stating the sale was an arms-length transaction.

Liz began the signing ceremony for the sellers and their agent by asking them for their identification. Much to her dismay, two of the sellers gave her Matricula Cards issued by Mexico. Liz explained, as a notary public, that she was unable to accept these forms of I.D. to notarize their signatures. The Matricula Cards do not meet the acceptable forms of identification under California Code 1185(b)(3) and (4). The third seller and the listing agent presented California driver's licenses. Liz excused herself to make photocopies of the licenses, and while walking to the photocopy room, noticed the third seller's license had unusually sharp edges and was thicker than the agent's license. She put both licenses under the UVeritech™ Blacklight in the copy room and the agent's was verified as authentic – the seller's was not!

Liz realized as she was walking back to the signing room that both licenses were expired by more than five years – rendering them useless as valid identification. She returned their identification and said she could not accept them. Liz thought it was ironic someone would present a fake I.D. then have the expiration date exceed the five year California limit. She listed the acceptable forms of I.D. and asked them if they had any of them. They said they did but they would have to come back. Since they were 45 minutes late for their appointment and it was now after working hours Liz told them they would have to return the next day.

The next day the sellers came back to Liz's office. All three presented her with California I.D. cards. Liz was going to be sure she scrutinized them very carefully and knew exactly how to do it. She pulled out her I.D. Checking Guide and grabbed her UVeritech™ Blacklight, then took them both into the closing room. Liz turned to the page in the I.D. Checking Guide that described the hidden image of the state flag which would appear under a black light. She placed the I.D.s under the black light. None of them contained the hidden images. To further illustrate, she asked the real estate agent for his driver's license. Although his license was expired when she placed it under the light, the flag appeared. They left her office again with a promise to return.

The third time they brought in Mexican passports, which were not stamped by U.S. Immigration. Liz explained to them these passports did not meet the requirements either. When they pushed her to close the transaction, Liz explained they were asking her to do more than just close a file. Liz knew the risks the Company faced and wasn't about to subject the Company to such risk. Liz felt even more upset that they were asking her to personally risk everything she had worked so hard for over the last 30 years. This included her notary commission, her job and livelihood, her retirement, her house and her reputation – which are all priceless. She explained she was offended by their request and their transaction was not worth losing everything for. Before they left, Liz took the time to print and provide them with a copy of the statute which describes the acceptable forms of identification a notary can accept.

That evening the listing broker e-mailed Liz, asking her to accept the seller's signed and notarized documents using the credible witness option under the California notary statutes. It was at this point Liz decided to resign from the transaction. If the sellers were unable to provide sufficient I.D. and tried three times to pass off fraudulent identification, why would we insure based on a statement from a "credible" witness? Liz made the right decision.

This story is a culmination of several warnings we have published in previous editions of Fraud Insights. Liz, our heroine, has taken each and every one of these articles to heart. Here is a list of those articles:
Volume 1, Issue 6 – June 2006: "The Matrícula Consular Card And Your Notary"
Volume 1, Issue 8 – August 2006: "Document Execution Guidelines"
Volume 1, Issue 9 – September 2006: "Notary Best Practices"
Volume 2, Issue 3 – March 2007: "Fraud Detection Technology"
Volume 3, Issue 9 – September 2008: "Hidden Images"
Volume 4, Issue 3 – March 2009: "The Importance Of Knowing Your Notary Laws"
Volume 5, issue 5 – May 2010: "Black Light Update"

Liz reported the incident to her National Escrow Administrator saying: "I hope every office has one of these black lights." It was Liz's knowledge of her notary statutes, ethics and use of the UVeritech™ Blacklight Fraud Fighter machine that enabled her to ensure the Company did not insure a transaction that could have proven to be fraudulent.

As a result of her diligent efforts in not one, not two, but three attempted closings and for recognizing it was time to resign, the Company has rewarded Liz with $1,000 and a letter of recognition.

Real Estate Commissions

From time to time, real estate agents change the brokerage they work for. This move complicates things if the agents have any pending listings or pending sales, since any commissions due from those transactions belong to the brokerage they worked for when the listing agreement or purchase and sale agreement were signed.

Recently our offices have seen an increase in real estate agent moves between brokerages. As a result, settlement agents should not lose sight of the fact the commission belongs to the brokerages named in the purchase and sales agreement.

For example: A transaction was scheduled to close in a week. The selling agent called his escrow officer and told her he changed brokerages and his new broker would be sending over a commission demand. The escrow officer explained to him she would need a release from his previous broker since this was the company shown on the purchase and sale agreement. He said he would call her back.

He called her back the next day and explained his previous broker would not agree to the release. Instead he wanted his escrow officer to cancel her file then open a new file with a new contract showing his new brokerage as the selling broker. She asked him if the listing broker was in agreement with all of this. He said yes and asked her what she needed in order to cancel out the current file. The escrow officer told the agent she needed to speak with the listing broker.

The escrow officer called the listing broker and asked if she was really going to advise her seller to cancel the existing contract they had and write up a new contract showing a new selling brokerage. The listing agent said she needed to call the Nevada Association of Realtors® legal hotline. You see, this escrow officer knew it was the listing broker who has an obligation to pay the selling broker. She didn't believe the listing broker would participate in cancelling the contract and writing up a new one knowing the listing broker could then be obligated to pay two selling brokerages if the same seller and the same buyer went through with the purchase of the same property. The listing broker called back and said they would not be cancelling the file and the commission would be paid to the original selling broker.

Moral of the Story:
Follow the written, mutually agreed upon instructions. The purchase and sale agreement regularly provides the answers to questions settlement agents are asked especially as it relates to the payment of commissions.

Plaza Home Mortgage v. North American Title Company

Over several years it has become evident to lenders, law enforcement, escrow and title companies alike that disbursements to unrelated third parties in a real estate transaction serve as a red flag of mortgage fraud. As a result, lenders closing instructions have been re-written to prohibit any such disbursements without lender approval.

Typically these types of disbursements are made from the seller's proceeds. Some argue since the payment is coming from the seller's money it's none of the lender's business. The lender argues it needs to be informed of all the disbursements being made, even from the seller's proceeds so it can make a fully informed decision as to whether or not it will actually fund the loan. It turns out the courts agree with the lenders.

Plaza Home Mortgage (Plaza) sued North American Title Company (North American) over the closing of ONE file. Plaza accused North American of failing to follow its closing instructions as it related to two matters:

• North American allowed the loan documents to be signed without approval via power of attorney rather than by the borrower himself.
• It accepted written instructions from the seller of the property to disburse $54,853 representing a portion of the seller's proceeds directly to the attorney-in-fact (who represented the buyer/borrower).

Plaza's closing instructions did require the settlement agent to disclose such a disbursement. The Addendum to the closing instructions said: "agent certifies that there are no additional payoffs or fees that were not disclosed to the lender either verbally or on an Estimated HUD-1."

The attorney-in-fact made two mortgage payments on behalf of the borrower. No other payments were made and the borrower defaulted on the loan. Plaza had to foreclose, and suffered even further since the market had declined when it sold the property and as a result, it was unable to fully recoup its losses.

Months after Plaza filed the lawsuit against North American and before the actual trial it posted this message on its Website:

Plaza Home Mortgage, Inc. v. North American Title Company, Inc. – Filed on April 27, 2010, Fourth District, Div. One (Cite as D054685) serves as precedence when disbursements are made to unrelated third parties in an escrow transaction.

Cases such as these rarely take into account the immeasurable costs. Not only was North American Title Company, Inc. ordered to pay damages, it incurred court costs and attorney fees (as well as bad press) and it lost out on new business.

There is no way for North American Title Company, Inc. to truly know the actual losses it incurred. Settlement agents everywhere should heed the warning this costly example provides. Not only have lenders sued title companies and won but they have also named the settlement agent individually as a co-defendant. Carefully read and adhere to the lender's closing instructions. When asked to make disbursements to a third party, simply decline. There is no legitimate reason the principals cannot make those disbursements outside of escrow once they have received their proceeds. As this example proves, it is just not worth the risk.