Sunday, May 12, 2002

Title rules called overly lax

By Ken Alltucker,
The Cincinnati Enquirer

        No state agency in Ohio or Kentucky oversees how real estate deals are completed even though unscrupulous agents have cost consumers and others millions of dollars in losses in recent years.

        Closing agents in Blue Ash, Vandalia, Columbus and Powell have been accused of fraud or theft in at least four cases since the late 1990s. A fifth title agent in Dayton was convicted and sent to prison.

        In each case, the title agent has been accused of taking consumers' mortgage money and spending it on everything from Jaguars and Porsches for themselves to risky stock market schemes.

        Although such cases are rare, critics say they point to the need for tougher oversight of title firms, which typically act as closing agents or middlemen to ensure that all parties get paid when real estate transactions are concluded.

        “It is very easy for title agents to get quite far along in a fraudulent scheme before anyone notices,” says Bob Sanker, a Cincinnati lawyer.

        Greater Cincinnati's title industry is being scrutinized for its role in the troubles of the Erpenbeck Co., Greater Cincinnati's fourth-largest builder facing an FBI bank fraud investigation for allegedly mishandling checks.

        Although no title company has been accused of fraud or wrongdoing relating to the Edgewood-based builder, at least five agents have faced criminal probes over the past few years.

        The most recent Greater Cincinnati title company failure came in 1999 when Phoenix Land Title Co. was accused in a civil lawsuit by its underwriter, Ohio Bar Title, of fraud by misappropriating escrow funds for personal and other use.

        The civil lawsuit resulted in a Hamilton County Common Pleas court-appointed receiver recovering less than $500,000 from the firm, far short of the $1.3 million in claims submitted to the court, according to a March 2002 court filing.

        The FBI is conducting a criminal investigation of Phoenix's failure, including an examination of the role of its president, Cathy Montesi. No charges have been filed.

        Ms. Montesi, who until recently showed model homes for Erpenbeck Co., declined to comment.

        Several Tristate title firms say they allowed large builders, including Erpenbeck Co., to personally deposit checks at the bank — a task title firms normally complete. The title companies say they discontinued the practice a couple of months ago.

        The FBI is investigating whether Erpenbeck Co. or its representatives used that opportunity to funnel checks into company accounts instead of paying off the builder's lenders, according to people familiar with the investigation. No charges have been filed against the company, and FBI agents and company officials have repeatedly declined to discuss the investigation.

        A. William “Bill” Erpenbeck, who once headed the company, was arrested Friday on felony charges of passing a bad check for $258,493.99 to a contractor. His lawyer said Mr. Erpenbeck is helping the federal authorities investigating his former company.

        The Erpenbeck Co. case has been worrisome for dozens of homeowners who now face a lengthy and potentially costly legal battle to fend off foreclosure. That's because contractors and lenders owed money by the company have filed claims, or liens, against dozens of Erpenbeck-built homes in a final effort for payment.

        Real estate lawyers, homeowners and others say that if the state had more stringent regulations ensuring that title agents distribute checks to all proper parties at closings, the Erpenbeck mess and other title company problems could be averted.

        “A lot of states have far more stringent safeguards than Ohio,” says Charles Cain, vice president of LandAmerica Financial Group, which owns Insured Land Title.

        The title firms' practice of giving buyers' settlement checks to Erpenbeck, instead of to the builder's lender, is legal under Ohio and Kentucky law.

        “The department doesn't have the authority to regulate a title agent when he is wearing his closing agent hat,” says Steve Hombach, a staff attorney with the Ohio Department of Insurance, which regulates title insurers.

        The state also doesn't monitor how title agents distribute checks at home closings. But it does require that agents keep detailed account of all transactions and make records available to the title agent's underwriter.

        The state of Kentucky doesn't even register title agents, let alone regulate them. Because many title agents are lawyers, Kentucky relies on the state bar association to monitor their role as title agents, says Roger Snell, a spokesman for the Kentucky Department of Insurance.

        Another gap in both Ohio and Kentucky's oversight of title agents, according to real estate lawyers, is the lack of requirement for bonding that would guarantee money will be available for parties who are owed by a title agent.

        “There is no bonding for title companies,” says A.C. Strip, a Columbus lawyer appointed as receiver in last year's collapse of Midwest Title of Powell. “There is no assurance to the public that the title company is protected.”

        Extra costs associated with any bonding requirement could push marginal title agents out of business, some lawyers say. But it also could force less competent firms out, too.

        Title agents often operate on razor-thin margins, leasing office furniture and other equipment. If the firm encounters financial trouble or pilfers funds, it can be difficult to recover any money through a civil lawsuit.

        “One problem is title companies don't have any assets,” says Jeff Jorling, a Cincinnati lawyer. “If they steal money, there's no recourse.”

        When a title firm collapses, it can send ripples throughout the local real estate industry, postponing home purchases and sales and potentially costing consumers thousands of dollars in legal bills.

        The most recent collapse of an Ohio title firm came in March when a Vandalia title agent, Equity Land Title Agency Inc., closed down. Equity's underwriter accused the agency and its owner, Steven L. Clayton, of misappropriating $4.5 million. More than 200 people or businesses claim Equity owes them money.

        “A lot of people around here are concerned,” says Vandalia police Detective Scott Breisch, who's overseeing a criminal probe of Mr. Clayton's dealings.

        The criminal investigations can be difficult and time consuming. Mr. Breisch said it could take months to piece together the complex paper trail from the Equity case. Even longer before prosecutors decide whether there is enough evidence to file charges.

        “We've got about 130 boxes of evidence we're going through,” he said.

        Mr. Breisch says no charges have been filed in the Vandalia case, and he doesn't know whether Greater Cincinnati homeowners face losses or problems stemming from Equity's collapse.

        Ohio insurance regulators prohibited Mr. Clayton from conducting business a day after his underwriter sued. Mr. Clayton could not be reached for comment.


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