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Title News - March/April, 2007

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March/April, 2007 - Volume 86 Number 2

Cover Story
Ethics in the Real Estate Marketplace

by Robert Miller

With the title industry in the spotlight over the last two years, ethics among title professionals has become a hot topic. Learn how to adopt an ethical decision-making framework for your company and the importance of instituting a Privacy Policy.

"Always do right — this will gratify some and astonish the rest."

Mark Twain’s 1901 message to the Young People’s Society
Brooklyn, New York

The consideration of ethics and its role in the business marketplace has received significant attention from regulators of the real estate profession and has increasingly become a required part of continuing education for real estate professionals to maintain their licensing. While we all strive to maintain ethical standards in our daily lives and work (see the sidebar for a good book on ethics), the real possibility exists that the increasingly dynamic real estate workplace of today may present real barriers to ethical decision-making for our business and our customers.

To overcome those obstacles:
  • Develop an awareness of an ethical decision-making framework.
  • Examine our workplace to determine barriers to ethical action.
  • Identify specific problem areas, such as customer privacy and data security, unique to the real estate marketplace.
  • Develop and implement tools for ethical decision-making and make them a part of our company culture.
  • While we are all generally familiar with the concept of ethics, Webster’s New World Dictionary defines it as: "relating to what is good or bad, having to do with moral duty and obligation."

    The Business Environment
    In the real estate marketplace, acting in an ethical framework involves not only the general requirement of conforming our conduct to good and moral conduct but also acting within

  • A framework of regulations and laws affecting our industry.
  • Customs and expectations of our customers.
  • Defined principles of morality and fair dealing.
  • The needs of our customers.
  • The business environment of the real estate marketplace has become an incredibly stressful environment making the implementation of ethical decision-making more difficult, in part because of the compression of time in which to make business decisions. While there are multiple factors that have added to this stress level, there are three key areas.

    1. Stress Level of Our Customers
    We meet our customers at one of the most stressful times in their lives, and the context of our business relationship with them does little to reduce their anxiety. Numerous studies by psychologists have shown that in comparing the relative stress levels of specific life events, the process of buying or selling a home is as stressful as divorcing a spouse and only slightly less stressful than mourning the death of a loved one.

    2. Declining Public Confidence
    Despite the number of hours and years that real estate professionals labor at their profession, it is clear that the public perception of our honesty and ethics has dropped to surprisingly low levels. In an “Honesty and Ethics” poll conducted by CNN/USA Today/Gallop in November of 2003, only 18% of Americans ranked business people (and title professionals are business people) as engaged in a profession with very high or high standards of ethics and honesty. The most trusted professionals in the United States were nurses who, 83% of Americans believed, possess high or very high honesty and ethical standards. Not surprisingly, car salesman came in last at 7%. Lawyers came in at 16%, just above stockbrokers and just below congressmen.

    3. Technological Advances The real estate industry has benefited from the dramatic technological advances of the Internet, allowing communication with our customers, lenders, and data sources to be almost real time rather than the snail mail of the 1970s to the early 1990s. With the rapidity with which we are required to receive and process information, it would appear that the real estate industry should be able to process information more quickly, more efficiently, and in a more secure fashion than the paper-filled offices of yesteryear. Unfortunately, a Chicago researcher has found that the average worker in 1994 was able to complete, on average, 75% of his/her daily work. That same worker 12 years later was only able to complete 66% of his/her daily work despite the technological advances. The study found that many workers were on information overload, attempting to make too many decisions in too short a time, and the technological advances of the Internet and email communication required them to multitask even though they were not adept at it.

    It is clear that the stressful condition of our clients, the declining public perception of our industry, and advances in technology have all contributed to whirlwind work environments that make implementation of an ethical decision-making framework difficult. But the reality is the industry has no choice. Title companies need to implement an ethical framework as a corporate culture to ensure the company remains compliant with the myriad of laws and regulations that affect us.

    An Ethical Framework for Business Decisions
    Warning Signs
    Have you or your employees ever made any of these statements when deciding whether to accept a transaction that has some ethical concerns?

  • All my competitors do transactions like this one
  • I will only do this one case
  • No underwriter will ever notice this case in an audit
  • I will lose business unless I do what the parties ask
  • An Ethical Framework
    It is easier than you might imagine to integrate personal ethics into the business place by asking the same questions of your business that you would of your personal life. When you or your employees must make a decision to take or decline a questionable transaction or to adopt a questionable business practice to compete in the marketplace, ask these questions.

  • Would I do this if the details were published in a newspaper with my picture?
  • Would this decision be questioned by my family and friends?
  • Will I sleep soundly tonight if I make this decision?
  • Is the decision or practice legal? Are there regulations that restrict such choices?
  • Ethical Concerns Gramm-Leach-Bliley Act
    The Financial Services Modernization Act, commonly known as the Gramm-Leach-Bliley Act, passed July 1, 2001, and imposed new ethical and legal requirements on financial services companies who routinely, and as part of their business, collect and maintain consumer financial data. In performing core title services, title companies historically have collected and maintained the sensitive and private data of customers as a critical part of performing the settlement service. Prior to the Act, individual real estate companies were left to create their own individual standards of safeguarding private customer data with little or no oversight by state or federal agencies. Subsequent to the passage of the Act, individual financial services companies, including all title service providers, were federally mandated to adopt and promulgate to their customers their Privacy Policy, which would apply to the use of the personal financial data collected by the settlement firm in the conduct of their individual transaction.

    The response of the national title insurance underwriters to the passage of the Act was to provide their title agents with a generic prototype Privacy Policy. While the intent of the underwriting community was to provide a framework for title agents to develop their own internal Privacy Policies and description of their security policies, the effect was most often the adoption of the generic notice without change or without implementation of security measures. The ethical requirement of settlement agents subsequent to the passage of the Act was not only to abide by the legal requirements of the statute but also to examine their current office procedures to ensure that the privacy requirements of their customers were adequately safeguarded. The unfortunate result of the adoption of a generic Privacy Policy is illustrated by the case of a real estate settlement provider in Kansas City, KS, that was prosecuted by the Federal Trade Commission in 2006 for, among other matters, failing to honor its promise to consumers to maintain “physical, electronic and procedural safeguards” of the consumer’s personal financial information. In that prosecution the title agency’s Web site was infiltrated by hackers who obtained sensitive, personal information of the customers. In addition, the agency was found to have discarded sensitive consumer financial information, including loan applications, in an unsecured trash dumpster behind its building.

    Because the allegation of the complaint was the failure to honor the promise to consumers that the company maintained “physical, electronic and procedural safeguards,” it is critical that if your settlement company is making similar claims through your Privacy Policy, you actually put the advertised safeguards in place. The penalty imposed by the Federal Trade Commission in this case included, among other penalties, a requirement that the company obtain an independent security audit every other year for 20 years. Every title agent should review their adopted Privacy Policy and consider the following:

    1. Do not adopt verbatim a generic Privacy Policy without ensuring that it is reflective of the actual privacy and security standards in place in your firm.
    2. Utilize the Privacy Policy as a marketing tool to promote your firm by detailing the procedures in effect such as:
      • Certification of Web site security by a Web site consulting firm
      • Utilization of crosscut shredders and/or commercial shredding service
      • Electronic secure storage of data on a CD-ROM given to customers at closing with destruction of the original documents in a secure fashion
      • Market and promote data scanning on your Web site
      • Market your firm as a secure and paperless entity with state of the art technology.
    3. Consider implementing an electronic archival fee on the HUD-1 to defer costs in implementing security controls of data scanning to CD-ROM’s and promote efficiencies of future delivery of data to customers electronically.
    4. Partner with your real estate agent customers to promote them by including their name and agency on the CD settlement file provided to your clients.
    5. Post your Privacy Policy proudly on your Web site to alert the community and prospective customers that you ethically embrace and promote security in the conduct of your business.
    6. Consider including in your Privacy Policy the manner and retention length of customer information by a statement such as:
      "It is our policy to maintain settlement files for a period of ___ years from settlement in electronic form on CD-ROM’s maintained in a secure, access-limited, environment, with hard copies of documents maintained in a private, secure, access-limited private storage facility. All records, electronic media, and/or paper after the stated retention period are destroyed by a private record- disposal firm in a manner compliant with the standards mandated by the Federal Trade Commission."
    7. Say what you mean and mean what you say.

    The Government Response — 2006
    Within two years of the passage of the Gramm-Leach-Bliley Act, governmental researchers found that most Privacy Policies were often complicated, lengthy documents and that most consumers neither read nor comprehended the contents of the policies. Because the purpose of the Act was to impart and disclose information to consumers in an attempt to protect their personal and sensitive financial information, the government commissioned a study utilizing 66 consumers in Baltimore, Washington, San Francisco, Richmond, Austin, Boston, and St. Louis to obtain their reactions to various Privacy Policy prototypes over a 12-month testing period. The results of the study were designed to promulgated standards for a prototype Privacy Policy designed to increase the likelihood that the consumer would read and comprehend the importance of the disclosures made.

    As a result of the study and testing, in February of 2006, the government released a 337-page report called “Evolution of a Prototype Financial Privacy Policy.” While the report was a culmination of a 16-month governmental study, there is no mandate currently that the providers of financial services or escrow settlement services adopt the prototype Privacy Policy or implement the recommendations and conclusions of the study in developing their internal Privacy Policies.

    While a mandate for standardization of the Privacy Policy has not been implemented as yet, it is significant to note the depth and breadth of the government’s commitment to improving consumer’s awareness of the importance of financial data security. Their commitment is likely to foster more prosecutions by the Federal Trade Commission against firms which fail to conform their security policies with their promulgated notices.

    The Disposal Rule
    Spearheading the enforcement powers of the federal government, on June 1, 2005, the Federal Trade Commission adopted the FACTA Disposal Rule, establishing a company’s legal responsibility to implement an information disposal program to mitigate consumer fraud and identity theft.

    The Disposal Rule applies to people and both large and small organizations that use consumer reports. Among those who must comply with the Rule are:

  • Consumer reporting companies
  • Lenders
  • Insurers
  • Government agencies
  • Mortgage brokers
  • Attorneys or private investigators
  • Debt collectors
  • Entities that maintain information in consumer reports as part of their role as service providers to other organizations covered by the Rule.

  • The Disposal Rule requires disposal practices that are reasonable and appropriate to prevent the unauthorized access to - or use of - information in a consumer report. For example, reasonable measures for disposing of consumer report information could include establishing and complying with policies to:
  • burn, pulverize, or shred papers containing consumer report information so that the information cannot be read or reconstructed;
  • destroy or erase electronic files or media containing consumer report information so that the information cannot be read or reconstructed.
  • Ethical Concerns: Email Communications
    The same mandate of the Gramm-Leach-Bliley Act to adopt secure environments for maintenance and preservation of sensitive and personal financial data also applies to the manner and extent of the dissemination of that information by email.

    Hackers can access settlement files, personal passwords, and data collected and stored on your computer. If criminals or other malicious users steal this information, they can use your customer’s information to facilitate identity theft. Strive to create strong passwords and keep them well protected.

    Security Measures You Should Adopt
    Discuss with your employees the critical need for security in email communications. Managers and owners should maintain a log of all employee passwords and require a change of passwords at regularly scheduled intervals.

    Check the security level of employee passwords. Microsoft has a free service where the relative strength or weakness of a password can be checked. The service can be accessed at:

    Always Do Right
    Mark Twain’s admonition to “Always do right—this will gratify some and astonish the rest” can become the mantra of the modern settlement company owner in an increasingly complex technological age and more complex regulatory scheme. If we embrace the ethical requirements of complying with privacy issues and security of data, our customers will recognize and be willing to pay for superior and secure service. Marketing your firm as “secure” with a mandate for secure and confidential handling of sensitive customer information, retention of records in a secure electronic form, and embracing technology to deliver settlement documents in secure electronic media will separate your firm from your competitors and provide a much needed calming influence on your customers.

    As the owner of your business, become the ethical sounding board for your customers and employees. Be able to say no and explain why a case cannot be accepted or handled in a way a customer requests, and suggest alternatives that might insulate your customers from liability.

    Be the example of ethical leadership, not the exception. A reputation among your peers as ethical takes a lifetime to build and only moments to lose.

    Mark S. Lynch, Esquire, is vice-president, senior Maryland state agency counsel for First American Title Insurance Company, Baltimore, MD. This article is an excerpt from his presentation during ALTA®’s 2006 Annual Convention in San Francisco. Mark can be reached at or 800-445-6024.

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