Title Now: Recent Episodes
The Fund
Title Now is a show about recent changes that are impacting the Real Estate industry in Florida. Check back often for the most up-to-date news and information. Look for our podcast in the Google Play Music app, Podcasts app or in the iTunes Store. Send in suggestions on topics or speakers that you would find valuable, by emailing m.murphy@thefund.com.
Join Melissa Murphy, Fund General Counsel, and Chris Morton from the American Land Title Association for a discussion on the current “lay of the land” regarding the use of alternative title products by the GSEs.
Think you know what’s covered by the title insurance policy? Think again! Tune in to Melissa’s discussion with The Fund's George Perez, Senior Manager of Claims, Risk Analysis and Member Compliance, on claims coverage issues that often surprise Fund Members.
Tune in to learn the case for closing with CASi and how they can save you time and money on closings. CASi services include assistance with secure digital closings/RON signings, settlement statement drafting/balancing, policy drafting and back office support Melissa's guest will be Andrew Dinnerstein of Closing Attorney Support
Think you know what’s covered by the title insurance policy? Think again! Tune in to Melissa’s discussion with The Fund's George Perez, Senior Manager of Claims, Risk Analysis and Member Compliance, on claims coverage issues that often surprise Fund Members.
Cut staff time – and come to the table fully prepared – by letting ACS draft and assemble everything you need.Tune in to learn how Attorneys’ Closing Services has helped real estate attorneys like you and your team confidently handle residential and commercial real estate closings from the initial draft to the final closing package. Melissa’s guest will be Ron Conte of Attorneys' Closing Services.
Attorneys in real estate and related practices have a hard time getting the message out about the value they bring to the table.There are so many misconceptions – what they do, how they do it and how much they cost. Tune in to learn how two campaigns, The Florida Bar’s “Hire an Attorney” and The Fund’s “Value of a Real Estate Attorney” are tackling this issue. Melissa’s guest will be Michael Gelfand, a member of The Florida Bar Board of Governors.
Alternative title products, including Attorney Opinion Letters, are currently being marketed as a cost cutting path to home ownership.
Frustrated by the risks associated with wire transfers of buyer cash to close? What about the hassle of disbursing to realtors, HOAs, tax collectors and others? Are there options under Florida’s “good fund rules” for other forms of payment?
Find out about the risks, advantages, and how this may affect YOU in your practice.
Melissa Jay Murphy 0:06
Hello everyone and welcome to The Fund's Title Now Pop-up Webinar. I'm Melissa Murphy. And we host these webinars from time to time for the purpose of bringing you a quick update on a topic or maybe even a new topic. But we want to do this in relation to real estate transactions so that you can keep up to date with what's going on out there in the real estate world. We try to keep these simple, no PowerPoints, just a conversation. And then we push the audio out to our podcast, which is also called Title Now so that you can easily access the information again and share it with your friends and colleagues. It's really easy to subscribe, you can get it wherever you get any of your podcasts and it's free, of course, another benefit of Fund membership.
Melissa Jay Murphy 1:02
So, what are we talking about today? Well, it has been several years since blockchain, and cryptocurrency first surfaced in the real estate transaction world. It was met with confusion and a fair amount of suspicion, I believe. Cryptocurrency continues to gain traction and we are hearing about it quite often in the news and in the media. You now see celebrities promoting the investment in cryptocurrency in fancy magazine ads, and in primetime television commercials. I guess the message is “Be like Matt Damon and invest in cryptocurrency.” But apart from what we are seeing in the media, we are seeing the use of cryptocurrency and blockchain coming back up again in the world of real estate transactions and real estate records. So, I thought it was time to get an update for Fund Members. We are fortunate that one of our very own underwriting attorneys is very knowledgeable about this topic and serves on the Blockchain and Cryptocurrency Subcommittee of the Commercial Real Estate Committee of the RPPTL section of The Florida Bar. The Business Law Section has a comparable committee on which she also serves. So, my guest today is Colleen Sachs, Senior Underwriting Attorney with The Fund. So, before I invite Colleen into this conversation, I want to make sure that all of you watching and listening today know how to post questions on the chat. One of our other Underwriting Attorneys, Caleb Hinton is monitoring the chat for us and so he'll come in at the end of our remarks and read off any questions that you might have asked but go over to the right-hand side of your screen and in that white box, go down to where it says chat. That's where you can insert your question and then under the drop-down box next to the word to pick Caleb Hinton as the person to whom you are sending your question that way it gets directly to Caleb, and there won't be any confusion. So hopefully that will work. We would love to get some questions. So, Colleen, welcome. Thanks for being with me today. And I want to start with some basics just to make sure we are all reminded of what we are talking about. So, tell us, what is crypto?
Colleen Sachs 4:00
Okay, well, crypto is a form of a digital asset. And it's based on blockchain, which is a network that's distributed across a large number of computers. So, cryptocurrency is simply a blockchain token. But keep in mind that crypto is just part of how blockchain can be used and the best-known cryptocurrency is Bitcoin. But there are about 12,000 cryptocurrencies, and that's double the number in the last quarter of 2021. We have about 1000 cryptocurrencies are being added each month.
Melissa Jay Murphy 4:35
I was really surprised when you told me that when we were getting ready to do this webinar. I had no idea there were that many cryptocurrencies and I think that adds to the confusion. But there have to be advantages to using cryptocurrency. So, what are people that are in favor of cryptocurrency saying are the reasons to use it? What are the advantages?
Colleen Sachs 5:01
Well, it's got a number of advantages. It's a fast money transfer without fees. It is a decentralized system that doesn't involve banks and a lot of people like that. It has the benefit of privacy, and it is much easier on international and on overseas transactions.
Melissa Jay Murphy 5:23
Those sound-like great advantages if they are in fact real. But I'll bet there are some disadvantages too. Otherwise, this wouldn't have, or this wouldn't have lagged in its incorporation into real estate transaction. So, what are the disadvantages?
Colleen Sachs 5:42
Sure, possibly the greatest perceived disadvantage in the use of cryptocurrency is the fluctuation of volatility. It's extraordinarily volatile. But some other disadvantages historically been the high consumption of energy involved in mining. All of that is changing. There are some more energy efficient means of mining nowadays, but also the use of cryptocurrency in criminal activities, such as purchases made on the dark web have given it a bad name, and they can have real consequences. There were recent fraud and Ponzi style cases that have involved many millions of dollars. One of them involved a $1.7 billion transaction in misappropriated funds, so they can have a very real downside.
Melissa Jay Murphy 6:31
Well, it seems to me it doesn't matter what type of currency you're dealing in. There are going to be fraudsters that try to jump people out of their money. But certainly, the lack of understanding of cryptocurrency combined with instances of fraud just makes people even more nervous. So, are governments starting to pay attention to this? Are there any regulations or laws out there that govern the use of cryptocurrency?
Colleen Sachs 7:01
Yeah, that's actually considered to be one of the downsides because there's some uncertainty in what the future holds regarding regulation. And we see this coming from regulatory agencies from legislation and from litigation. For example, there was a 2021 case from the United States District Court in the Northern District of Georgia. And it was in affect specific situation, but they found that the transaction for the sale of a house then included a portion of the payment in the form of cryptocurrency was an unlawful sale of unregistered securities. The various Attorneys General in states are monitoring crypto closely. Fannie Mae has new crypto requirements, and then you're going to see rules that are dealing with what they call KYC or “Know Your Customer” and AML which are “Anti-Money Laundering” rules to try to deal with security and FinCEN also comes into play. And then also in the title industry, a title company has to receive payment in fiat or US dollars. So, that can become problematic.
Melissa Jay Murphy 8:07
Certainly, a regulatory restriction on the use of cryptocurrency and I know that Florida, the legislature created and appointed a blockchain task force but that was with a pretty narrow focus, and not so much on regulating the use of cryptocurrency here in Florida. So, it'll be interesting to see if our state government gets involved in this in any way, but I do want to circle back with you about your comment about Fannie Mae requirements. Fannie Mae obviously plays a big role in the world of real estate transactions. So, give us some more information about these Fannie Mae guidelines.
Colleen Sachs 8:55
Okay, well, in fact, the Fannie Mae guidelines say that virtual currency that has been exchanged into US dollars is acceptable for down payment, closing costs, and financial reserves. If there's been documented evidence that the virtual currency has been exchanged into US dollars and held in a US or state regulated financial institution, and the funds are verified in US dollars prior to the loan closing. A large deposit may be made from virtual currency that was exchanged into US dollars. The lender also has to obtain sufficient documentation to verify that those funds originated from the borrower's virtual currency account. The virtual currency may not be used for the deposit on a sales contract for the purchase of the subject property. Once again, it will always have to be exchanged into fiat. If it's a large deposit, then they're going to have to see that this came from the borrower's virtual currency account.
Melissa Jay Murphy 10:04
Those guidelines don't seem terribly inconsistent with current lender guidelines for proof of source of funds. It just makes it very clear that we're not going to verify your crypto currency balance or value. We're going to want you to convert that first but you're going to have to show the chain of custody of your cryptocurrency being converted into US dollars and proving all of that. So those don't seem contradictory or conflicting with sort of the way things have been done in the past. But also, doesn't seem to conflict with our underwriting guidelines. So, it seems like we're going to be fine with Fannie Mae when it comes to cryptocurrency, right. So, let's move to the world of real estate. So why are these topics again something of interest to the title industry?
Colleen Sachs 11:03
That's because it's actually affecting the market now. There was a survey that was conducted by the real estate brokerage firm, Redfin. It showed in the fourth quarter of 2021 nearly 12% or one in nine of first time us homebuyers sold cryptocurrency for either part or all of their down payment. Millennials made up a large part of this number because they’re so many first-time homebuyers in that range. Another interesting point is that there's some speculation that some of this is tied to the pandemic. There was an increased interest in crypto by people who had jobs during the pandemic. They had extra money because they weren't traveling, they weren't going out to eat as much and they started dabbling in crypto in their abundant spare time. But you have to keep in mind that fiat and in our case, US dollars are still going to be needed for things such as recording and other closing costs. So, contracts that involve crypto need to address that fact. You're going to have to have US dollars at some point and they're going to need to address who takes on that conversion risk. There are some also some new areas in the industry, new companies that are popping up to serve this industry. Companies that verify that the currency that's being transferred and companies and payment processors who coordinate the transfer of the currency. All of those things are going to make the transaction much safer than a pure wallet to wallet transfer. We don't have this in Florida yet. But Wyoming and Nebraska have both authorized digital banks.
Melissa Jay Murphy 12:38
Oh, yeah. Well, that will be an interesting change if that comes to Florida. But all these things that you mentioned, sound to me like the market is being affected by the consumers desire to utilize their cryptocurrency value to buy a house. So, they are required by various regulators to convert that to US dollars in order to operate in our world. But it seems like that is a factor now because when the buyer is asked “Where are you getting your money?” They say, “Well, it's in my cryptocurrency account.” So, everyone involved in real estate transactions needs to understand what the process is to take that cryptocurrency value and turn it into US dollars. So that we can get a contract written, we can comply with the lenders requirements who wants to comply with Fannie Mae requirements, we have to comply with our title insurance regulations. So, I love seeing changes in the industry coming from the consumer because usually it's from the government down and this is something that's coming from the consumer and bubbling up. I like it. So those are general things that are happening, but what's I mean, are there examples of cryptocurrency being used in Florida transactions?
Colleen Sachs 14:20
Yeah, there are and while Florida doesn't have all the regulation and things that some of the other states do, Florida is on the leading edge of transactions that are involving blockchain and cryptocurrency. There are different ways to use it. You can use it by selling crypto to get US dollars for closing as we've been talking about. You can transact directly in cryptocurrency, or you can create a non-fungible token that is used to document the transaction. So, for the first one, selling the crypto to get the US dollars, that's basically the same type of real estate transaction we're doing now. With the other two. We've got two really good examples. They've got the sale of a four-bedroom penthouse in the art building in Surfside that set in Miami Beach price per square foot record of $4,440.50 a square foot. The sale price was $22.5 million dollars. That transaction was completed in cryptocurrency which makes it the largest known crypto real estate transaction. In this case the conversion risk was on the buyer. So that was directly transacting it in cryptocurrency.
Melissa Jay Murphy 15:28
So, when you say the conversion risk was on the buyer, the buyer took the risk that the Ethereum value could go up, but they were still obligated to pay the seller at the same number of Ethereum.
Colleen Sachs 15:50
Correct
Melissa Jay Murphy 15:59
How do they refer to the cryptocurrency in a contract? Because you know, when you say $250. How do they refer to it in contracts?
Colleen Sachs 16:12
They're actually just referred to by the number of the item just like we do in dollars. So, we would talk about it in however many Ethereum. Another case that we have was dealing with the sale of a residence in Gulfport Florida. In that case, the sale price was 210 Ethereum. At the time that represented about $653,000 in US dollars. That was an interesting one because the home's ownership was by the award of an NFT or a non-fungible token. The home was titled in an LLC, and then the transfer of the LLC interest to the purchaser was represented by an NFT that was documented on the blockchain. So, it was kind of interesting. You won't see a deed. You'll see a deed into the LLC. But then the actual transfer was done by the transfer of the interest in the LLC, and it's documented by the award of an NFT.
Melissa Jay Murphy 17:20
Wow, so this adds yet another aspect of these cryptocurrency slash blockchain transactions that Fund Members need to know about. So, talk to us about how NFTs work non-fungible tokens.
Collee Sachs 17:36
Sure, an NFT, a non-fungible token, by their name or they are limited in number which creates scarcity. In the hope of the creator of the NFT it also creates value. So, an NFT has a unique identifying code. It’s not interchangeable hence it being non-fungible, it can be authenticated. The authenticity is very secure, because the NFT is on the blockchain. So that transaction is going to be encrypted. The network can then decrypt it for the transaction, it verifies it, it authenticates it, and then it records it in an unmodifiable environment. This has gained a lot of popularity. You see NFTs talked about a lot in the sale of digital art and sports related videos. As seen in the Gulf port transaction, it's now part of the real estate world.
Melissa Jay Murphy 18:40
When you say that NFTs are limited in number, explain that, who controls setting that limit?
Colleen Sachs 18:50
The creator of the NFT sets the limit. In the case of a sale of a piece of real estate, if you've got one purchaser that's buying the real estate, the number of NFTs are going to be one. You may have some kind of digital art that they may want to say, “Okay, I'd like to be able to sell this to 100 people or 1000 people,” sort of like you would see like a numbered print. The NFTs can be any number, but the fewer would tend to be the more valuable and in the case of real estate, generally it would just be one.
Melissa Jay Murphy 19:28
Can the owner of an NFT for example, the sole member of this LLC, that owns this house? Can they create undivided interests in an NFT?
Colleen Sachs 19:47
Sure, they can. It's just like you would own any other asset you can create interests in it. Right.
Melissa Jay Murphy 20:00
Well, that may be a topic for a whole separate webinar when Members start asking questions about that. All right, so we've talked about cryptocurrency. We've talked about NFTs and how they're playing a role in real estate transactions, but we haven't really talked much about blockchain. So again, back to basics. Tell us again what blockchain is.
Colleen Sachs 20:26
Sure. So blockchain, it's an unchangeable, distributed digital ledger. It's going to be a ledger that shows ownership and everything just like any other ledger would. It's not changeable. It's going to be stored in multiple places on a peer-to-peer computer network. So, you've got computers all over the place that are going to be storing this information, and that makes it secure because if it's changed on one computer in the network, that will show that it's been changed on the other computers. So, it makes it a lot more secure because you are automatically alerted that there's been a change on the blockchain.
Melissa Jay Murphy 21:10
So that's how you can know that this NFT hat represent your interests in this LLC is not going to be transferred inappropriately or fraudulently because it shows up on all these different computers. And they would say, wait a minute, that's not supposed to be messed with.
Colleen Sachs 21:30
Exactly.
Melissa Jay Murphy 21:31
How is blockchain now being used in the real estate industry? What are the new things that you're seeing out there on that?
Colleen Sachs 21:45
Oh, it's got some really excellent applications in real estate, I think it's going to be much more widely accepted much more quickly than the use of crypto, while crypto has a fair amount of downside because of volatility, and bad actors, blockchain doesn't. It has the advantage of being very secure. We're seeing timeshare developers documenting ownership interests on blockchain that creates NFTs that represent that interest. The same goes for commercial real estate leases. It's already being used in recording real estate records in some states. Not in Florida yet, but in other states. The benefit is there's greater efficiency due to the digitization of the process and it's an accurate record of ownership that updates in real time.
Melissa Jay Murphy 22:38
But let me ask you about the use of blockchain and real estate records because in Florida, of course, we have a very broad public records law. And we're very protective of that and of the public's right to access public records. So how would a citizen be able to access real estate records on blockchain?
Colleen Sachs 23:10
Well, they will have the same access as they have now. Looking at the computer and actually in some areas, where they're recording documents, deeds and things like that on blockchain, you will see a deed that will be stamped with a QR code. You can then put your phone camera over that QR code, and it will bring up the copy of that deed. So, it is something that can be set up. It can be very private, particularly when you're dealing with NFTs but you can have the blockchain be open, very open to the public as well. It’s tamper proof and disaster resistant since it's this decentralized ledger. If something goes down, if we have a storm and it takes out a courthouse, that has the server in the courthouse, instead of the records just being destroyed and losing them. It would be accessible through one of these other computers on that peer-to-peer decentralized ledger. We've got some areas are actually recording things on blockchain right now. South Burlington, Vermont has partnered with Propy, who was the company that did the Gulfport Florida transaction, to develop a blockchain based deed registration system that's going to store deeds on the Ethereum blockchain. Cook County Illinois has a blockchain pilot program in their office of the recorder of deeds. In what is the most blockchain friendly state, Wyoming. Teton county is putting all of its land transaction records on blockchain. That doesn't mean it's going to make title searches unnecessary, but it is going to make the searches more efficient and more reliable. It gets rid of the ability of someone to alter records in the courthouse so it's just very, very secure.
Melissa Jay Murphy 25:05
Interesting. Well, it'd be very interesting to keep an eye on this trend of utilizing blockchain, for the recording of public records. That's something that the industry is going to have to pay a lot of attention to. Lots of great information, certainly new stuff going on new ways that these new types of currency and representations of ownership are being used. What would you say are the five takeaways for a Fund Member from this conversation?
Colleen Sachs 25:47
Well, Fund Members need to have some level of awareness of this trend than the industry because things are happening now. They need at least a very basic knowledge of the fundamentals when they're dealing with contracts. If your client is involved in a transaction involving cryptocurrency, you need to understand who was going to take the risk of volatility of the currency and you're going to also have to determine who is going to have to fund the closing cost with US dollars. Keep in mind that our underwriting position has not changed, we are not able to ensure wallet to wallet transactions. So said another way crypto has to be converted into US dollars, simultaneous with or before the closing for the entire transaction. But be aware that if you're dealing with Fannie Mae you may have to prove that source of funds. Then be aware that this concept of an NFT has been used to document ownership and an LLC. And just stay alert for any aspect of this that's coming to Florida because it's not a matter of “if” but a matter of “when.”
Melissa Jay Murphy 27:00
Well, I would agree with all of those takeaways. I would also be so bold as to say that as things change and any aspect of this comes to Florida, you will hear it from us here at The Fund as soon as we hear about it, so we will keep you up to date. Caleb, are there any questions out there from the attendees?
Caleb Hinton 27:22
Yeah, we actually got quite a few. The first one was with relation to NFTs and using NFTs instead of a deed. What is the trend? Because you were talking about at the end some of the advantages related to the security of using NFT on the blockchain to record and follow the chain of title. Do we see it going towards using NFTs in lieu of deeds in the traditional sense, or is it just kind of this niche thing right now that people are kind of playing with?
Colleen Sachs 27:55
There isn't really a trend because there are different ways of doing it. If there is a trend, it is mostly in people converting their crypto into fiat before a transaction, so having a very traditional transaction because they want to be able to get title insurance. They're purchasing property from someone they don't know. They want to have title insurance. If you are just transferring the ownership interest in the LLC, you don't have all of the same things you would have with a traditional closing. We are seeing that it was used more or less to make it possible to have this auction and the payment actually happened in crypto, the house in Gulfport. I also see that as being kind of a something that was a good marketing for property, the company that handled it, so it definitely got it into the media and got people talking about it. I don't see that as a trend at this point. I think we're going to see more conventional closings, but with money coming from crypto that's been converted.
Caleb Hinton 29:06
And then broadly just back to the Gulfport deal. One of the questions was, they didn't trade an NFT for the house. The NFT was how they were. In other words, how they documented the deal, right?
Colleen Sachs 29:20
That's exactly right. That's how they documented it. They had an auction so the money actually did come from a cryptocurrency wallet. They had the auction, and the payment was for the interest in an LLC that held title to the house. Then the transfer of that interest in the LLC was documented on blockchain for security purposes, instead of having a deed recorded, transferring the interest in property. So, the deed that is recorded on that house is actually still the deed into the LLC. The LLC interest just transferred and instead of having it not be something that people could see in public, they transferred it on blockchain to keep it secure and safe from anybody coming in and making a change do it that shouldn't.
Caleb Hinton 34:45
The next question, I guess that logically follows from there. Okay, now you've done this deal on blockchain and you have this NFT that is the ledger, if you will, for that deal being done. How do you do the next deal, but based on what you just said, basically, you can still do a good old-fashioned deed out of the LLC into a new buyer it’s just the NFT that kept the ledger.
Colleen Sachs 30:39
Yeah, you absolutely can. You can and for purposes of that, if it's a transfer from that LLC into a third party, then you're going to have a deed out, you're still going to have an LLC that is that the interest in the LLC is represented on blockchain, but it no longer holds title to that property. If it has anything else in it, then it may have some value, but the property just comes out. The other way that they could handle it is they could actually transfer the interest in the LLC and record that transferred to the blockchain as well. So that would show that chain of interest in the LLC.
Caleb Hinton 31:21
Okay. And then, and I've seen some of this in the news. So, I'm actually curious on your answer on this as well, who is the regulatory body on crypto?
Colleen Sachs 31:30
Well, it depends. I mean, right now, there is not a lot of regulation. We're getting more and more than the State's Attorney Generals are coming into play some. We're seeing some states that have a separate for example, Wyoming is extremely blockchain friendly, and we're seeing that regulation through statute in that state, and they have set up regulatory agencies within the state to deal with it. In Florida right now, we're still looking basically at the Attorneys General. And then we see regulation, of course through entities like Fannie Mae, that they have said, if you want to deal with us and you want to use blockchain, these are our criteria. It's very decentralized at this point.
Caleb Hinton 32:15
Right, all over the place. And then with relation to Fannie one of the questions was, are they actually asking that you prove up your ownership of the tokens before you are to do a deal? In other words, wallet to wallet as you put it?
Colleen Sachs 32:32
Well, they don't allow a wallet-to-wallet transfer. Fannie Mae will not allow that they will allow virtual currency if you have converted it to US dollars. If you have a large deposit and this is sort of like if you know it's a source of funds matter for them when if they want to know if you've gotten a gift or if you've gotten money from somebody else, same type of thing. If you're going to have a large deposit, they're going to want you to verify that those funds originated in your own virtual currency account. So, you've got to show that those funds came from you. Just like you might have to show that money came from a bank account when you're doing a closing.
Caleb Hinton 33:08
One last question. Ethereum, are there any other digital, any other blockchains that are being used as a ledger, or is it just Ethereum that seems to be taking point with real property transaction?
Colleen Sachs 33:27
Ethereum is definitely the leading edge in real estate transactions. You’re seeing Ethereum used as the ledger, and then you're seeing the Ethereum tokens used to determine the price like the transaction in Florida was 210 Ethereum. So, you're seeing that for the price. That's really the primary one. You do not see transactions happening really in Bitcoin, very often. They can but they're not really happening in Bitcoin.
Melissa Jay Murphy 34:07
Thanks, Caleb, and thanks for all of those really great questions. And thank you for attending today. I think we've wrapped up our conversation. I hope it's been interesting. I hope it's been valuable. And again, look for us to push this out on our podcast, Title Now, so that if you want to listen to this again, or share it with your colleagues as the easiest way for them to get it, and send me your suggestions for future pop-up webinar topics, I would love to hear from you. And of course, as always, thank you for your support of The Fund.
Real estate transactions involving cryptocurrency may expose the parties to the transaction, the title agency and the underwriter to several unique risks. These transactions may not be insured without a thorough underwriting evaluation and written authorization. Significant considerations include liability related to dealing with unknown parties in real estate investment, unknown sources and payees of funds and valuation concerns. Fund Members who encounter requests to insure a transaction involving cryptocurrency must contact their underwriting counsel for evaluation and authorization. Due to these unique risks, Fund Members are cautioned to refrain from advertising the ability to close transactions involving cryptocurrency. Additionally, closing protection letters will not be issued for these transactions.
Find out about the risks, advantages, and how this may affect YOU in your practice.
Melissa Jay Murphy 0:06
Hello everyone and welcome to The Fund's Title Now Pop-up Webinar. I'm Melissa Murphy. And we host these webinars from time to time for the purpose of bringing you a quick update on a topic or maybe even a new topic. But we want to do this in relation to real estate transactions so that you can keep up to date with what's going on out there in the real estate world. We try to keep these simple, no PowerPoints, just a conversation. And then we push the audio out to our podcast, which is also called Title Now so that you can easily access the information again and share it with your friends and colleagues. It's really easy to subscribe, you can get it wherever you get any of your podcasts and it's free, of course, another benefit of Fund membership.
Melissa Jay Murphy 1:02
So, what are we talking about today? Well, it has been several years since blockchain, and cryptocurrency first surfaced in the real estate transaction world. It was met with confusion and a fair amount of suspicion, I believe. Cryptocurrency continues to gain traction and we are hearing about it quite often in the news and in the media. You now see celebrities promoting the investment in cryptocurrency in fancy magazine ads, and in primetime television commercials. I guess the message is “Be like Matt Damon and invest in cryptocurrency.” But apart from what we are seeing in the media, we are seeing the use of cryptocurrency and blockchain coming back up again in the world of real estate transactions and real estate records. So, I thought it was time to get an update for Fund Members. We are fortunate that one of our very own underwriting attorneys is very knowledgeable about this topic and serves on the Blockchain and Cryptocurrency Subcommittee of the Commercial Real Estate Committee of the RPPTL section of The Florida Bar. The Business Law Section has a comparable committee on which she also serves. So, my guest today is Colleen Sachs, Senior Underwriting Attorney with The Fund. So, before I invite Colleen into this conversation, I want to make sure that all of you watching and listening today know how to post questions on the chat. One of our other Underwriting Attorneys, Caleb Hinton is monitoring the chat for us and so he'll come in at the end of our remarks and read off any questions that you might have asked but go over to the right-hand side of your screen and in that white box, go down to where it says chat. That's where you can insert your question and then under the drop-down box next to the word to pick Caleb Hinton as the person to whom you are sending your question that way it gets directly to Caleb, and there won't be any confusion. So hopefully that will work. We would love to get some questions. So, Colleen, welcome. Thanks for being with me today. And I want to start with some basics just to make sure we are all reminded of what we are talking about. So, tell us, what is crypto?
Colleen Sachs 4:00
Okay, well, crypto is a form of a digital asset. And it's based on blockchain, which is a network that's distributed across a large number of computers. So, cryptocurrency is simply a blockchain token. But keep in mind that crypto is just part of how blockchain can be used and the best-known cryptocurrency is Bitcoin. But there are about 12,000 cryptocurrencies, and that's double the number in the last quarter of 2021. We have about 1000 cryptocurrencies are being added each month.
Melissa Jay Murphy 4:35
I was really surprised when you told me that when we were getting ready to do this webinar. I had no idea there were that many cryptocurrencies and I think that adds to the confusion. But there have to be advantages to using cryptocurrency. So, what are people that are in favor of cryptocurrency saying are the reasons to use it? What are the advantages?
Colleen Sachs 5:01
Well, it's got a number of advantages. It's a fast money transfer without fees. It is a decentralized system that doesn't involve banks and a lot of people like that. It has the benefit of privacy, and it is much easier on international and on overseas transactions.
Melissa Jay Murphy 5:23
Those sound-like great advantages if they are in fact real. But I'll bet there are some disadvantages too. Otherwise, this wouldn't have, or this wouldn't have lagged in its incorporation into real estate transaction. So, what are the disadvantages?
Colleen Sachs 5:42
Sure, possibly the greatest perceived disadvantage in the use of cryptocurrency is the fluctuation of volatility. It's extraordinarily volatile. But some other disadvantages historically been the high consumption of energy involved in mining. All of that is changing. There are some more energy efficient means of mining nowadays, but also the use of cryptocurrency in criminal activities, such as purchases made on the dark web have given it a bad name, and they can have real consequences. There were recent fraud and Ponzi style cases that have involved many millions of dollars. One of them involved a $1.7 billion transaction in misappropriated funds, so they can have a very real downside.
Melissa Jay Murphy 6:31
Well, it seems to me it doesn't matter what type of currency you're dealing in. There are going to be fraudsters that try to jump people out of their money. But certainly, the lack of understanding of cryptocurrency combined with instances of fraud just makes people even more nervous. So, are governments starting to pay attention to this? Are there any regulations or laws out there that govern the use of cryptocurrency?
Colleen Sachs 7:01
Yeah, that's actually considered to be one of the downsides because there's some uncertainty in what the future holds regarding regulation. And we see this coming from regulatory agencies from legislation and from litigation. For example, there was a 2021 case from the United States District Court in the Northern District of Georgia. And it was in affect specific situation, but they found that the transaction for the sale of a house then included a portion of the payment in the form of cryptocurrency was an unlawful sale of unregistered securities. The various Attorneys General in states are monitoring crypto closely. Fannie Mae has new crypto requirements, and then you're going to see rules that are dealing with what they call KYC or “Know Your Customer” and AML which are “Anti-Money Laundering” rules to try to deal with security and FinCEN also comes into play. And then also in the title industry, a title company has to receive payment in fiat or US dollars. So, that can become problematic.
Melissa Jay Murphy 8:07
Certainly, a regulatory restriction on the use of cryptocurrency and I know that Florida, the legislature created and appointed a blockchain task force but that was with a pretty narrow focus, and not so much on regulating the use of cryptocurrency here in Florida. So, it'll be interesting to see if our state government gets involved in this in any way, but I do want to circle back with you about your comment about Fannie Mae requirements. Fannie Mae obviously plays a big role in the world of real estate transactions. So, give us some more information about these Fannie Mae guidelines.
Colleen Sachs 8:55
Okay, well, in fact, the Fannie Mae guidelines say that virtual currency that has been exchanged into US dollars is acceptable for down payment, closing costs, and financial reserves. If there's been documented evidence that the virtual currency has been exchanged into US dollars and held in a US or state regulated financial institution, and the funds are verified in US dollars prior to the loan closing. A large deposit may be made from virtual currency that was exchanged into US dollars. The lender also has to obtain sufficient documentation to verify that those funds originated from the borrower's virtual currency account. The virtual currency may not be used for the deposit on a sales contract for the purchase of the subject property. Once again, it will always have to be exchanged into fiat. If it's a large deposit, then they're going to have to see that this came from the borrower's virtual currency account.
Melissa Jay Murphy 10:04
Those guidelines don't seem terribly inconsistent with current lender guidelines for proof of source of funds. It just makes it very clear that we're not going to verify your crypto currency balance or value. We're going to want you to convert that first but you're going to have to show the chain of custody of your cryptocurrency being converted into US dollars and proving all of that. So those don't seem contradictory or conflicting with sort of the way things have been done in the past. But also, doesn't seem to conflict with our underwriting guidelines. So, it seems like we're going to be fine with Fannie Mae when it comes to cryptocurrency, right. So, let's move to the world of real estate. So why are these topics again something of interest to the title industry?
Colleen Sachs 11:03
That's because it's actually affecting the market now. There was a survey that was conducted by the real estate brokerage firm, Redfin. It showed in the fourth quarter of 2021 nearly 12% or one in nine of first time us homebuyers sold cryptocurrency for either part or all of their down payment. Millennials made up a large part of this number because they’re so many first-time homebuyers in that range. Another interesting point is that there's some speculation that some of this is tied to the pandemic. There was an increased interest in crypto by people who had jobs during the pandemic. They had extra money because they weren't traveling, they weren't going out to eat as much and they started dabbling in crypto in their abundant spare time. But you have to keep in mind that fiat and in our case, US dollars are still going to be needed for things such as recording and other closing costs. So, contracts that involve crypto need to address that fact. You're going to have to have US dollars at some point and they're going to need to address who takes on that conversion risk. There are some also some new areas in the industry, new companies that are popping up to serve this industry. Companies that verify that the currency that's being transferred and companies and payment processors who coordinate the transfer of the currency. All of those things are going to make the transaction much safer than a pure wallet to wallet transfer. We don't have this in Florida yet. But Wyoming and Nebraska have both authorized digital banks.
Melissa Jay Murphy 12:38
Oh, yeah. Well, that will be an interesting change if that comes to Florida. But all these things that you mentioned, sound to me like the market is being affected by the consumers desire to utilize their cryptocurrency value to buy a house. So, they are required by various regulators to convert that to US dollars in order to operate in our world. But it seems like that is a factor now because when the buyer is asked “Where are you getting your money?” They say, “Well, it's in my cryptocurrency account.” So, everyone involved in real estate transactions needs to understand what the process is to take that cryptocurrency value and turn it into US dollars. So that we can get a contract written, we can comply with the lenders requirements who wants to comply with Fannie Mae requirements, we have to comply with our title insurance regulations. So, I love seeing changes in the industry coming from the consumer because usually it's from the government down and this is something that's coming from the consumer and bubbling up. I like it. So those are general things that are happening, but what's I mean, are there examples of cryptocurrency being used in Florida transactions?
Colleen Sachs 14:20
Yeah, there are and while Florida doesn't have all the regulation and things that some of the other states do, Florida is on the leading edge of transactions that are involving blockchain and cryptocurrency. There are different ways to use it. You can use it by selling crypto to get US dollars for closing as we've been talking about. You can transact directly in cryptocurrency, or you can create a non-fungible token that is used to document the transaction. So, for the first one, selling the crypto to get the US dollars, that's basically the same type of real estate transaction we're doing now. With the other two. We've got two really good examples. They've got the sale of a four-bedroom penthouse in the art building in Surfside that set in Miami Beach price per square foot record of $4,440.50 a square foot. The sale price was $22.5 million dollars. That transaction was completed in cryptocurrency which makes it the largest known crypto real estate transaction. In this case the conversion risk was on the buyer. So that was directly transacting it in cryptocurrency.
Melissa Jay Murphy 15:28
So, when you say the conversion risk was on the buyer, the buyer took the risk that the Ethereum value could go up, but they were still obligated to pay the seller at the same number of Ethereum.
Colleen Sachs 15:50
Correct
Melissa Jay Murphy 15:59
How do they refer to the cryptocurrency in a contract? Because you know, when you say $250. How do they refer to it in contracts?
Colleen Sachs 16:12
They're actually just referred to by the number of the item just like we do in dollars. So, we would talk about it in however many Ethereum. Another case that we have was dealing with the sale of a residence in Gulfport Florida. In that case, the sale price was 210 Ethereum. At the time that represented about $653,000 in US dollars. That was an interesting one because the home's ownership was by the award of an NFT or a non-fungible token. The home was titled in an LLC, and then the transfer of the LLC interest to the purchaser was represented by an NFT that was documented on the blockchain. So, it was kind of interesting. You won't see a deed. You'll see a deed into the LLC. But then the actual transfer was done by the transfer of the interest in the LLC, and it's documented by the award of an NFT.
Melissa Jay Murphy 17:20
Wow, so this adds yet another aspect of these cryptocurrency slash blockchain transactions that Fund Members need to know about. So, talk to us about how NFTs work non-fungible tokens.
Collee Sachs 17:36
Sure, an NFT, a non-fungible token, by their name or they are limited in number which creates scarcity. In the hope of the creator of the NFT it also creates value. So, an NFT has a unique identifying code. It’s not interchangeable hence it being non-fungible, it can be authenticated. The authenticity is very secure, because the NFT is on the blockchain. So that transaction is going to be encrypted. The network can then decrypt it for the transaction, it verifies it, it authenticates it, and then it records it in an unmodifiable environment. This has gained a lot of popularity. You see NFTs talked about a lot in the sale of digital art and sports related videos. As seen in the Gulf port transaction, it's now part of the real estate world.
Melissa Jay Murphy 18:40
When you say that NFTs are limited in number, explain that, who controls setting that limit?
Colleen Sachs 18:50
The creator of the NFT sets the limit. In the case of a sale of a piece of real estate, if you've got one purchaser that's buying the real estate, the number of NFTs are going to be one. You may have some kind of digital art that they may want to say, “Okay, I'd like to be able to sell this to 100 people or 1000 people,” sort of like you would see like a numbered print. The NFTs can be any number, but the fewer would tend to be the more valuable and in the case of real estate, generally it would just be one.
Melissa Jay Murphy 19:28
Can the owner of an NFT for example, the sole member of this LLC, that owns this house? Can they create undivided interests in an NFT?
Colleen Sachs 19:47
Sure, they can. It's just like you would own any other asset you can create interests in it. Right.
Melissa Jay Murphy 20:00
Well, that may be a topic for a whole separate webinar when Members start asking questions about that. All right, so we've talked about cryptocurrency. We've talked about NFTs and how they're playing a role in real estate transactions, but we haven't really talked much about blockchain. So again, back to basics. Tell us again what blockchain is.
Colleen Sachs 20:26
Sure. So blockchain, it's an unchangeable, distributed digital ledger. It's going to be a ledger that shows ownership and everything just like any other ledger would. It's not changeable. It's going to be stored in multiple places on a peer-to-peer computer network. So, you've got computers all over the place that are going to be storing this information, and that makes it secure because if it's changed on one computer in the network, that will show that it's been changed on the other computers. So, it makes it a lot more secure because you are automatically alerted that there's been a change on the blockchain.
Melissa Jay Murphy 21:10
So that's how you can know that this NFT hat represent your interests in this LLC is not going to be transferred inappropriately or fraudulently because it shows up on all these different computers. And they would say, wait a minute, that's not supposed to be messed with.
Colleen Sachs 21:30
Exactly.
Melissa Jay Murphy 21:31
How is blockchain now being used in the real estate industry? What are the new things that you're seeing out there on that?
Colleen Sachs 21:45
Oh, it's got some really excellent applications in real estate, I think it's going to be much more widely accepted much more quickly than the use of crypto, while crypto has a fair amount of downside because of volatility, and bad actors, blockchain doesn't. It has the advantage of being very secure. We're seeing timeshare developers documenting ownership interests on blockchain that creates NFTs that represent that interest. The same goes for commercial real estate leases. It's already being used in recording real estate records in some states. Not in Florida yet, but in other states. The benefit is there's greater efficiency due to the digitization of the process and it's an accurate record of ownership that updates in real time.
Melissa Jay Murphy 22:38
But let me ask you about the use of blockchain and real estate records because in Florida, of course, we have a very broad public records law. And we're very protective of that and of the public's right to access public records. So how would a citizen be able to access real estate records on blockchain?
Colleen Sachs 23:10
Well, they will have the same access as they have now. Looking at the computer and actually in some areas, where they're recording documents, deeds and things like that on blockchain, you will see a deed that will be stamped with a QR code. You can then put your phone camera over that QR code, and it will bring up the copy of that deed. So, it is something that can be set up. It can be very private, particularly when you're dealing with NFTs but you can have the blockchain be open, very open to the public as well. It’s tamper proof and disaster resistant since it's this decentralized ledger. If something goes down, if we have a storm and it takes out a courthouse, that has the server in the courthouse, instead of the records just being destroyed and losing them. It would be accessible through one of these other computers on that peer-to-peer decentralized ledger. We've got some areas are actually recording things on blockchain right now. South Burlington, Vermont has partnered with Propy, who was the company that did the Gulfport Florida transaction, to develop a blockchain based deed registration system that's going to store deeds on the Ethereum blockchain. Cook County Illinois has a blockchain pilot program in their office of the recorder of deeds. In what is the most blockchain friendly state, Wyoming. Teton county is putting all of its land transaction records on blockchain. That doesn't mean it's going to make title searches unnecessary, but it is going to make the searches more efficient and more reliable. It gets rid of the ability of someone to alter records in the courthouse so it's just very, very secure.
Melissa Jay Murphy 25:05
Interesting. Well, it'd be very interesting to keep an eye on this trend of utilizing blockchain, for the recording of public records. That's something that the industry is going to have to pay a lot of attention to. Lots of great information, certainly new stuff going on new ways that these new types of currency and representations of ownership are being used. What would you say are the five takeaways for a Fund Member from this conversation?
Colleen Sachs 25:47
Well, Fund Members need to have some level of awareness of this trend than the industry because things are happening now. They need at least a very basic knowledge of the fundamentals when they're dealing with contracts. If your client is involved in a transaction involving cryptocurrency, you need to understand who was going to take the risk of volatility of the currency and you're going to also have to determine who is going to have to fund the closing cost with US dollars. Keep in mind that our underwriting position has not changed, we are not able to ensure wallet to wallet transactions. So said another way crypto has to be converted into US dollars, simultaneous with or before the closing for the entire transaction. But be aware that if you're dealing with Fannie Mae you may have to prove that source of funds. Then be aware that this concept of an NFT has been used to document ownership and an LLC. And just stay alert for any aspect of this that's coming to Florida because it's not a matter of “if” but a matter of “when.”
Melissa Jay Murphy 27:00
Well, I would agree with all of those takeaways. I would also be so bold as to say that as things change and any aspect of this comes to Florida, you will hear it from us here at The Fund as soon as we hear about it, so we will keep you up to date. Caleb, are there any questions out there from the attendees?
Caleb Hinton 27:22
Yeah, we actually got quite a few. The first one was with relation to NFTs and using NFTs instead of a deed. What is the trend? Because you were talking about at the end some of the advantages related to the security of using NFT on the blockchain to record and follow the chain of title. Do we see it going towards using NFTs in lieu of deeds in the traditional sense, or is it just kind of this niche thing right now that people are kind of playing with?
Colleen Sachs 27:55
There isn't really a trend because there are different ways of doing it. If there is a trend, it is mostly in people converting their crypto into fiat before a transaction, so having a very traditional transaction because they want to be able to get title insurance. They're purchasing property from someone they don't know. They want to have title insurance. If you are just transferring the ownership interest in the LLC, you don't have all of the same things you would have with a traditional closing. We are seeing that it was used more or less to make it possible to have this auction and the payment actually happened in crypto, the house in Gulfport. I also see that as being kind of a something that was a good marketing for property, the company that handled it, so it definitely got it into the media and got people talking about it. I don't see that as a trend at this point. I think we're going to see more conventional closings, but with money coming from crypto that's been converted.
Caleb Hinton 29:06
And then broadly just back to the Gulfport deal. One of the questions was, they didn't trade an NFT for the house. The NFT was how they were. In other words, how they documented the deal, right?
Colleen Sachs 29:20
That's exactly right. That's how they documented it. They had an auction so the money actually did come from a cryptocurrency wallet. They had the auction, and the payment was for the interest in an LLC that held title to the house. Then the transfer of that interest in the LLC was documented on blockchain for security purposes, instead of having a deed recorded, transferring the interest in property. So, the deed that is recorded on that house is actually still the deed into the LLC. The LLC interest just transferred and instead of having it not be something that people could see in public, they transferred it on blockchain to keep it secure and safe from anybody coming in and making a change do it that shouldn't.
Caleb Hinton 34:45
The next question, I guess that logically follows from there. Okay, now you've done this deal on blockchain and you have this NFT that is the ledger, if you will, for that deal being done. How do you do the next deal, but based on what you just said, basically, you can still do a good old-fashioned deed out of the LLC into a new buyer it’s just the NFT that kept the ledger.
Colleen Sachs 30:39
Yeah, you absolutely can. You can and for purposes of that, if it's a transfer from that LLC into a third party, then you're going to have a deed out, you're still going to have an LLC that is that the interest in the LLC is represented on blockchain, but it no longer holds title to that property. If it has anything else in it, then it may have some value, but the property just comes out. The other way that they could handle it is they could actually transfer the interest in the LLC and record that transferred to the blockchain as well. So that would show that chain of interest in the LLC.
Caleb Hinton 31:21
Okay. And then, and I've seen some of this in the news. So, I'm actually curious on your answer on this as well, who is the regulatory body on crypto?
Colleen Sachs 31:30
Well, it depends. I mean, right now, there is not a lot of regulation. We're getting more and more than the State's Attorney Generals are coming into play some. We're seeing some states that have a separate for example, Wyoming is extremely blockchain friendly, and we're seeing that regulation through statute in that state, and they have set up regulatory agencies within the state to deal with it. In Florida right now, we're still looking basically at the Attorneys General. And then we see regulation, of course through entities like Fannie Mae, that they have said, if you want to deal with us and you want to use blockchain, these are our criteria. It's very decentralized at this point.
Caleb Hinton 32:15
Right, all over the place. And then with relation to Fannie one of the questions was, are they actually asking that you prove up your ownership of the tokens before you are to do a deal? In other words, wallet to wallet as you put it?
Colleen Sachs 32:32
Well, they don't allow a wallet-to-wallet transfer. Fannie Mae will not allow that they will allow virtual currency if you have converted it to US dollars. If you have a large deposit and this is sort of like if you know it's a source of funds matter for them when if they want to know if you've gotten a gift or if you've gotten money from somebody else, same type of thing. If you're going to have a large deposit, they're going to want you to verify that those funds originated in your own virtual currency account. So, you've got to show that those funds came from you. Just like you might have to show that money came from a bank account when you're doing a closing.
Caleb Hinton 33:08
One last question. Ethereum, are there any other digital, any other blockchains that are being used as a ledger, or is it just Ethereum that seems to be taking point with real property transaction?
Colleen Sachs 33:27
Ethereum is definitely the leading edge in real estate transactions. You’re seeing Ethereum used as the ledger, and then you're seeing the Ethereum tokens used to determine the price like the transaction in Florida was 210 Ethereum. So, you're seeing that for the price. That's really the primary one. You do not see transactions happening really in Bitcoin, very often. They can but they're not really happening in Bitcoin.
Melissa Jay Murphy 34:07
Thanks, Caleb, and thanks for all of those really great questions. And thank you for attending today. I think we've wrapped up our conversation. I hope it's been interesting. I hope it's been valuable. And again, look for us to push this out on our podcast, Title Now, so that if you want to listen to this again, or share it with your colleagues as the easiest way for them to get it, and send me your suggestions for future pop-up webinar topics, I would love to hear from you. And of course, as always, thank you for your support of The Fund.
Real estate transactions involving cryptocurrency may expose the parties to the transaction, the title agency and the underwriter to several unique risks. These transactions may not be insured without a thorough underwriting evaluation and written authorization. Significant considerations include liability related to dealing with unknown parties in real estate investment, unknown sources and payees of funds and valuation concerns. Fund Members who encounter requests to insure a transaction involving cryptocurrency must contact their underwriting counsel for evaluation and authorization. Due to these unique risks, Fund Members are cautioned to refrain from advertising the ability to close transactions involving cryptocurrency. Additionally, closing protection letters will not be issued for these transactions.
These Agreements obligate an owner to pay a real estate commission, contain covenants running with the land, and potentially create a lien against the property that could be adverse to a buyer. Don’t be caught off guard if one of these appears in your title search.
Melissa Jay Murphy 0:05
Welcome to The Fund's Title Now Pop-up webinar. I'm Melissa Murphy with The Fund and we do these webinars from time to time, on relevant or developing topics. They're free. So we don't offer CLE because we want them to be as spontaneous and conversational as much as possible rather than instructional. That's why we discourage PowerPoints because we really want there to be a conversation between the speakers and we also have a an ulterior motive, which is to push the audio out to our podcast, which is also called Title Now. You can get the podcast wherever you subscribe to other podcasts. So sign up now. We are going to take questions at the end of our prepared remarks. So if you have a question about any of the information that we talked about, just put something in the chat, and we have John Benson, who is very overqualified to monitor the chat, but he offered to do it, so I took him up on it. And then at the end of our prepared remarks, we'll see what questions you might have. Joining me today is Brian Stringer. Brian is one of our Fund underwriting counsels. We are here to talk about memorandums of agreement that are popping up in the public records around the state, in fact, around the country. And these agreements create what many people feel are surprising obligations on the part of an owner of property who might become a seller of that property in the future. And some of these obligations may bleed over to the buyer also. So Brian, tell us what these agreements are all about.
Brian Stringer 2:06
Well, these agreements basically what they provide us is in exchange for an up front payment of money, which can be anywhere from a few $100 to several $1,000. The owner obligates themselves to list their home with a specific broker if they decide to sell because on provide that the owner role of commission typically 6% upon the sale.
Melissa Jay Murphy 2:23
Well, how long did these obligations typically run?
Brian Stringer 2:28
Well, that's the thing that makes things a bit unique. The typical listing agreement may last for a few months or up to a year, but we've seen these agreements with terms for as long as 40 years
Melissa Jay Murphy 2:37
40 years. Does it apply only if the owner wants to list a property with a broker? What I'm getting at is the owner allowed to sell their home on their own a FSBO?
Brian Stringer 2:53
Well, that's a great question and unlike a typical agreement the owner can't sell their home on their own. These agreements, again, it's gonna depend on the individual agreements, because there's a few that are out there, but the commission is likely due even if they sell without the use of any broker at all. Even if the commission is not due, for some reason, many of the agreements that we've seen have a fee that's triggered by any transfer of the property, even a gift or a conveyance with no consideration.
Melissa Jay Murphy 3:17
Well, I would, I would hope that it only covers a voluntary sale or conveyance, but do the typical agreements that you've seen cover any type of transfer of ownership? I mean, what if the owner dies?
Brian Stringer 3:34
Well, yes or no. That's an interesting wrinkle with these agreements as well. If the owner dies and title transfers to an heir beneficiary there's no fee due, but only if the heir beneficiary agrees to assume the obligations under the current agreement.
Melissa Jay Murphy 3:49
So these agreements that you've seen would cover a transfer resulting from death if the heirs don't agree to assume the obligations that would obligate them upon the future sale of a property.
Brian Stringer 4:03
That's correct.
Melissa Jay Murphy 4:05
What about other types of involuntary conveyances like a foreclosure or something of that nature? Are those transfers also covered?
Brian Stringer 4:17
So they are and so some of those are specifically outlined in the agreements that say a transfer and foreclosure voluntary/involuntary transfer are often listed as what they call the triggering events which requires a payment, not typically the full 6%, but some other amount is calculated based upon the value of the property.
Melissa Jay Murphy 4:35
So it sounds as if the exact terms of these agreements are dependent upon the wording of the agreement, which of course is true of any contract. And these vary depending upon who the broker is and what iteration of their contract they happen to be using at that time. But what are other types of provisions that you are commonly seeing in these agreements? Is there any way for the owner to opt out of this obligation?
Brian Stringer 5:11
There is. Once they've agreed to list with the broker, they're sending these agreements most of the agreements have come from an early termination or cancellation provision, and they usually provide that the owner can opt out by paying an early termination fee, which is typically equal to a certain percent of the fair market value of the property as determined by the broker or the other party to the agreement. So that's the difference is that the broker is the one that's going to calculate the early termination fee at the time the other seats determine.
Melissa Jay Murphy 5:38
Is there any provision for the owner to challenge or arbitrate or negotiate that value that the broker determines? Have you seen anything like that in these agreements?
Brian Stringer 5:51
I have in respect to arbitration. I have seen that there is a requirement to arbitrate disputes or new agreements but specifically with respect to the calculation, that early termination fee and fair market value, which you would typically see in a contract where an each party would say, "I think this is a fair market value," and other people would say "I don't think that's the fair market value" and a third arbitrator would come in and say "This is a fair market value." The ones that I've seen just provide that the broker is going to determine the fair market value.
Melissa Jay Murphy 6:17
Well, I can see where that would be a possible point of contention. But let's move away from the provisions of the agreement and talk about what you've seen happen out in the real world. What have you seen happen if the home is sold, and the broker that was a party to these agreements is not "Hey, what's happening?"
Brian Stringer 6:44
We've seen that and the odd thing about these is they don't make a demand for payment from the party. We enter into the brokerage agreement. They're making demands for payment from the buyer, subsequent owner, not the seller of the product.
Melissa Jay Murphy 6:57
On the buyer? how can they leverage the buyer to pay this fee when they weren't even a party to the agreement to start with?
Brian Stringer 7:08
As we've seen from these agreements, the brokers have hired very competent and clever attorneys and the obligations that they create in these agreements, they purport to be covenant with the land. So that's how they get the buyer or any other successor an interest obligated is that these obligations attached to the property and they're not independent contractors.
Melissa Jay Murphy 7:27
So the obligation to list with this particular broker is an ongoing obligation for every future owner of the property?
Brian Stringer 7:41
It appears the plain reading of these agreements is that they are going to be obligating every future owner of the home for up to four decades versus they could expire on their terms for the passage of time, but in the intervening term, they obligate everyone who owns that property.
Melissa Jay Murphy 7:55
Well, I have read some of these agreements and the ones that I have read, contain language to the effect that the broker has a lien against the property, if title transfers and they aren't paid their commission, so it's a springing lane, or lane that will come into existence. And so is that part of the demand that's made on the buyer? You know, something to the effect that foreclosure of that lane will begin if they don't pay this fee?
Brian Stringer 8:32
That's exactly what we've seen. So we've seen demands for payment on a subsequent owner, and they're not used to demand for payment. They've been accompanied oftentimes by a draft foreclosure complaint. This way the owner knows that they don't fulfill the demand that the broker is ready, willing and able to go to court or close their lien interest.
Melissa Jay Murphy 8:50
Well, this seems to be the real heart of the problem from The Fund's perspective. I mean, certainly we want to make Members aware of these agreements, they are out there in the practice. But what we are focused on and most concerned about is delivering clear title to our proposed insured. So how are we dealing with a potential assertion of this lien when one of these agreements show up in a title chain? And, and by the way, what exactly shows up in the public records?
Brian Stringer 9:31
Good point, what we're seeing in the public record typically, we're not seeing, at least I have not seen that full agreement. What we're seeing is either a memorandum of agreement or a memorandum of interest, which is signed witnessed notarized in part by the owner. So it can be recorded. And it's very similar, to what you see with a memorandum of lease. It's just putting the public on notice that this agreement exists and here are the basic terms. You can contact this party in order to proceed.
Melissa Jay Murphy 9:58
So are we addressing these things in our commitments?
Brian Stringer 10:05
We are and just started with creating a new Schedule B-1 requirement. It's going to be included in the commitments on the properties where we find these memorandum of agreement because the we've drafted requires that the period be terminated in any lien released. This is a new clause that Members likely have not seen yet. From what we have gathered, we're going to begin seeing these quite frequntly. So the Members should pay really close attention to the commitments when they come in and see where this requirement is called.
Melissa Jay Murphy 10:33
And you you mentioned the word "They will start seeing these frequently." I have heard anecdotally, I can't say I've done any kind of independent verification, but I have heard anecdotally that there are 1000s of these memorandum of agreement are recorded in the public records just in Florida, just in Florida. So it does seem as though this will be something that Members will see. So it's going to be a Schedule B-1 requirement. That they get a termination and release. So how do they go about getting that?
Brian Stringer 11:12
Well, as you can imagine, there's contact information for the broker in these memorandums of agreement. They they've made it quite straightforward to obtain and release the agreement. What they're going to do the the owner, the seller is going to have to contact the broker and confirm either confirm the amount for the release or negotiated release the payment in exchange for the release and termination. And because these things are so new, and we've not seen many of them satisfactions and releases we're going to underwriting review any proposed release termination. So if a Member does see this on the Schedule B-1, the owner wants to get through release termination, Members should send it to underwriting. So we can review the terms and make sure that it adequately releases the property not just the lien for the commission, but the covenant running with the land.
Melissa Jay Murphy 11:56
Yeah, I was gonna make that point. Our position is we not only want to terminate or release the lien, but we want to terminate the agreement so it's no longer a covenant running with the land.
Brian Stringer 12:12
Absolutely, because it's not clear from from my analysis, whether once you listed with the broker and paid a commission that you've satisfied the agreement from the plain terms of the agreement is going to continue for every subsequent sale.
Melissa Jay Murphy 12:23
Got it. So I may have missed this in your comments, but is there a contact information in the agreement so that the Member knows where to go to talk about getting this termination and release?
Brian Stringer 12:41
So that's a great question. In the memorandums of interest there we've seen do have a contact information for the broker, because they've actually made it quite easy to contact them and get the release and they tell you how they're going to give it to you. So these problems are not insurmountable title problems that we're going to see that are going to be completely derail a transaction. They are solvable. There's contact information in the Memorandum of Agreement and there's a mechanism for determining.
Melissa Jay Murphy 13:07
So, Brian, if you're going to sum this situation up for a Fund Member, what points would you make?
Brian Stringer 13:17
Well, I would reiterate one of our primary points that we always tell our Members and that's first of all, review your commitments very carefully to see what are your requirements, what are the exceptions, see if one of these things does in fact affect your property and if you have a commitment that was delivered prior to this webinar, or prior to The Fund, to the your general counsel blog. Look at your B-2s because sometimes these exceptions were showing up on the B-2s and some Members were looking at it very similar to the declaration of condominium or CCR is to just keep it on B-2 moving forward because the property is subject to so if you do have a commitment that was delivered some weeks ago, I advise that they look at the B-2 exception very carefully.
Melissa Jay Murphy 13:56
Very good point because we are undertaking to train our examiner's on what these agreements are and the requirement that they be treated such that there's a B-1 requirement, but just to be sure Members ought to also check the B-2 exceptions agreed. And if there's nothing there at all, do you have any advice for a Member?
Brian Stringer 14:23
I suggest that even there's nothing there, you know, ask your seller if you sign any sort of a listing agreement, do you have any outstanding agreements with respect to listing or selling your property? And if there is an agreement of record, talk this seller about what needs to be done just as an explained to them there is a mechanism to release them. There is a way to terminate the covenant running with the land and does this needs to be counseled with the seller and they can satisfy the requirement. If you do if the seller is going to satisfy be sure to get a proper release and termination, and we would advise the Member to obtain the release and termination record of themselves.
Melissa Jay Murphy 14:57
I would agree with that. Particularly if it's a B-1 requirement. And it's interesting that you make the comment that you should talk to the seller and explain to them what needs to be done. I agree with that 100%. Because if in fact the Member has been sent a transaction and there's no listing agreement or a broker involved, or a listing agent involved in the transaction, but you then see one of these agreements shown on your commitment, and it may very well be that the seller does not understand clearly or has ignored their obligation under this agreement to list with that particular broker. So it would be important for you to reach out to to the seller and ask them questions and explain to them that this agreement is there and we need to arrange for a release. Very good point. John Benson. Are there any questions in the chat so far?
John Benson 16:05
I just got unmuted by the master. No Melissa, there are no questions being asked at this point.
Melissa Jay Murphy 16:13
Perfect. Then we will wrap this up here by first thanking Brian for his time and energy and putting together all this information but I also want to offer some comments. These agreements are new, and to some people really a bit shocking. And I want to be clear that we are not expressing any opinion on their legality or their fairness or the business practices of any of the companies involved in this. The sole purpose of the webinar today is to make Fund Members aware that these agreements exist. Explain to them how they affect title and and how you can address the issue in connection with your particular closing. So Brian, and I hope that this has been useful information to you.
Melissa Jay Murphy 17:17
And this is a perfect example of what we're trying to do with these pop up webinars. Just sort of in and out quick information, new issues out there for you to deal with. So thank you so much for attending. And don't forget, we're gonna push this audio out to our podcast which is also called Title Now and keep an eye out for future podcasts that we are putting together because we're trying to sort of reinvigorate these things and offer them a bit more regularly. And as always, thank you for your support of The Fund. Thank you
Learn the latest on sophisticated schemes targeting businesses like yours and what you can do to protect yourself.
Melissa Jay Murphy 00:06
Hello, everyone, welcome to the Title Now Pop-up webinar. I'm Melissa Murphy with The Fund and I am relaunching these webinars after taking a fairly significant break. So, thank you for tuning in. Because it's been several months since I hosted a webinar, I thought that I would make sure that all of you know we also have a podcast I feel very modern and with it. The podcast is also called Title Now and I generally push the audio from these webinars to the podcast and will be doing that with today's presentation. The podcast is available through all of the typical channels so sign up and take advantage of all the great content that we have in the podcast.
So, what are we talking about today? We're talking about cyber fraud and why cyber fraud because it is the number one threat to our industry. It's the number one threat to your business. Despite that reality I fear that so many people in the closing business have heard about cyber fraud over and over and over again and I know I nag about cyber fraud over and over again. You've become sort of resigned to it. You've made minimal gestures toward protecting yourself perhaps setting up some procedures you've made minimal efforts to really keep up to date with what's going on out there in the world of cyber fraud. You're basically rolling the dice on whether you will be the next victim and honestly in today's market, unless you have $400,000 or $500,000 set aside in your rainy-day fund, you are really taking a chance. So, I feel like because this threat to our industry has evolved over the past year. Things have changed and in who's behind this and how they're, what their business plan is, what their workflow model is. And those changes are not good for us. The criminals have figured out that preying on our industry is pretty darn lucrative and apparently not that hard. So, I thought it was a great time to revisit this topic give you an opportunity to learn more about who is behind this crime, how they view our industry and how they have identified our weak points and how they can get in.
We have two gentlemen with us today that are on the frontlines of this war and yes, it's a war. They're going to share their knowledge, expertise, and advice on what the industry and you need to understand and what you need to do to address this threat. So first, I have with me, Tom Cronkright. Tom's an attorney in Michigan, but much more importantly than that Tom is in a closing business. He has a title agency Sun Title, it's a high-volume agency, and he also has a company CertifID, that's in the business of safeguarding money in real estate deals and through this process through this life experience, Tom has become one of the real estate industry's leading experts on cyber fraud and he is committed to solving the largest problem in real estate. And he's so good at this, that the Secret Service has partnered with him. We have Steven Dougherty here from the Secret Service. And as you can see from his impressive background, he's with the Global Investigations Operation Center for the Secret Service.
Tom and Steven, let's get started. What's happening in the world of cyber fraud, business email fraud? What do we need to know?
Tom Cronkright 4:28
Steven, I'll let you take this but Melissa, thanks for taking the time and just spreading more and more awareness on this topic. You do such a nice job, appreciate the tee up. But Steven, why don't we read you in we've had a very very active year and a half together and as far as combating BEC, or business email compromise and wire fraud. But as Melissa mentioned, a little bit more background but I'm a wire fraud victim as well. So as an attorney, title agent, I've been through this process. Unfortunately, in 2015, it cost me nearly $200,000 and ended up in a high-profile federal trial down in Tampa. So, when Melissa mentioned that I've become a subject matter expert, I just paid a lot of tuition in this realm that these are courses I did not want to take. As a title agent or lawyer, I don't remember a cyber fraud and money laundering class in law school. I remember tax and corporations secure transactions, but that's it. Steven, you could be read the group into what we're seeing at a high level and how that starts to work its way down into the real estate.
Steven Dougherty 05:40
Yes, where I sit in a very unique position here. I'm at Secret Service headquarters in Washington DC. I'm in a desk here called our business email compromised mission desk, in which my unit gets in pretty much real time aggregative incidences cyber enabled financial fraud affecting every industry. These guys are threat actors are targeting every industry out there where financial transactions are taking place. You know, every industry has it, but where's it most visible? It's most visible in the real estate sector. So, they've really turned their sights on the real estate sector for the past several years and they continue to focus on it because there's so many different transactions involved in real estate transactions. You have your closing, you have your mortgage payoff, you have your earnest money deposit. All of these things are being targeted by our threat actors, and it is driven by one thing. The intersection of what I call contemporaneous and privileged information between your buyer and seller, your real estate and closing attorney they will be the only the ones you would think would have the information like the Closing Disclosure, mortgage payoff documents, anything involving the transaction, but that gets intercepted by our bad actors. And then they weaponize that against you. To get you to redirect transfers of funds, send a payment somewhere you shouldn't stuff like that.
Tom Cronkright 7:03
Steven when you say that they're visible. What do you mean that real estate transactions are uniquely visible?
Steven Dougherty 07:10
Just the information is out there, due to the real estate sector types of reporting information. Tom, you know, you and I have talked about this a lot about how much of open-source information is available for us to go get or for our threat actors to go find. They can use that, piece it together and then uses that to do a very, very targeted attack. That's so specific that fools even the most complex or educated individuals to spend their money.
Tom Cronkright 7:38
Yeah, what we've seen I want to layer on it mostly, if you don't mind. I went two minutes on this because I think the framework of where we are right now creates unique vulnerabilities than when I was hit in 2015 as an agent. So, if we think about the multiple listing service, all of our real estate partners that feed us deals that we're codependent on have an obligation to post up activity on the MLS. That MLS has contracts with Zillow and Trulia and a realtor typically for money to syndicate or buy that data in real time. So, what's interesting is real estate, being now the largest asset of people's lives, and there's not a close second given appreciation. I don't know if you guys saw the NICU from ALTA this morning, but home prices went up another 15% last year. That not only is that the largest asset of people's lives, it's the most visible transaction that we have in the United States. Car purchasing and other high value assets those are happening between, you know, kind of behind the curtain but not real estate. Because of the open market process that a listing agent has to conduct to get highest best use or highest best value for a property and then the fraudster just mine these deal boards. Say “Oh, looks like Norma is listing her house” and “Steve is listing his house” and listing you know, my whatever it happens to be. And then through phishing strategies, these real estate agents have the security of a dumpster essentially, on a super warm day. And they're just exposing us and I'm just going to say it because look, not every time but let's just say in most cases, and then we don't know that all the information that Steven is saying contemporaneous and privileged is being scraped and analyzed overseas, to then trick a homebuyer.
And again, let's talk about homeownership right now. There is no inventory. We fell below 1 million listings last month there are more licensed real estate agents in the country than there are homes for sale for the first time that they've been tracking inventory levels. Run the math. By about a few 100,000, we have 3,800 licensed real estate agents in Greater Grand Rapids. This morning we had 900 listings. So, what does it take to buy a parked property? I've got an employee right now at CertifID. She missed out on three offers. She's been through 12 homes she was high fiving me last night almost crying in a text. “Oh my gosh, we got one right.” They’re going to do anything they can to close that. When they get to the end three weeks from now and are asked to transfer money, if they're not set up for success, that buyer anxiety and that buyer fatigue, at a time when we need them more protected, I would argue creates more vulnerability because look I'm not going through that process again. So, I'm going to do whatever you need. If you're saying I don't need to bring a check anymore and I’ve got a wire funds. Tell me where to send that wire. Steven, I think you'll agree we saw that over and over and over and continue to every week that we're involved in recovery efforts.
Steven Dougherty 10:56
Yes. Talking to you touch on some really good points. So, let's talk about how these compromises are actually occurring. How are they actually getting in and getting this information out? What they do is through multiple different means either through already having your password for your email account that's already on the dark web through a data breach compromise. You guys actually go to a website Have I been pwned? https://haveibeenpwned.com They've been your email address and see if that email address was involved in any of the large-scale data breach compromises. They'll take that information, find your old password, try to use that to log into your account. That's one way to do it.
Another way they'll attack is through a targeted phishing email, where they'll send you an email with a document to click on for some reason. You click on it because you think you're supposed it brings you to a web page. You type in your email address and password and boom are bad actors now your email address and password. And once they have that information, they go in and they log into your email account. They only log in one time. Generally, what they do is they'll go to your settings, and they'll set up an email rule to auto forward out any email you receive. So, you get an email from your client or homebuyer saying, “Hey, I've been told to close yeah, these are the details I have. What do you have?” Now our threat actor has all that information. That's how they get it. They only log in once, they setup the email rule, and the emails are built around that.
Melissa Jay Murphy 12:29
Steven, I'd had a question on the chat for you. Oh, Tom already responded to the question. He is spot on. So, we have put in the chat the website that you go to see whether or not your email has been compromised and is out there on the dark web. https://haveibeenpwned.com So that's all.
Steven Dougherty 12:50
Yeah, essentially, essentially, it's a website that conglomerates a bunch of different data breaches, and you know, going back for years, so your email address was involved in one of these. It will ping that and show you. That's why it's important to really keep your passwords updated, use new passwords, and don't repeat passwords. These threat actors, they just see that information, and they just start trying it in different places and they get lucky.
Tom Cronkright 13:20
Steven let's stay on email accounts because they just seem to be the genesis of all things bad when they're compromised. Not only complex password, but can you speak a little bit about the importance of email settings and analyzing email settings. I think if this industry is ever going to set up Lunch and Learns this year is training our referral partners to identify whether their email accounts have been breached. This is one way but within the email account have rules been set up where their email account is being monitored in real time. They just don't know it and how you prevent it.
Steven Dougherty 13:58
So essentially, like I said, these guys log into your email account just once, they go into your settings and they set up a setting or filter to auto forward out of all your emails that way and it’s not only that, they're deleting everything that gets auto forwarded out. They can tailor it to be very specific that you'd have it say you know, any email that uses the word “wire” or “account” or “payment”. I want you to filter that out to another email account and then delete it. So, it is very targeted with that. What we recommend and what you really should be doing along with changing your passwords very regularly, as you change your password every time go in and check those settings and make sure no unauthorized settings have been set up. You can also actually automate that through different your IT groups if you have them. Your IT groups can even, especially if you're using suite like Office 365, can be set up a way to monitor all email rules that are set up on your system to prevent unauthorized roles being set up. So that's one thing is very important. You guys got to check on that just as much as you can get your password. If you do review your rules, you will be able to see the rules set up. Most of the time, these are set out as user generated rules that you can see in those settings. Pretty easy to do. Particularly in Outlook go up to the gear on the right, click that drop it down, go to Settings, go to rules and alerts if anything's been set up there.
Tom Cronkright 15:56
Yeah, I mean specifically any forwarding rules, any autodelete rules, any rules that scan for keywords in emails, all of those you can see either in Outlook 365 version or a desktop or native environment. Also in Google, Yahoo. All the different platforms have essentially these rule settings. The challenge is if the rule is set up, you could change your password every single day. The fraudster is still moving that communication into other accounts. So, you just got to make sure you kick him out of that. Then you reset the password and then you enable two factor or what's called multifactor authentication. Multifactor authentication is an additional security setting. So, you have your username, you have your password. We use a complex password manager here at our all of our organizations. That is LastPass. (https://www.lastpass.com) In a complex password manager you create this super secure master password and then for every site that you link for your email accounts, they create some ridiculous password that like you'd never know it. When you enable multifactor, multifactor is one more layer of security that provides a unique code each and every time that you send in a request to access the account. This adds a little bit more friction. But again, we're balancing friction with user security and data security. As attorneys the bar for us is always higher. There's no difference in court when we're standing up and someone's on the other side saying “Let me get this straight. You didn't check a box of multifactor that could have prevented this whole thing because this seems to be the proximate cause of where we're landing here.” Either your IOLTA account or escrow account was drained. Or I've got a consumer facing the loss of life savings. So that's just the brutal truth of it guys. Then using secure email, judges really don't understand secure email, but secure email is essentially a rail that provides security layer between one server and another server. So, you're sending the email on more secure basis. What we're talking about is making sure that that destination point isn't compromised. Because if the destination point is compromised, secured email doesn't do any good at all. Okay, the secure email secures it in transit, not what they call “at rest.” So, you got to do both.
Melissa Jay Murphy 18:03
So, it seems to me that these additional safeguards and procedures are all a result of the increasing sophistication and increasing numbers of attempts. So, you know, I just don't think this is somebody in a gray hoodie in a Starbucks anymore. So, who is it that's behind this now because hasn't that change?
Steven Dougherty 19:13
She's stole my line or she stole our favorite line. The line is that these are not your lone wolf hackers sitting in their grandma's basement drinking Mountain Dew and eating Cheetos, their favorite lives. That's what people think when they think you know, computer hackers, cyber fraud. But no, it's definitely not these guys operate what I refer to as the enterprise business model. It's a top-down business with a C suite and all set up with people below them to work these very complex organizations. They are transnational organized crime organizations. With the C suite you have your CEOs, then they call themselves that Mr. CEO, Mr. Chairman, and they're the ones that are kind of dictate how they want to do their attacks. Then they realize okay, I need somebody to pull off my phishing attack. So, they'll go hire somebody to do that. Then they're gonna be like, “Alright, cool, the phishing attacks good. I have the good information. I know when this transaction is going to be done, and I'm going to redirect it.” So now it's redirecting to another bank account. So now they need the launder that money. They need to get that money to themselves to do that they go and set up a sort of financial director wing. That is this expansive network of global money mules that just constantly are transmitting money back and forth. This problem has gotten really bad. We're seeing a lot of money mules actually be picked from some romance scams prior. So, they are unwitting money mules. They don't know what they're doing. They're just told by someone they met online, that they're going to receive money and help them for construction project or something like that. Then afford those funds on. It is a sprawling network of money mules here. It gets even more granular you have sort of an admin team that helps maintain spoof domains that they need to carry out their attacks or monitor, maintain email addresses or pull off other types of fraud such as unemployment, insurance fraud, even ransomware is tied into this now to kind of bolster up the organization. So, you really have a robust organization you're dealing with here, and they're very complex. They're very efficient, and as they make more money from these frauds, they only get better. Now they can afford more money mules. They get afford better malware. So, it's just momentum that they've developed and it's a momentous problem.
Melissa Jay Murphy 20:51
I know that they're targeting title agents because title agents are receiving and sending money, but the source of most wire diversions and claims that I am seeing amongst Fund Members involve that mortgage payoff and they're intercepting the mortgage payoff when it's being sent to the title agent? Are they sort of hoping that there's an easier way that they can get to that mortgage information and scale it up? Do you think that that's on the horizon?
Steven Dougherty 21:37
Yes. Or it may have already happened, in some instances where they're getting in and they're getting pure information fed to them before it reaches its destination. Tom and I are seeing something very similar. We can't speak about specifics, but Tom if you want to touch on it.
Tom Cronkright 21:55
You're exactly right. Melissa, I ran a statistic. The average open mortgage balance at the beginning of this month was just over $299,000 across the country. Okay, we haven't seen those levels ever. Again, that's because of the accelerated increase in home prices. So, a few years ago, mortgage payoff fraud really was I'm sitting in the real estate agent’s account. I'm seeing the closing attorney send over the mortgage payoff between the client they're sitting somewhere and they're obtaining the original copy of the mortgage payoff. They're taking that PDF, they're using software to doctor that up and then spoofing typically, the loan servicer or the lender saying, “Hey, we had to make a correction. Here's an updated payoff.” So, they're we're using it as kind of an updated payoff scam. But what they're realizing now is to say, “Wait a second, what if we could distribute your original payoff into the email system of the party requesting it, and it's fraudulent from the beginning, like the first one has been tampered with?” So, we saw this early on in the Nashville area mid-summer. And then we just saw in the state of Texas, where the fraudsters again appear to have compromised the electronic fax account of the title company or title companies using the fax to receive mortgage paths. Look, I'm in the industry, 98% of these come over by “fax”, but it's not the fax of days passed because that was a machine that telephonically printed out something on a piece of paper. We said we can't do that anymore. We need the fax to be converted to a PDF and an email and then have that sent into our general stream of communication. So, they figured out I call it the note of distribution. They figured out that to your point well that's that's a great phrasing. We can compromise these at scale. If we could get access to the eFax, GFI FaxMaker. It doesn't matter guys, but if they get in there, they can reroute traffic from the originating servicer where the payoffs being sent from, doctor that up, and push it right through the same rail down in the email. Fascinating scam, and we've seen them do it unfortunately at scale as recently as a couple of weeks ago.
Melissa Jay Murphy 24:44
What I hear you saying is that in those situations, it doesn't matter if the criminal has put email forwarding rules in my account, or not, because they're in there before it even gets to me. So, they're not even diverting any information from my account. They, you know, they've moved on to a much more sophisticated scheme.
Tom Cronkright 25:16
That's 100%, right. If you look at what 80% by definition of our disbursement obligations, sit at the mortgage payoff. We can't adequately insure it. The most insurance you're going to get is 250,000 per and that's assuming you did 15 things and a COVID test and a blood test to show them that you did everything to mitigate the insurance company's risk, which if you did that, you wouldn't have the fraud. And I think the other thing that we're seeing is, you just simply can't trust mortgage payoffs that are coming from in either direction from the fax right now, from a closing attorney that you relied upon to gather that because you're the dispersing agent, not the rep representing the seller. And if you don't mind, I'll touch on this. It comes down to essentially three things. One you have codified somewhere a trusted list of mortgage payoff information. Treasury templates are the best way to do it. That's stored on your bank server wall. So, you start to set up the wire. You type in Bank of America and all of a sudden, a bunch of known trusted accounts pop up, you compare it to what you have, you release the wire. Some people do that on spreadsheets. I've seen people that have had folders of PDFs that check, check and date. However, you do it, history can be a very, very good guide on what is true versus things that are not true. When it comes to mortgage payoffs. Calling to verify any new account information is even harder than it was before. It’s hard enough to get them to initiate the payoff. It's even harder right now to confirm just general bank account information for a wire but you have to do it or you just send a check, add some per diem, send a check but that's why it's important to get the mortgage payoff early in the process. Let's just think about mortgage payoff risk. Unless I'm sorry, this is going to breach some underwriting standard. The risk only goes down because the worst case is they made another payment. So, let's just get it out in the open. Let's get it before the fraudster has visibility to it. We can always ask for an update or they'll settle that out with the borrower at the end if for some reason they're radio silent on the verification. Know that we're in the process and we will be launching at CertifID an insured mortgage payoff database for spring market. So, we're in the process of analyzing over 300,000 trusted mortgage payoff records right now. We'll be piloting this in the next two weeks with a group and then we'll be launching this out. This is the number one threat. This is the threat guy that keeps me up at night. Because I know that any loan, commercial, there the table stakes could get large very quick where I'm out of business as a Title Agency in one single wire. We were involved last year in a 22 and a half million dollar, about $21 million commercial payoff wire recovery that landed in the money mule’s account. One wire that would have been lights out.
Steven Dougherty 28:28
So, if these do happen to you, and there's a very good chance that it may just due to the threat landscape that's out there. The one thing that's extremely important here, time is money. If you discover this, you need to report it as quickly as you possibly can. There are numerous ways to report it. You can report it through any secret service field office, you can just Google “secretservice.gov and field offices.” You guys I believe are all in Florida, right for the most part. So, while our Orlando Tampa and Miami offices are all very active, very good offices, you can reach out directly to them. Or you can also go to FBI’s IC3, the IC3.gov. www.ic3.gov It’s the Internet Crime Complaint Center. You can also report it there. I'll put the link to the Secret Service field offices in the chat here in a second. But time is money, Tom, I mean, you know you get live streams of victims to you, and you get them to me and how fast have you seen money move within hours. So, we need to stress that time is money.
Tom Cronkright 29:27
Yeah, what used to be touted as you know, 72 to 96 hours with the advent of cryptocurrency and just the sophistication. So, what happens in most cases is that when fraudulent wiring instructions are sent, they are typically sent from somewhere overseas. They're sent from the syndicate running the fraud play, but domestically, they have a series of money mules that either know what they're doing or wrapped up in something they're not even aware of that take money in and then quickly move it out. They can withdraw it in cashier's checks. They can withdraw it in cash. They can buy gift cards. Most insidious is that they move into crypto wallets. Then those wallets move and then they move out into other fiat currencies in different countries, and they can move those funds while the Federal Reserve is closed. So, as we're trying to digitize and make it more convenient, these rails of moving money, that are we would look at as kind of nontraditional, it's just a superhighway for them to launder funds and almost completely avoid detection. So, if you're two or three days in, and you haven't triggered a response from federal law enforcement and notified the banks, I mean the to your points Steven we've seen money move within hours. But we've also had instances where the money was in the bank branch. We notified the bank through our efforts, and they were stopped cold. I love stories like that. But it's harder. It's harder to reclaim the money after it's been stolen because they understand the gravity of how quickly they have to move the funds.
Melissa Jay Murphy 31:13
So let me go back and let's try to make this really clear to our audience. The moment that you realize that either a mortgage payoff has been diverted or perhaps the sellers’ proceeds have been diverted. You contact a secret service field office, you email the IC3 website and file a notification. You must I assume contact your sending bank and the receiving bank and who do you ask to speak to at both the sending bank and the receiving bank?
Tom Cronkright 31:59
So, before you answer, Steven, here's the point of this. What he's about to say needs to be done in advance. These relationships in this pathway needs to be groomed before you have an incident because what we found is that when crisis hits, people freeze and you're burning daylight, that could mean the difference between something coming back and everything being lost. So, I didn't need to step on you there Steven, but what we're about to say is do not wait. This playbook should be set in the organization before there's an incident.
Steven Dougherty 32:41
The way I prioritize it is first you should actually contact your financial institution that sent the wire. They generally will on your behalf send a wire recall or a swift message that it was due to a fraudulent means or compromise. If you contact the receiving bank directly if you're not a client for them, oftentimes they won't help you because you're not their client or customer. That's just a caveat. But immediately contact your financial institution and tell them what happens and see if they can put a wire recall in. The next step is to contact federal law enforcement or local law enforcement really whatever you're comfortable with. But what Tom's point was great is you need to have an incident response plan in place before these happen. You need to know who to call to help you. Local law enforcement can help with this. State law enforcement to help and federal law enforcement. So, it's whoever you're comfortable with who you developed a relationship with. You can just Google obviously I provide the Secret Service field offices link you can also Google FBI field offices. HSI Homeland Security also plays in this space. IC3.gov is just a place to report that these happened. Even if there's an attempt, report and attempt. Even if you stop it, please report it to the IC3.gov because what that does is it now gives us meat to go after because there's still the bank account that was used to divert the funds, or the spoofed emails used to send the attack email. We can go add to that as well. So please, the biggest steps are to have an instant response plan in place where you know who to contact and how, and two report everything you can wherever you see because not only does it protect yourself it protects the entire community.
Tom Cronkright 34:24
Yeah, well, what I've what I've been most surprised by when I'm most surprised, but one of the surprising things Steven I've involved in well over 100 recoveries last year for 35 to 36 million victims. And I say that because each one has a little uniqueness to it. One thing that seems to be bubbling up is if you're banking with a credit union or a community bank, maybe a smaller regional bank. You might be surprised, and you don't want to be surprised when you're going through it, that they don't have a fraud desk, they don't have somebody that understands how to send an alert through the Fed wire system or notify the receiving bank which is typically a money center bank. So, it's leaving a small bank. I mean, 9 times out of 10 it's hitting one of the big guys, because of the coordination they have globally. So, if they don't have their own incident wire fraud communication, all those channels. I mean, I had to educate bank presidents on what an indemnification and hold harmless looks like going to a money center bank, to allow the funds to come back to a victim. It's surprises me as a lawyer. So just don't be surprised. You run this. Sit down with your banker and make sure you know exactly who to call and the information that they will that will require. If they in turn, have the rails set up to protect you and get the documentation that the receiving bank is going to need to put a suspension on the account, freeze the movement of money, and hopefully work that back to you or your customer. And Melissa, it's worth noting it's not just the disbursement wires, yes, those were a direct hit to the closing attorneys. But it's the risks that buyers face when the closing attorney is spoofed. They haven't been educated. They haven't been engaged on this issue. They haven't received wiring instructions. And all of a sudden at the closing table we realize that there's no certified check in hand because their life savings was wired a few days ago. And I'm going to say this it does not matter to tell the people we don't receive wired we only receive certified checks. We have seen time and time again. The fraudster redirecting through communication the requirement that “Nope, can't have a check now because I've got an OMICRON outbreak or something's going on. I need your wire and I need your wire today.” It's just we've seen it unfortunately.
Melissa Jay Murphy 37:05
It does seem to me that reverting to what we call the old-fashioned way of conducting business has some role here, has some advantages here. Some of the questions on the chat or have to deal with these new fax systems that do come straight to your computer versus more of a phone line that's sitting on the desk behind you. But is it better to use an old-fashioned fax machine to send and receive things? The problem is a buyer, the normal consumer, out there doesn’t have a fax machine sitting on their desk if they have a fax number? It's something tied to their computer, but certainly for the purpose of receiving a payoff from a lender. An old-fashioned fax machine seems like it might give you some level of protection. Then in dealing with for example, buyers that need information about where to send their cash due at closing. I don't know what the average homeownership is now, but you know, it's five to seven years, maybe. People don't do this on a daily basis the way we do and so they're not sophisticated and educated about this cyber fraud and rather than communicating with them via email it seems like a reliable form of communication is the good old-fashioned phone. Do you agree? Is that something real practical piece of advice?
Steven Dougherty 39:01
You know for customers; this is not a muscle memory transaction for them. Just to put it out there, everybody puts disclaimers at the bottom of their email saying, “wire fraud is real.” Well, guess what? People don't read anything below your signature line in your email. They read the content. That's it, they're not reading and paying attention to that. So, you really have to engage your clients and customers on a very sort of vigorous basis. Tom, you agree that you should do it upfront and throughout the entire process. Let them know, this is the process, and fraud exists, this is how we combat it.
Tom Cronkright 39:44
We didn't create this threat. The threat is not going away. It's only getting worse. So, what do we do in response? My argument has been to the industry, to my staff, to our community here in West Michigan primarily is that this isn't going to happen on our watch. And if it does happen, we as transaction participants as advisors, lending, real estate, title and closing that we've done everything we could. We met the standard of care as is being defined in the courts, unfortunately, federal and state as to what success looks like for a consumer to be protected. The challenge is we're not driving them to the bank. We're not over their shoulder when they're opening online banking. A lot of them are banking with an eBank and there's no bank branches. That's the other realization with this economy we're in. We're not in a good fun state. So, I don't have to take wires and if I put my title owner hat on, I don't have to take wires in for cash to close. Now don't have to send wires out, pursuant to the state of Michigan. But what I need to do is educate the consumer that this thread is out there. They can strike at any point and we're going to set you up for success. So, the first thing we do is when we issue the title commitment, we send our wiring instructions along with a wire fraud notice to every consumer. We send it through CertifID. You may even say I'm going to send it through secure email; however, you send it just make sure that you have confirmation that they're the ones that actually received it. Because in a vacuum you can say “Look, no wires only checks. Got it great. We'll see you at closing” and then they get tricked after and it's simply not enough. The other thing that we've done is educate them of the closing scheduled. “Hey, remember if you are going to wire only those instructions that were sent earlier can be trusted.” With regard to enrolling the real estate agents and the referral partners. This is the key. This is where you can multiply the message and multiply this yourself in this conversation because guess who they trust? They trust the real estate agent because they're typically the one driving the traffic. You're being fed off them. Everyone is kind of beholden or codependent on the real estate agent. There's an opportunity there that at the agency formation, this knowledge transfer takes place. So, through notices, we've provided what we call a “day zero document” that our real estate agents put in Dotloop and DocuSign that we have the customer sign because they might start working with a buyer six weeks ago trying to find houses. We've been involved in wire fraud recoveries where the purchase agreement wasn't even countersigned by the seller in the entire cash to close amount was wired to a fraudster by the buyer. Purchase Agreement wasn't even consummated yet. That's how early they can get approached. So, educating the real estate agent, you know, showing them what you're doing to protect the consumer to protect them, and then getting them as part of the lexicon of how they do their business. Wire fraud becomes this conversational piece, not something that we hide behind or act like it's not happening. That in my opinion, is how you drive sustainable engagement. You can't do it all yourself.
Melissa Jay Murphy 43:16
Interesting. I think thiss has been an incredible source of information. So, thank you to Tom and Steven. I think that we might have raised some questions that we have not been able to answer and those have been reflected in the chat. So, what I am going to try to do along with my team is look at the issues and questions created by the chat. Review the information that Tom and Steven have shared with us. Try to make some organizational sense to it and try to push something out to Fund Members to update them on the best way to deal with this. Nothing about what you do when you realize there's been a crime is really different than what's on our website right now, Fund Members. We have the IC3 website. The Secret Service connection is something that's a little bit new. And so, we're definitely going to add that kind of information to our webpage. https://www.thefund.com/information-center/information-security.aspx Steven, so thank you for that.
Steven Dougherty 44:35
On that website, you can actually go back to do investigations. And there's actually numerous pieces, there's PDFs, there's documents that help prepare for a cyber incident and give updated information on cyber stuff that you can definitely pull down and link to on your website. www.ic3.gov
Melissa Jay Murphy 44:54
We will definitely look into that. So, with that I am going to thank Tom and Steven again. I'm going to thank all of you 190 people that participated in this webinar. Thank you so much for your time and attention. Don't forget we're going to push this out on the podcast. And so that's another way you can listen to this webinar again in the information. We will make sense of the comments and information that has been posted in the chats and push that out to you. And as I always do when I wrap up one of these is thank you above all, thank you for your support of The Fund.
My guest is Tom Cronkright, with CertifID. Tom is very knowledgeable about how cyber criminals have successfully targeted businesses just like yours. He will have information about how it works, new schemes and what you can do to protect yourself.
My guest will be attorney Joel Maxson, who heads up the Realtor® hotline at Florida Realtors. Joel and I will talk about the most common questions that are called into the hotline, what's a "hot" question right now and how the pandemic has affected (or not) the questions being asked.
Melissa Jay Murphy 0:06
Welcome to this week's Title Now Pop Up webinar, I'm Melissa Murphy General Counsel at The Fund, and I have the pleasure of hosting these weekly pop up webinars. For those of you who might be new to this, we offer them pretty much every week. They are on Thursday’s at noon. 30 minutes. I'm pretty strict about that, and they are free, and we just try to touch on a variety of topics that would be of interest to real estate practitioners, Fund Members their staffs, and anyone interested in the real estate and settlement services industry. We also push the audio content out on our podcast, which is also called Title Now, so that's easy to remember. And you can subscribe to that podcast anywhere that you subscribe to other podcasts. So, sign up, and then you can get the audio content if you miss a weekly webinar. So, thanks.
Many of our past webinars have focused on an issue related to the pandemic, that we are all currently experiencing remote online notarization altered office practices, eviction and foreclosure moratoriums, which by the way was extended today, until September 1, and the economy. But today we're going to learn about an issue facing many businesses that is not related to the pandemic. So, we're all aware of the Americans with Disabilities Act. And some of us are certainly more aware than others just based on your circumstances. But have you ever thought about whether the ADA applies to websites or to your website? We have the perfect guest with us today to talk about that. So, I want to introduce Adam Chotiner, he's a shareholder with Shapiro Blasi Wasserman Hermann in Boca Raton. He's been practicing law for 22 years. Adam is board certified by The Florida Bar in labor and employment law, but throughout his practice he has also had extensive experience defending public access discrimination claims under the Americans with Disabilities Act, and various types of Fair Housing Act claims. He has counseled countless clients on accessibility matters, including physical barrier issues and website accessibility concerns. So welcome Adam, thank you so much for being with us today.
Adam Chotiner 3:12
Thank you, Melissa, and welcome to everybody. I'm going to jump right into it. As she said today, I'm going to speak with you about public Access Disability Discrimination claims. For more than 25 years extensive substantial amount of such claims have been filed against private businesses and property owners under the Americans with Disabilities Act of 1990. Recently there's been a new trend that has developed, where real estate agents and brokers are getting hit with claims that their websites are advertisements, under the Fair Housing Act, and are not accessible to visually impaired individuals. So, let's start at the beginning, which is the ADA. The ADA has three parts to it. Part One deals with employment. Part Two deals with state and local governments. We are dealing with Part Three, Title Three. Title Three became effective in 1993. Beginning around the mid-90s, mid-to-late ‘90s, a wave of ADA lawsuits began to be filed and Florida has consistently been one of the top states for ADA lawsuits in the entire country. Now, when it comes to physical structures and surrounding architectural issues, there are literally hundreds of regulations that specify how these properties and facilities are to be compliant. It covers everything from how wide a parking space needs to be to the slope of the parking lots and ramps to table heights to door widths to even the height of the toilets and the type of faucet handles in the bathroom. The level of detail is actually staggering. But it generally makes it easy to determine whether something is compliant or not. You take out a tape measure, or a level, and it's either compliant or it's not. Since the effective date in 1993, all new construction has had to comply 100% with the regulations. Existing structures at time also need to comply, there is no such thing as being grandfathered in where you just don't have to comply at all. Existing structures have a different standard though they have to comply, but they only have to comply to the extent it is readily achievable. Now what is readily achievable. It's sort of like beauty, it's in the eye of the beholder. But ultimately if a property or a business is not 100% compliant. Then there is potential exposure and a risk of being sued. And if you cannot achieve 100% compliance, for whatever reason, then the goal is to be as unattractive a target as possible.
Melissa Jay Murphy 6:20
What do you mean by an unattractive target?
Adam Chotiner 6:25
The example I always give is this. Let's say you have a restaurant. It's a free-standing structure, and it has a restroom, of course. Let's say that everything inside that facility everything from the parking lot to the interior everything is 100% compliant, except the size of the restroom. Okay, even within the restroom, the fixtures are correct, the toilet is the right height, the grab bars are in the right place, but ultimately there's, it's just such an older property that the only way to get sufficient clear floor space within the restroom, is to start knocking down walls, you need to enlarge the restaurant. So, you have a situation like that. But again, everything else is compliant. In my experience, that is not a property that is likely to be sued. Because it's simply an unattractive target to a plaintiff's lawyer. Why, because in that situation, the defendant, number one probably has a good argument that it is not readily achievable. And number two, as part of that you may very well be backing the defendant into the corner where it might be better for the defendant to actually fight the case and establish that it's not readily achievable. And this is a good example of what readily achievable means. It's not just the cost of doing the work. Say again in the restaurant example. Well if you're going to enlarge the restroom, you're going to make something else, smaller, and let's say as a result of enlarging the restroom, you actually lose one or two tables for customers to sit at. Alright well now, there's a different party analysis which gets into ongoing damage ongoing loss of revenue. So that's what I mean when I say, an attractive target.
Melissa Jay Murphy 8:24
Okay.
Adam Chotiner 8:25
So, until several years ago, pretty much all of the ADA lawsuits were these kinds of physical or architectural barrier cases. Then the attorneys who file these cases decided to try something new. They started suing businesses by claiming that the business's website is inaccessible to visually impaired individuals. Now blind and visually impaired individuals can access and use websites and the internet, using what's called screen reader software. But for the software to be effective, the website itself, simply needs to be programmed in a certain way. And the essence of the claims, was that the websites were not programmed in the right way. Now, these website cases are especially challenging. The main reason is that unlike with physical structures. There are no regulations that specify what it means for a website to be compliant. We just don't know specifically what it means. A secondary challenge is that the law is currently unsettled as to the extent to which a business's website can even be challenged under the ADA. In the 11th circuit, as it stands right now, there needs to be a nexus, or a connection to a physical location that a person may seek to access or learn more about such that the website is treated as an extension of that physical space.
Melissa Jay Murphy 10:07
So, have any website cases been brought to trial and end been ruled upon?
Adam Chotiner 10:16
So, the question today in the entire United States, there has only been one ADA website case which has gone all the way to trial. Not coincidentally, that was in Florida. In fact, in South Florida, and that case was brought against Winn Dixie the supermarket chain. Winn Dixie lost. Now, before going on to talk about that case this is a good point to discuss what I call, or what people call ‘WIC AG’, WCAG stands for the Web Content Accessibility Guidelines. WCAG comes from an organization called the Web Accessibility Initiative, which in turn is part of the World Wide Web Consortium, W3C, the consortium is an international community, that helps set standards for the web, so that the web is more uniform and runs better. For a few years, the standard, quote unquote, for website accessibility under WCAG has been what we call WCAG 2.0. Now that version of the guidelines has 38 of what are called success criteria, which are things that at least ostensibly can be measured in some way to determine accessibility. And recently, they came out with WCAG 2.1, which adds 12 new success criteria for a total of 50.
Melissa Jay Murphy 12:00
What are some examples of this success criteria, because I'm trying to envision what it is about a website that is critical?
Adam Chotiner 12:11
Sure. Here's just a handful of things that are identified as success criteria. Is there are there transcripts available for video only and audio only content? Is there closed captioning for videos with sound? You cannot rely on color alone to display or convey information. You have to be able to pause, stop or mute any audio conveyed on the website. All content and functions on the website, must be accessible by keyboard only without using a mouse. Users have to be able to navigate through a website in a logical sequential order that preserves meaning. Now, that's a little vague but that is one of the criteria.
Melissa Jay Murphy 13:04
You would think that we need that on all websites.
Adam Chotiner 13:06
Yeah, you would think though. Form errors need to be easy to identify understand and correct. One of the newer success criteria is to make sure that text spacing is able to be adjusted without causing a poor experience using the website. So those are just some examples of the success criteria. Now, I've handled many of these ADA website cases. And everyone that I've settled on ultimately, we have settled by using the WCAG 2.0 or 2.1 standard. Again, there are no regulations. But WCAG is pretty much the closest thing we have right now to some sort of objective criteria.
Melissa Jay Murphy 13:55
So those WCAG guidelines had been used to settle a case but no court has ruled that those are the applicable standards.
Adam Chotiner 14:04
No, actually that's what happened in the Winn Dixie. Okay. The Winn Dixie case Winn Dixie lost, and the judge imposed WCAG 2.0 as the standard. Now Winn Dixie appealed that decision. Now oral argument in that appeal before the 11th circuit was held, almost two years ago October of 2018, and we still do not have a ruling. Now, in my experience that's kind of a long time for an appellate court a federal appellate court to, to not rule. We're not really sure what they're waiting for at this point. But those of us who practice in this area are very anxiously waiting for some kind of guidance. So with all that in mind, I'd like to just briefly talk about what I mentioned was sort of the latest craze, which is that a lot of real estate agents brokers and realtors are receiving these demand letters and draft complaints. Now, so far, based on what I've seen these demand letters and draft complaints are being asserted under the Fair Housing Act. As I'm sure you know the Fair Housing Act, anti-discrimination provisions apply to any advertisements. Unfortunately, it's probably difficult to argue that a website, on which available housing can be viewed, is not an advertisement. I think that's the essence of what these demand letters are claiming. Now, a question is why are they traveling under the Fair Housing Act and not the ADA? I believe there's two reasons. First, the ADA only applies to quote places of public accommodation close quote that generally means places like restaurants, stores, shopping centers, malls, movie theaters, gas stations, office buildings, and similar private businesses with a physical location that is open to the public. I think it's at least arguable that real estate agents and brokers, maybe some of them do not represent places of public accommodation, particularly if they maybe work out of their home. So rather than even fight that battle. These lawyers sending these letters are going right to the Fair Housing Act. The second reason why I think they're traveling under the Fair Housing Act is that the ADA does not allow for damages, a plaintiff suing under Title Three of the ADA is not entitled to damages or monetary relief. They're only entitled to injunctive relief, basically in order requiring the defendant to fix the property, of course, that also entitles the plaintiff to have his attorneys’ hourly fees paid. And because it's an only injunctive relief. There are no jury trials, under the ADA, but with the Fair Housing Act damages are recoverable and jury trials are allowed.
Melissa Jay Murphy 17:08
So, How are these cases against the real estate agents and the real estate brokers? How are they being defended can they be different?
Adam Chotiner 17:18
Well that's a, that's a good question and I think it's the answer is, I'm going to answer it in a more broad sort of way, which really it applies to any of these sort of public access type disability claims. You know, in theory, they certainly can be successfully defended, but it is often cost prohibitive to take that approach. Under these laws, a prevailing plaintiff will recover the attorneys’ hourly fees and costs, however, except in extremely rare situations, a prevailing defendant gets nothing, and a prevailing defendant should not expect to recover their fees and costs. So, most of these cases do settle for nothing else than a business decision in terms of overall cost and expense. Plus, in my experience, it is unusual for there to be insurance coverage that defends these claims. I have seen it, but it's definitely on the unusual side. Now, for many years, a typical defense in an ADA case at least would attack, the plaintiffs standing, essentially, arguing that the plaintiff was not a genuine customer but instead was, you know, a serial filer of lawsuits. Unfortunately for those of us who defend these claims and they in the businesses they get it back in 2013, the 11th circuit held that ADA plaintiffs can have standing as testers, which basically took a bad situation and made it worse. And actually, made it easier for these cases to be filed. Nowadays they the most effective way to defend a claim is for a defendant to fix everything that needs to be fixed and to do it ASAP. Under the ADA, if a defendant fixes everything that's wrong, then the defendant can seek a dismissal based on mootness, since only injunctive relief is available. If everything is fixed, then there's no relief to grant. Significantly infant case is dismissed due to mootness, then the plaintiff is not entitled to attorneys’ fees, even if the defendant only fixed everything, because a lawsuit was filed. Now, in any of these matters there's always two goals. Okay, at least from my standpoint, representing a client. First you want to address and resolve the pending claim. But second, you want to take steps to prevent future claims, because of issues remain. There's definitely exposure for a subsequent lawsuit. Now, for several reasons, you know, certainly, it'll typically take a client, some time to come into compliance. Once a matter settles. Now, if it's a private settlement, and the property or website remains non-compliant pending any modifications, then there is a risk of another claim being asserted, and the fact that you've reached a private settlement with another plaintiff, but yet haven't yet finished the work is not a defense is not a defense. Having said that, if an actual lawsuit has been filed as opposed to a pre-suit settlement, then you can choose to settle the matter via a consent decree, which basically serves as an order of the court. And so, if during the compliance period, and I've seen it anywhere from six months to three years or more. But if during that period another claim is asserted, then you would have an excellent argument that the new law suit is moot and shouldn't be dismissed, because the defendant is already under a court order, meaning this consent decree, and that order provides remaining time to comply. Ultimately, the sad truth is that when it comes to these public access claims. There really is no sort of get out of jail free card. There's no, I say there's no VIP lounge or champagne room, you know, they need to be addressed and ultimately it's going to cost money plain and simple.
Adam Chotiner 21:47
Now, I will say this. One of the issues with website issues is that taking the approach or quote unquote fixing everything right away is challenging. Why? Because there are no regulations, and so it can be very difficult to convince a court that your website now complies with the ADA or the Fair Housing Act. When we really don't know what it means to comply in the first place. So that can be really challenging, but I when I speak about these public access claims I always like to tell the Clint Eastwood story. And I tell it to clients as well. The Clint Eastwood story doesn't necessarily make my client feel any better once they've been sued. But I do tell it to demonstrate that that businesses and individuals who get hit with these claims. They shouldn't necessarily feel powerless, because they're the little guy. The truth is sometimes you can't fight City Hall, no matter who you are. For many years, one of the primary gripes about these public access claims, is that the law does not require pre suit notice it simply does, you can just go right into filing a lawsuit. There have been attempts to change the law, including a couple of years the House of Representatives passed the bill. But it went nowhere in the Senate. And I will tell you having followed this issue for many years. This is not some kind of political hot potato issue. That scenario I just described is played out many times over the past 20 years, with different parties in the two houses and in the White House. It just doesn't matter who is in charge. It just hasn't happened, and I don't think it's going to happen. So about 15 to 20 years ago, Clint Eastwood got sued. Regarding the restaurant that he owns in Carmel, California, where many years ago he was the mayor. Now, like many people. He couldn't believe that the law didn't require a pre-suit notice, but unlike most people, and because he's Clint Eastwood. He was able to go to Washington DC, and he spoke before a congressional committee and implore them to change the law for all the reasons you might expect. But as you've already heard nothing happened, law hasn't been changed. The moral of the Clint Eastwood story is that in Dirty Harry couldn't get something done really what chance do the rest of us have, again, doesn't necessarily make feel, make people feel better, but it might make them feel a little less powerless that ultimately you're just up against something that it's very difficult to fight. So, for now, like I said, We await further guidance from the courts, particularly on these website issues. But ultimately, if someone does get hit with an ADA claim or a demand letter under the Fair Housing Act, really they need to try and look to achieve the same two goals I mentioned earlier. You want to address an obvious thing resolve the immediate claim, but it is important to take steps to try and prevent future claims. Thank you.
Melissa Jay Murphy 25:08
So, Adam a couple of questions, with regard to the website situation. Are there companies out there that are sort of in the business or are in the business of helping companies fix their websites? Is there a burgeoning industry out there? Is that a well-established industry?
Adam Chotiner 25:38
I'm not sure I would describe it as well established, but it is an industry now I will say this. Nowadays, there's things that you can buy that I've seen this sold called widgets that are ostensibly these autonomous programs and sort of apps that you can install on a computer system that are intended to, you know, address these kinds of website issues. However, in my experience, what I've found is that they're better than nothing, but in many cases I believe that the level of compliance that they help you achieve is still significantly lacking, and does leave you exposed. If a company came to me and said, you know, money is no object. We want to be as compliant as possible. We want to comply with WCAG 2.1 to the maximum extent. How do we do that? Then I would advise them to engage a company that does specialize in website accessibility compliance, and there are companies like that. There are companies that I've referred clients to. And what these companies do is, it's not merely a matter of programming to achieve true compliance, you want to do human auditing. What the widgets purport to do is sort of autonomous auditing, but it just isn't as effective. So these companies make the programming changes to the website, but then they literally do human spot checking. They actually check the effectiveness of the changes they go through, the success criteria, and they see hands on is this stuff, you know, now compliant the way that WCAG intends.
Melissa Jay Murphy 27:55
So you need to make sure that whatever company or product that you buy knows what those guidelines are and agrees to bring you in compliance with whatever the most current version of those guidelines would be on the pretty reasonable assumption that that's going to be the measure, or the standard against which you're going to be measured.
Adam Chotiner 28:20
That's true. And I will say I mean, you know like, when a lot of things you do get what you pay for the widgets are generally an economical option because it's like I said it's sort of autonomous. But to give you an example when the Winn Dixie trial took place. The testimony at that trial was that for Winn Dixie to get its website to comply with WCAG 2.0, that the cost involved in that was a six-figure number. So now granted the Winn Dixie website has hundreds maybe thousands of pages to it. Because presumably you know if you click on a product, you know it might have its own page so it's an extensive website and generally speaking, the cost of modifying a website is largely tied to how many pages the site consists of, but it's not necessarily an inexpensive proposition to have a company do it with human auditing. But again, if you're really looking to protect yourself and you're looking to maximize or minimize your exposure and risk, then that's the way to go.
Melissa Jay Murphy 29:44
Well, Adam, we are out of time. Thank you so much for spending a little bit of time with us and clearly you've just touched the surface with us on this issue but I think you've done a great job of telling us what we need to know in order to know how much we don't know which is always helpful in my estimation.
Adam Chotiner 30:09
Everybody now knows enough to be dangerous.
Melissa Jay Murphy 30:11
Very, very.
Melissa Jay Murphy 30:14
That's always our goal in these webinars.
Adam Chotiner 30:18
You're right. You're very welcome Melissa Thank you very much. Thank you everybody for having me. Thank you.
Melissa Jay Murphy 30:24
Thanks everybody for attending. You can catch the audio content on our podcast I will remind you of that and look for the notifications of our future pop up webinars, Thursdays at noon 30 minutes. And as always, Thank you for your support of The Fund.
We will focus on the state of the economy and my guest will be Dr. Anirban Basu. Dr. Basu has shared his wit and wisdom with us at Assembly for the past two years and was my guest on a webinar a few weeks ago. I am glad to have him back to give us an update on the economy in general, with a special focus on Florida real estate.
We will be talking about force majeure clauses in various types of contracts related to real estate. This is a topic many of you have asked about so here is your chance to hear some discussion about how to view these situations. My guests will be Manny Faruch and Mike Hargett, two Fund Members with a lot of experience in real property litigation issues.
We will be talking about the moratorium on residential evictions: how it has impacted both landlords and tenants, strategies for both after the moratorium expires on July 1 (unless extended), and other issues. My guests will be Fund Members Geil Bilu and Marc Brown.
Get to know Senator Kathleen Passidomo, her inspiration to run for office and she uses her experience as a real estate lawyer to identify and solve issues that come before legislation.
Kathleen C. Passidomo is a Republican member of the Florida Senate who has represented the 28th district, which includes Collier, Hendry, and part of Lee County in Southwest Florida, since 2016. She previously served three terms in the Florida House of Representatives, representing the Naples area from 2010 to 2016.
Join me for this week's Title Now Pop Up Webinar where my guest will be Shane Hartzler, Director of eMortgage Strategy and Operations for FNMA. We will talk about what is going on in the lending market and how it all interfaces with e-signatures.
Working with Lenders to get documents signed is a big part of what you do every day. The challenges of the pandemic and the desire to avoid face to face interaction between a notary and the borrower have made this even more problematic. Why won't Lenders accept electronic signatures? Does FNMA allow this? Information has been confusing since early March.
Join Michael Rothman and Melissa Scaletta for a review of our updated FAQs. We have developed these new FAQs to give you guidance on the law and on some practical issues Members have faced. It will be an information-packed session so you will not want to miss it.
My guests are Laird Lile and Sandy Diamond, both of whom are estate planning, probate and trust attorneys. Laird practices in Naples and Sandy is in St. Petersburg.
We will be talking about how their practices have changed: How do they interact with clients? How do they manage communication? Signing of documents? Determining capacity? Determining undue influence? We will likely touch on the option of utilizing RON for document signing, too.
Melissa Jay Murphy moderates a Fund Member panel! Learn from your peers and how they have adapted their offices and closing procedures during the pandemic.
There are some really good ideas out there and hearing from Members "in the field" about things that work, things that didn't work, how they manage their employees working remotely and how they deal with clients and customers should prove to be pretty interesting!
An Interview with accomplished economist, Dr. Anirban Basu, Chairman & Chief Executive Officer of Sage Policy Group, Inc. Dr. Basu is well known to The Fund, having spoken at Assembly in 2019 and several other Fund and Old Republic events. He brings his expertise and insight to what is going on in Florida, in the nation and in the world.
An Interview with Florida Realtors General Counsel, Juana Watkins, about what Florida Realtors as an organization is doing to support their members and what realtors are doing out in the field to help you market your property or buy a property as safely as possible.
Melissa Jay Murphy talks with with Steve Gottheim, Deputy General Counsel at the American Land Title Association, on the new FNMA and Freddie Mac guidelines on remote online notarization of loan documents and the use of limited powers of attorney.
Links to various guidelines from FNMA and FreddieMac:
- Freddie - Updated Guidance on RON and LPOA (middle of the page):
https://guide.freddiemac.com/app/guide/bulletin/2020-8 * Freddie - RON States Listed in Bulletin (on page 11):
https://guide.freddiemac.com/ci/okcsFattach/get/1003772_7 * Fannie – Updated Guidance on RON and LOPA (links provided on page 1):
https://singlefamily.fanniemae.com/media/22316/display * Fannie Q&A:
https://singlefamily.fanniemae.com/media/22326/display * Freddie’s FAQs:
https://sf.freddiemac.com/faqs/covid-19-selling-faqs#title-closing-and-notarization
Link to next week's ALTA webinar with guests from Freddie and FNMA. https://www.alta.org/news/news.cfm?20200414-Register-for-Webinar-to-Learn-About-GSEs-New-Closing-Guidance
Florida does not have a list of "approved" RON Service Providers. The companies that we hear about most frequently are Pavaso, NotaryCam, DocVerify and Notarize. They are all slammed right now and it is hard to get through to them. You have to be persistent!
Attached is a map of states that have passed RON legislation as of March 26, 2020 (this does not include any Executive Orders entered during the pandemic). http://www.thefund.com/information-center/pdf/digital-closings/ron-states-3-26-30-for-popup-responses.docx