Under Illinois law, can we require home equity line of credit (HELOC) borrowers to use a non-affiliated title company? Does it make a difference if we are obtaining only a title search (as part of our due diligence), which we pay for ourselves, without requiring the borrower to purchase title insurance?

Yes, we believe your bank may select third parties to perform title searches for HELOC applicants as part of its due diligence when the bank pays the search fees, with the provisos discussed below. Because your institution would be paying for the costs of the title searches, as opposed to the applicants, you have a strong argument that Illinois law does not prohibit you from using a particular title company or other third party to perform the title searches.

There are two Illinois laws that prohibit lenders (and others) from requiring the use of a particular title insurance company for a loan secured by the borrower’s principal residence — the Consumer Fraud and Deceptive Business Practices Act and the Title Insurance Act. However, both laws apply only to “title insurance,” which is distinguishable from a “title search” that simply lists relevant information about a property and does not underwrite insurance coverage.

A second point is that the Title Insurance Act’s prohibition applies only when a borrower is paying for the title insurance. The fact that your institution would not be charging borrowers for the title search again points to the conclusion that this Act should not apply.

As a cautionary note, the IDFPR has released a “Statement Regarding Consumers’ Right to Choose Title Provider,” which warns that if a party is paying for the title insurance, it must not recoup its costs “in the form of a higher price for other services, higher interest rate, increased points or other pre-payments or any other ruse designed to circumvent the operation of these important consumer protections.” Should your bank proceed to select unaffiliated parties to conduct title searches and assume these costs itself, we still would recommend carefully documenting that your bank is not recouping the costs of the title search in any of these ways.

Also, in such case, your bank should remain sensitive to any and all facts that potentially could give rise to UDAAP concerns. We cannot identify any such concerns based on the facts stated in your question, but needless to say, your bank’s sensitivity to this subject should remain paramount as you proceed.

For resources related to our guidance, please see:

Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/2T (“No person, firm, corporation, partnership or association which may extend credit or make a loan secured by an interest in real estate which is or is to be improved with a single family residence or any residential condominium unit occupied or to be occupied as a principal residence by either the borrower as an individual or, if the borrower is the trustee of a trust, by a beneficiary of that trust, shall require, either directly or indirectly, as a condition precedent to making such loan or extending such credit (a) that any seller, borrower, mortgagor or debtor to whom such money or credit is extended negotiate, obtain or contract for title insurance through a particular insurer, agent or broker; . . . .”)

Title Insurance Act, 215 ILCS 155/18.1 (“It is declared to be the public policy of this State that parties to a contract for the sale of residential real property who are obligated to provide and pay for title insurance have the right to choose the title insurance company and title insurance agent that will provide such title insurance. No lender or producer of title business, as the term is defined in this Act, shall, as a condition of making a loan . . . require a party to a contract for the sale of residential real property who is obligated by that contract to furnish and pay for title insurance at their expense, to procure title insurance from a title insurance company or title insurance agent other than a title insurance company or title insurance agent that is chosen by the party paying for the title insurance.”)

Title Insurance Act, 215 ILCS 155/3 (Defining “title insurance” as “insuring, guaranteeing, warranting, or indemnifying owners of real or personal property . . . .” Separately defining “title insurance business” to include “(B) Transacting or proposing to transact one or more of the following activities when conducted or performed in contemplation of or in conjunction with the issuance of title insurance . . . . abstracting, searching, or examining titles. . . .”)

IDFPR Statement Regarding Consumers’ Right to Choose Title Provider (“These protections for Illinois consumers apply to sellers and purchasers of residential real property when those parties pay for the title insurance commitments and policies issued to them or on their behalf. In situations where another entity claims to pay for such costs, title insurance agents and title insurance companies must be careful to determine that no circumstance exists where the party paying initially ends up recouping those payments from either seller or buyer in the form of a higher price for other services, higher interest rate, increased points or other pre-payments or any other ruse designed to circumvent the operation of these important consumer protections.”)

Consumer Financial Protection Act of 2010, 12 USC 5536(a) (“It shall be unlawful for (1) any covered person or service provider . . . (B) to engage in any unfair, deceptive, or abusive act or practice.”)