Wire Fraud at Closing. Who’s on the Hook?

Over the past three years, wire fraud in home purchases has gone up sharply.

Many victims are turning to court to seek damages after losing much of their life savings to the scammers involved. But who can they go after? The bank? An insurer? The title company? The agent?

Some of the players (like banks and insurers) have better shields than most.

Title professionals, real estate agents, and their clients are most likely to be left holding the bag. Public pressure is mounting on lawmakers to change this, according to the latest report from the wire fraud prevention firm CertifID.

Increasingly, Real Estate Pros Are Holding the Bag

Title and escrow professionals, and in some cases buyers’ agents, are increasingly being held liable for losses when client escrow funds are diverted by fraud.

While swindlers are really to blame, courts are holding real estate professionals responsible — especially if they aren’t using solid security measures and educating their customers.  

According to legal experts, “courts have held that the party most responsible for causing the payment to be misdirected must bear the loss…” The person closest to the “misdirection” could be the title agent, the broker, or the buyer’s real estate lawyer, depending on the norms in a given state.

The question of who’s liable for a fraudulent misdirection of closing funds came up in Hoffman v. Atlas Title Solutions, Ltd. Conor Hoffman and Macie McMahon were getting married, and they wanted a home of their own. The Atlas Title company did their escrow and title work. The couple successfully sued Atlas Title, claiming the company failed to implement adequate email safety procedures.

Banks Have a Legal Shield: The UCC

Courts typically let banks off the hook for wire fraud losses, declares CertifID, as long as the account holder initiated the money transfer.

Specifically, Article 4A of the Uniform Commercial Code shields banks from liability for diverted electronic transfers. To use Article 4A, banks just need to apply “commercially reasonable” security protocols.

So, real estate companies are unlikely to succeed if they try to blame banks. Will the brokers’ insurance companies come to the rescue? Unlikely. Courts have backed the insurers when the particular type of loss isn’t expressly and clearly covered in the policy. Without “specific insurance coverage for stolen funds” and to-the-letter adherence to an insurance policy’s stated procedures, the broker or title agent will likely be held liable, CertifID says.

In a case named Helms v. Hanover Insurance, a couple wired $120,000 to fraudsters. The couple was not about to accept the loss, so they sued their broker and real estate agent, alleging negligence. The agent went to Hanover, its insurer, to recover the lost funds under its errors and omissions coverage. The court sided with the insurer, declaring that the policy plainly excluded coverage for “claims based on or arising out of the theft, stealing, conversion, or misappropriation of funds.” ‍

For some situations, enhanced title insurance can help fight the costs of being victimized through fraud. Learn more with Deeds.com.

There’s a more general message here for us all. Ask your insurance broker probing questions about coverage and exclusions whenever you buy, update, or renew a policy.

Are Banks Ever Liable for the Lost Funds?

Banks have strict compliance mechanisms to keep them out of liability. Banks regularly go through hacker drills. Seek out the benefit of their knowledge! Bank and credit union customers should fee encouraged to talk to someone at the institution about fraud well before the closing date.

You might wonder: Do banks ever drop the ball? Would a court ever hold a bank liable for the botched transfer? The answer is yes. But only in narrow circumstances. Here are two scenarios where a financial institution could be responsible for a fraud-related loss:

• Insufficient verification procedures or security lapses at the bank let hackers into the system.

• A bank representative knows the recipient of the transfer is not the authorized party but wires the funds anyway.  

Real estate professionals — those who give wiring instructions and channel the closing funds — had better “protect consumers from wire fraud scams or face a potential court judgment for damages,” CertifID’s report stated.

So, CertifID recommends that real estate firms educate consumers about wire fraud. Everyone should check for red flags in email messages, like misspellings or odd sentence structure. (Better yet, don’t use email for wire transfer instructions!)

Regulation E limits your liability for an unauthorized electronic funds transfer, says the Consumer Financial Protection Bureau, under certain circumstances. Reg E applies to Automated Clearing House (ACH) transfers), over-the-phone payments, and debit card transactions — but not wire transfers.

Fraud-Busting Tips for Home Buyers

Don’t let your guard down in the heat of a home purchase. Escrow instructions and loan payoff instructions are “spoofed” every day.

Here are some tips you can use as a checklist:

• Ask about your title and escrow firms’ risk mitigation policies. When they issue closing-related information, do they include warnings for customers to call them and check the routing details before authorizing transfers? Do they use multi-factor identity verification?

• Be sure your own bank or credit union sets up a call with you before the wiring. Get to know someone at the institution, and have a plan in place in case of suspicious activity.

• Trust your gut if something seems off. Act quickly to inform your trusted bank rep. It can take just minutes for cash transfers to go to an overseas account. Don’t wait. Call!

• You or your agent should check with the title rep on closing day — both to review the transfer timing, and afterward, to check that the funds safely arrived.

• Be suspicious of emailed or phoned instructions. Verify everything yourself, on a call that you initiate. Let the requester know you will call them back on the number you already have.  

• Is there urgent language in the instructions, suggesting you should hurry up? Be extra suspicious.

• Are there new or unexpected wiring details for your prior loan payoff or your transfer into escrow? Contact a person at the recipient’s office to verify the details before authorizing a transfer.

An aware real estate agent can create a rapport among all involved — weaving the title and escrow firm into the loop. You might offer a “secret answer” (but not over email) that they can ask for, so everyone knows they are talking with the real parties before funds move.

Good communication is an excellent safety mechanism.