Tuesday, May 21, 2002

Legislator seeks title reform

Erpenbeck scandal shows loopholes

By Patrick Crowley pcrowley@enquirer.com
and Ken Alltucker kalltucker@enquirer.com

The Cincinnati Enquirer

        A Kentucky lawmaker is drafting a new law he said will offer better consumer protection by closing legal loopholes exposed by the scandal surrounding the Erpenbeck Co.

        Rep. Jon Draud, R-Crestview Hills, said Monday he is working with bill drafters in Frankfort on the major components of the law, which would be considered by the Kentucky General Assembly in January.

Click here for all Enquirer reports on Erpenbeck Co.
If you have any additional information on the business dealings of the Erpenbeck Co. or Peoples Bank of Northern Kentucky - or on the involvement of any parties not yet identified in our coverage - please email Enquirer business reporter James McNair at jmcnair@enquirer.com or Kentucky Enquirer reporter Patrick Crowley at pcrowley@enquirer.com.
        Last week, Ohio Rep. Michelle Schneider, R-Madeira, vowed to work with Ohio's title agents, home builders and banks to bolster consumer protection in the home-buying process.

        The Cincinnati Area Board of Realtors also will vote this month wheth er to change standard home-purchase contracts that would encourage more buyers to purchase owner's title insurance.

        The proposals are the latest efforts to avert a repeat of the Erpenbeck case, which could cost homeowners, contractors and lenders millions.

        “We will be looking at what provides the public the best protection,” said Gene Snaveley, executive vice president of the Realtors' board.

        Mr. Draud said at least one provision of his bill will deal with the $15 million in checks made out to home lenders that were diverted into Erpenbeck Co. accounts at Crestview Hills-based Peoples Bank of Northern Kentucky.

        Officials at Peoples Bank say Erpenbeck employees were able to cash the checks made out to various area banks by slipping them into stacks of checks payable to Erpenbeck.

        “We need a comprehensive bill that would hold a bank responsible for reviewing the checks and verifying all the names are right,” Mr. Draud said.

        Among the areas Ms. Schneider will examine is the role of title companies.

        Title agents usually distribute checks to all proper parties at a real estate closing. In the case of Erpenbeck, title agents allowed the builder to carry checks made out to the builder's lender.

        The result: Erpenbeck is accused of depositing checks in its own accounts instead of paying off lenders, who never released their ownership claims, or liens, to new homes that were sold to consumers. Now homeowners must go to court to prove ownership.

        No law in Ohio or Ken tucky requires title agents to personally deposit or mail checks to proper parties. Title companies say they have discontinued the practice of trusting builders with other parties' checks.

        The banking industry also is examining its practices.

        Peoples Bank officials said they have changed procedures in dealing with checks, including having tellers match the payee to the depositor of checks over $5,000.

        Mr. Draud's bill would require builders to sign affidavits at closings that all subcontractors who worked on the house have been paid. The subcontractors would also have to sign to acknowledge they received payment.

        In the Erpenbeck case, unpaid subcontractors also filed liens on homes in an effort to get paid.

        Also under Mr. Draud's bill, bankers would have to disclose any outside business relationships they have with top borrowers.

        Two of Peoples Bank's top executives — president John Finnan and executive vice president Marc Menne — were forced to resign last month after the bank's board of directors learned they had a private arrangement with Mr. Erpenbeck to buy the company's model homes.

        Mr. Draud said he is open to hearing from others on what the bill should include.

        “What I'm working on now is just a start,” he said.

        Consumers can protect themselves from liens by purchasing title insurance. Fewer than one in five home buyers elect to buy this protection even though they are required to buy it for their lender.

        That could change if the Real tors' board decides to reword home-purchase contract language when it meets May 29. A month ago, the Realtors' board declined to make changes, but the controversial Erpenbeck case could pressure board members to change their position.

        Now, home buyers are asked whether they want to purchase title insurance. Proposals include giving sellers the option of paying for all or part of title insurance policies for buyers.

        Other markets such as Cleveland require sellers to pay for these policies.

        “It is an excellent idea,” said Charles Cain, vice president of LandAmerica Financial Group, which ownes Insured Land Title.


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