I have mixed feeling about this practice.  On one hand, if the seller is paying for the policy, I believe that they should have the right to choose.  If the buyer insists on choosing their title company, they can - if they are willing to pay for it. And, to me, that seems reasonable.  After all, there is nothing other than the sales contract that requires the seller to pay for anything.

However, with so many of these foreclosure mills churning out policies based on short searches, you really can't rely on them for clear title.  When the seller directs the buyer's title policy to the title company under their thumb, and a full search isn't being done, the buyer seems to lose some of the value ordinarily obtained in the process.  Thus, it may be better to let the buyer choose.

California seem to be on their way to passing legislation aimed at ensuring the buyer has the right to choose the title company on REO sales.  The California Buyer's Choice Act recently passed the Senate.

The Buyers Choice Act would mandate that buyers of bank-owned properties would have the choice of using a local escrow office to handle the transaction. It would prohibit a seller of residential property from requiring the buyer to use an escrow service company or purchase title insurance chosen by the seller and would also prohibit a seller of residential property from, without good cause, disapproving the use of a title or escrow company chosen by a buyer.

As far as RESPA is concerned, I do not believe that there is any violation if the seller requires their title company so long as the seller is paying for the policy.  The problem comes from poor language used by HUD in explaining RESPA in "plain English."  They summarize Section 9 thusly:

Section 9 of RESPA prohibits a seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance.

The problem here is the language "to use."  This makes it sound like any time the seller requires a particular title company to handle the transaction, it is a violation of RESPA.  This, however, is not the case.  Compare HUD's "plain English" version with the actual statute:

Sec. 2608. Title companies; liability of seller

(a) No seller of property that will be purchased with the assistance
of a federally related mortgage loan shall require directly or
indirectly, as a condition to selling the property, that title insurance
covering the property be purchased by the buyer from any particular
title company.
 

Clearly, the requiring a buyer to "use" a particular title company is not what is prohibited in the RESPA statute - it is only requiring the buyer to "purchase" title insurance from any particular title company.  This sort of makes sense, because RESPA is a consumer protection statute.  As far as they are concerned the buyer is "protected" by their title policy (a point we could all argue), and if someone else pays for it, there is no harm in allowing the seller to chose the provider.

Best,
Robert A. Franco
SOURCE OF TITLE