June 6, 1997 GSBCA 13981-RELO In the Matter of FRANCIS B. BIGGAR Francis B. Biggar, Midland, TX, Claimant. Deborah A. Osipchak, Manager, Financial Services Branch, Federal Aviation Administration, Washington, DC, appearing for Department of Transportation. GOODMAN, Board Judge. Mr. Francis B. Biggar, an employee of the Federal Aviation Administration (FAA), was transferred from Lake Charles, Louisiana to Midland, Texas in May 1994. Mr. Biggar purchased a newly constructed home in Midland and financed the home with a Federal Housing Authority (FHA) loan. Mr. Biggar claimed reimbursement for relocation real estate costs, including the amount of $1,022 for title insurance policies. This insurance included coverage for both the lender and the owner. He was reimbursed the full amount of $1,022 in September 1994. However, the FAA later questioned whether it should have reimbursed him the amount attributable to the owner s title insurance and requested repayment. The FAA sought additional information from the lender. The lender advised that if the owner s coverage had been provided at seller s expense, as is customary in the area for the sale of an existing home, the cost to the seller would have been $847. The FAA therefore requested repayment from Mr. Biggar in the amount of $757.01 ($847 less $89.99 FICA taxes previously withheld). Mr. Biggar protested the requested repayment. He supplied a letter from the mortgage company stating that it is a prerequisite for loan approval that a[n] Owner s Title Insurance policy be purchased at the time of closing. The mortgage company indicated to the FAA official that it will not service the loan, but will serve as a closing agent and will broker the loan to a servicing company. The investors purchasing the mortgage require owner s title insurance, so the mortgage company requires the insurance as a prerequisite. The FAA confirmed this by indicating that there is an increasing practice among lenders to issue a loan to a home buyer and then sell the loan to another bank. Thus, such lenders will require the purchaser to obtain owner s insurance, so that the lender will be able to sell the loan on the secondary market. According to the FHA, owner s title insurance is not a prerequisite for obtaining an FHA loan, but investors require it if they purchase the loan. Additionally, Mr. Biggar submitted a letter from a real estate agent in Midland which stated: [I]t is customary in the residential real estate market in Midland, TX that purchasers of new construction homes pay for both the Owner s Title Policy and the Lender s Policy. This practice pertains to new construction. Local builders do not pay for an Owner s Title Policy, therefore placing this expense upon the buyer. By letter dated October 10, 1995, the FAA requested a decision from the General Accounting Office (GAO) pursuant to 31 U.S.C.  3529 as to whether Mr. Biggar should be reimbursed the cost of the title insurance. The FAA stated in its letter that it is requesting this decision because [i]t is unclear whether the requirement by [the mortgage company] for owner s title insurance in order to place the loan with a servicing mortgage company qualifies as a prerequisite to financing, thus qualifying the cost for reimbursement. The following statutory and regulatory requirements are applicable. The provisions governing reimbursement of residence transaction expenses are contained in 5 U.S.C.  5724a(a)(4) (1994) and the Federal Travel Regulation (FTR), 41 CFR chs. 301-304 (1994). The relevant portions of the FTR provide: (1) Reimbursable items. The following expenses are reimbursable in connection with the . . . purchase of a residence, provided they are customarily paid . . . by the purchaser of a residence at the new official station, to the extent they do not exceed specifically stated limitations, or in the absence thereof, amounts customarily paid in the locality of the residence: . . . . (ix) Owner s title insurance policy, provided it is a prerequisite to financing or the transfer of property; or if the cost of the owner s title insurance policy is inseparable from the cost of other insurance which is a prerequisite to financing or the transfer of the property. (x) Expenses in connection with construction of a residence, which are comparable to expenses that are reimbursable in connection with the purchase of an existing residence. (2) Nonreimbursable items. Except as otherwise provided in paragraph (d)(1) of this section, the following items of expense are not reimbursable: (i) Owner s title insurance policy . . . paid for by the employee in connection with the purchase of a residence for the protection of the employee; . . . . (vi) Expenses that result from construction of a residence. 41 CFR 302-6.2(d). The cost of owner's title insurance for which Mr. Biggar paid is not reimbursable under the above regulations. Two prohibitions are contained in 41 CFR 302-6.2(d)(2). The first prohibition in 41 CFR 302-6.2(d)(2)(i) states that the cost of owner's title insurance paid for by the employee in connection with the purchase of a residence is nonreimbursable except as provided in 41 CFR 302- 6.2(d)(1). The first prerequisite for an item to be reimbursable pursuant to 41 CFR 302-6.2(d)(1) is that it must be customarily paid by the purchaser of the new residence. The title company has stated that such insurance is customarily paid for by the seller in the sale of existing homes, and not the purchaser. This cost therefore fails to meet the initial prerequisite that it be customarily paid by the purchaser. Therefore, even though Mr. Biggar contends that the owner's title insurance for which he paid is a prerequisite to financing, which is another prerequisite set forth in 41 CFR 302-6.2(d)(1)(ix) for owner's title insurance, the cost is not reimbursable. The second prohibition in 41 CFR 302-6.2(d)(2)(vi) states that "[e]xpenses that result from the construction of a residence" are not reimbursable except as provided in 41 CFR 302-6.2(d)(1). Because Mr. Biggar is not purchasing an existing home, but is constructing a home, the cost of owner's title insurance falls within this broad category of prohibited costs. The exception in 41 CFR 302-6.2(d)(1)(x) is for "[e]xpenses in connection with construction of a residence, which are comparable to expenses that are reimbursable in connection with the purchase of an existing residence." This regulation still requires that for such costs to be reimbursable, they must customarily be paid by the purchaser. As discussed above, such costs are not reimbursable in connection with the purchase of an existing home, as they are not customarily paid by the purchaser. The cost of the owner s title insurance is therefore not a reimbursable item under 41 CFR 302-6.2(d)(1)(x). In summary, the regulation prohibits reimbursement of the cost of owner's title insurance and expenses arising from the construction of a residence, except under specified circumstances. As the facts in this case do not fall within the excepted circumstances, Mr. Biggar is indebted to the agency for the cost of the owner s title policy for which he had been previously reimbursed. The FAA also asks for the following opinion: If a determination is made [that Mr. Biggar is indebted to the agency], we are unclear on whether Mr. Biggar owes the agency the amount which would have been paid at the time of closing for owner s title insurance issued simultaneously with the lender s coverage, or the amount representing the higher cost of an owner s title policy issued to and purchased by the buyer after the purchase transaction is closed. In determining the amount which Mr. Biggar owes the agency, it appears from the settlement sheet that the actual amount Mr. Biggar did pay at time of closing for title insurance was the result of his having purchased lender s coverage at the same time. In response to the agency s inquiry, Mr. Biggar should not be penalized by assessing him a higher cost which he did not pay. However, it should be noted that previous decisions by GAO have recognized that lender s title insurance, when purchased with owner s title insurance, is usually sold at a substantial rate reduction. Thus, the price actually paid for owner s title insurance reflects a portion of the cost of lender s title insurance, and that portion may reasonably be considered allocable to the cost of lender s title insurance, which is a reimbursable expense. James R. Hladik, Jr., 66 Comp. Gen. 206 (1987). Thus, the agency should determine the cost of the lender s title insurance if purchased separately. The difference between this amount and the total cost of both lender s and owner s title insurance charged ($1,022) is the amount which Mr. Biggar should repay the agency. _______________________ ALLAN H. GOODMAN Board Judge