The Housing Scene by Lew Sichelman


A decision by federal and state authorities to take legal action against an alleged title insurance kickback scheme, in which cash and marketing services were traded for referrals, should give impetus to legislation that would ban such practices altogether.

In a complaint filed in federal court, the Consumer Financial Protection Bureau (CFPB) and the Maryland attorney general accused Genuine Title and its officers of exchanging valuable services with real estate agents and mortgage brokers in return for referring their clients to the company for closing services.

Among other things, the company purchased, analyzed and provided loan agents with data on consumers, then created and mailed letters on behalf of loan agents. It also funneled cash kickbacks through a network of other companies.

Such practices violate provisions of the Real Estate Settlement Procedures Act, which bars a "fee, kickback or thing of value" in exchange for a referral of business related to a real estate settlement.

A bill by Rep. Keith Ellison, D-Minn., would remove any ambiguity in that law by prohibiting any agent or broker from receiving a financial benefit for referring clients to a title firm. It would require violators to pay restitution to clients and competitors, and extend the law's statute of limitations from one year to three.

In other words, the measure would protect buyers from what is now an opaque market with hidden commissions and reverse competition.

"When sellers or real estate agents refer buyers to a title insurance company, homebuyers assume they're getting the best deal," said Ellison, a member of the key House Financial Services Committee. "But agents may have a financial stake in the title insurance company they recommend to buyers."

No one is arguing about the need for title insurance, which assures both the lender and buyer that the seller actually has clear ownership and the legal standing to transfer the property. It is also a guarantee that the title agent has reviewed the relevant data to identify any problems. Premiums are based on the price of the house.

Theoretically, buyers have the ability to shop for coverage and negotiate the rate. But according to the Consumer Federation of America, the business is highly concentrated, with five insurer groups controlling about 92 percent of the market.

And as folks approach the end of the long, sometimes nervewracking homebuying journey, most don't have enough energy left to hunt for title insurance bargains. Instead, they follow their realty agent's suggestion to use this closing professional and the insurance he sells.

Kickbacks are the "primary reason" title insurance is so expensive, says J. Robert Hunter of the Consumer Federation of America (CFA), an association of nearly 300 nonprofit consumer groups.

Insurers primarily compete with other real estate professionals for business, rather than appealing directly to consumers, says Hunter, a former federal insurance administrator under presidents Ford and Carter. Consequently, insurers offer costly considerations for referrals -- considerations like cash, lavish dinners, vacations and even tickets to special events -- that drive up the cost of insurance.

As it turns out, according to a report by the CFA, the Maryland case is hardly unique. Over the years, numerous actions have been taken against title insurers by the feds, the states and even individuals:

-- Just last month, New York Gov. Andrew Cuomo, a former secretary of the Department of Housing and Urban Development (HUD), along with the state's financial services office, proposed new rules for the title insurance business, saying kickbacks and other improper expenditures have unnecessarily increased the cost of coverage.

The state said that an investigation found inducement arrangements, including meals and other considerations, to be "common and expensive to consumers."

-- The CFPB itself has fined several title companies and big national lenders thousands of dollars. Stonebridge Title in New Jersey was hit with a $30,000 fine, Lighthouse Title in Michigan was nailed for $200,000 and Wells Fargo and JPMorgan were dinged for $35.7 million in a precursor to the Maryland case.

-- Colorado has closed more than 10 title agencies created to receive kickbacks from insurers and pledged to shut down nearly 200 "sham" affiliated real estate businesses that took kickbacks. Similar cases have been settled in California, Michigan and Arizona.