At the center of the expanding probe of the insurance industry by New York Attorney General Eliot Spitzer and now California Insurance Commissioner John Garamendi is the issue of steering business from brokers to insurance companies for financial gains.
The real estate connection may not be too far off.
The investigation may have already led to the doorsteps of insurance brokers who steer homeowners insurance business to specific insurance companies in exchange for fees. Last night, California commissioner John Garamendi implied he would take action on at least one insurance broker and that he would propose new regulations that would require insurance brokers to disclose all compensation from insurance companies and explicitly prohibit brokers from steering business to insurers in exchange for payoffs.
If these types of investigations of payoffs and fees deepen, the real estate angle could be broader than homeowners insurance. The widening scope of regulators’ concern could easily find government investigators at the doorstep of the real estate industry. Mortgage brokers often steer business to particular lenders in exchange for compensation. While the compensation should be disclosed, it is often fuzzy and still represents payment for directing business to particular lenders.
Other real estate business dealings also could be scrutinized, including affiliated business relationships, capture-rate programs and bundling–a practice in which lenders, real estate brokers, franchises and title companies wrap products together and exchange fees. In some cases, the consumer is informed of these relationships, but often it is disclosed in fine print, well hidden or poorly explained.
While the Real Estate Settlement Procedures Act regulates industry kickbacks and payoffs, in the last decade the industry has pushed the limits of the law in order to capture revenues from affiliated businesses with lending and title companies.
While RESPA promises to prohibit kickbacks in exchange for referrals of home buyers and sellers to services providers, there are many loopholes and it is one of the most tightly wound laws in real estate. RESPA’s complexity may partially explain why there are so many varied interpretations.
But complexity isn’t the whole story. RESPA also is the subject of heated debate because so much money is at stake in the numerous affiliated business arrangements that legitimize and legalize profitable relationships between brokers, lenders, title officers and other people who profit from the real estate transaction.
Many reputable brokers and sales associates insist that the industry is in full compliance with every tiny detail of RESPA and that absolutely no one is breaking the law. But others say compliance is at best spotty due to the widespread ignorance, misinterpretation, shady dealings and outright law breaking, according to a Inman News special report on RESPA released last year.
The government’s inability to enforce RESPA clouds the issue by making it difficult to assess the degree of compliance. The debate over the law and kickbacks generally centers on the home buyer and seller, though most are unaware of the law and its protections. Many brokers and agents rationalize actions to steer business based on the consumers’ desire for one-stop shopping, which by definition means affiliated business arrangements and an exchange of fees.
Critics argue that consumers pay more for these bundled services and are not properly informed of the business relationships.
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