Last summer, the California Department of Insurance seized $500,000 in escrowed funds from a Southern California title insurer after an investigation uncovered the company allegedly was using rebates to entice brokers to steer customers to them.
And last fall, New York Attorney General Elliot Spitzer launched a widespread probe into the insurance industry, alleging insurance brokers regularly steer business to certain insurance companies for profits. California Insurance Commissioner John Garamendi quickly followed suit with a similar state probe.
Now the title insurance industry is under the microscope in several states.
Current investigations of national title insurers in Colorado and California have again raised the specter of illegal steering practices in real estate in which insurers overcharge home buyers for title insurance, then split the fees with developers, home builders and real estate agents who sent the business their way.
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.
Every real estate sale in the United States is touched by RESPA, a complex and arcane law that regulators and industry experts admit is understood in its entirety only by a handful of special-interest attorneys and government bureaucrats.
Congress enacted the law in 1974 during a wave of consumer protection legislation that touched every industry in the country. RESPA promised to provide home buyers with full disclosure of mortgage loan settlement costs and end real estate industry kickbacks.
Kickbacks work like this: Home buyers rely on a real estate agent to walk them through the home purchase process, and along the way they’ll turn to the agent for advice about selecting settlement, insurance and mortgage service providers. These providers rely on real estate agents for business referrals and some of the providers sweeten the deal by giving the agents cash, trips to Hawaii, fax machines and other financial incentives in return for those referrals. Agents who pocket these rewards are accepting a kickback that’s illegal under RESPA for both the agent and the service provider.
The real estate industry over the years has devised elaborate loopholes to RESPA. There isn’t a boardroom in any real estate company in the country that hasn’t had a meeting where someone asked, “What about RESPA?” and the answer was “We can find a workaround.”
These workarounds became so flagrant that HUD amended RESPA in 1983 to include a definition of what is known today as an affiliated business arrangement (ABA). These arrangements make certain referral fees legal and, some argue, they’ve driven illegal kickbacks even deeper underground.
The industry characterizes ABAs as one-stop shopping, a practice that has mushroomed in the last decade. Nearly every large real estate brokerage and home builder in the country today either owns its own mortgage or title company or has an alliance with one – steering home buyers to a single source and benefiting from it.
RESPA 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 an Inman News special report on RESPA.
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.
Another big problem with RESPA is that HUD hasn’t effectively enforced it. HUD’s investigations for decades have been primarily complaint-driven, and HUD’s small staff doesn’t have the muscle to adequately investigate the nearly 1,200 RESPA-related complaints logged in 2000 and 2001 and the 830 more logged in 2002.
HUD announced a few major crackdowns in the last few years. In 2001, the department investigated five major real estate companies for alleged RESPA violations, and the companies subsequently settled by paying a combined $2.25 million. In 2002, seven title companies in Texas were taken to task for giving real estate agents “free” virtual home tours in exchange for business referrals.
To show its concern over real estate professionals understanding how to comply with kickback regulations in the complex RESPA, the National Association of Realtors in November issued two white papers to its members explaining the guidelines in detail.
One paper discusses how HUD determines whether a mortgage or title company is a sham company formed to illegally funnel compensation to those who refer business. Another paper advises realty agents and brokers on when they can receive a fee from mortgage companies without violating RESPA.
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