A California investigation into alleged kickback schemes involving title insurance companies is a good idea, industry figures said, with one advocating even wider investigations.
“It’s a good idea,” said Devon Callan, a loan originator with American Advantage Mortgage, regarding the investigation that California Insurance Commissioner John Garamendi announced on Tuesday.
“It’s one thing to set up a strategic alliance between yourself and another company. But once you start doing this revenue-sharing thing, where does the line get crossed? I think the investigation should be carried over to mortgage companies that are affiliated with Realtors as well.”
Garamendi has been working with Colorado and Washington insurance regulators to probe a series of “phony ‘reinsurance’ contracts” and has issued subpoenas in the matter. Garamendi said Tuesday that Fidelity National Title and LandAmerica companies were being investigated.
“Under these elaborate schemes, the title insurers agreed to give about half of the premium on title insurance policies to ‘captive’ reinsurance companies created by the other conspirators,” Garamendi said. “The parent companies of these ‘captives’ would in turn refer business to the title insurer.”
Giving or accepting money in exchange for title insurance business is a violation of the federal Real Estate Settlement Procedures Act.
The investigation is “absolutely” a good thing, according to Everett Ives, a Texas-based consultant to mortgage brokers and bankers.
“There are many violations of RESPA going on by people who are well-intentioned and don’t have a clue they are violating these subtleties in RESPA,” said Ives.
“This is a 30-year-old law. There’s so much dust on it, it’s safe to assume 90 percent of the people in the business don’t understand it,” said Ives. He believes the common person has a hard time understanding the language in RESPA and that something needs to be done about it.
“Either let’s modify the law so it’s clear, or maybe we need to have a mandatory test of everybody who wants to be a settlement service provider to prove they understand the regulations,” Ives said.
According to Callan, who is based in New Jersey, “it would be good if the investigation has national impact, and I think it will.” He said certain affiliated business arrangements should be scrutinized as well.
“When your Realtor refers a customer to a particular mortgage broker are they doing so because their office is affiliated with that broker or happens to own the mortgage company, or because they do a good job?” Callan asked.
Such arrangements do not violate RESPA unless there is specific compensation going to the agents who make such referrals, John Holmgren, loan officer and broker of record for California’s Holmgren & Associates, an independent mortgage company, pointed out.
Holmgren applauded Garamendi’s investigation, saying, “To the extent there isn’t a level playing field regarding the offering of title insurance, it’s an important area of investigation by the state.”
An affiliated business arrangement was recently cemented between Metrocities Mortgage and Keller Williams San Francisco Properties. Charlene Delaney, owner of the real estate brokerage, says the two companies are scrupulous with regard to RESPA.
“When we do ABAs we make sure it’s very carefully vetted by lawyers before we go into any such arrangement. That’s one of the good things about Metrocities. They dot the i’s and cross the t’s,” Delaney said.
In response to Ives’ comment about problems with understanding RESPA, Delaney said, “We don’t think RESPA laws are all that difficult.”
Delaney said, “I’ve been in the business 32 years and certainly there were egregious practices in the past. So I know why RESPA is necessary.”
According to Delaney, both her officers and those of Metrocities are aware of the provisions of RESPA affecting their arrangement.
“We do know disclosure is an issue,” Delaney said. “If there is any financial gain to be had when we recommend someone, we always have to disclose that and the client has to be aware of it. Disclosure all around. Our mortgage company cannot directly compensate agents unless agents are doing loan processing. I don’t want them to do that. That’s not what they’re good at.
“If there’s anything that needs to be brought into the open, it’s a good idea,” Delaney said of Garamendi’s investigation.
Though Delaney didn’t agree with Ives as to the difficulty of understanding RESPA, Ives’ comments seem to resonate with comments made by James Maher, executive vice president of the American Land Title Association, last week regarding an ongoing Colorado investigation into alleged title insurance kickback schemes.
“We contacted HUD in 1999 to ask for guidance with respect to reinsurance arrangements between title companies and builders and RESPA’s possible application to those arrangements and got a response in November of 2004 that was no response at all,” Maher said in a previous interview.
The U.S. Department of Housing and Urban Development (HUD) polices compliance with RESPA.
“There are unique characteristics to the title insurance industry and referring us to the mortgage industry did not give us the guidance we needed,” Maher said.
“Their (HUD’s) response told us to look at their 1997 letter related to mortgage insurance,” Maher said.
Referring to the arrangements between title insurance companies and Realtors, developers and lenders, Maher said, “These are complex business arrangements. While Section 8 of RESPA seems very straightforward and easy to interpret, we have lots of U.S. Circuit Courts and courts of appeal that have approached Section 8 differently.”
HUD spokesman Brian Sullivan would not comment on the issues raised by Maher.
“Our only statement is longstanding guidance to the industry and I think RESPA speaks very clearly to this,” Sullivan said, referring to the arrangements under investigation. “It would be a violation of RESPA if the insurance premiums consumers pay did not reflect the risk those companies were taking. Whatever a consumer pays should reflect the true value of those costs.”
The arrangements under investigation involve three entities: home builders (or other entities such as brokers), insurers and reinsurers.
Erin Toll, deputy insurance director of the Colorado Department of Insurance, is conducting a similar investigation in Colorado. Toll said the home builders would offer a large amount of business to a title company if the title company agrees to reinsure with a reinsurer that is actually an affiliate of the homebuilder.
Then, Toll said, the title company pays an inordinately large premium to the reinsurer. The reinsurer, Toll said, then funnels the money back to its parent company, the home builder, hence “kicking back” money to the builder.
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