Colorado Division of Insurance announced this week that it has shut down 11 “sham” title insurance agencies, which the division charges were created as vehicles to channel kickbacks to mortgage brokers.

The state division also suspended the license of Douglass P. Farr, the title agent listed as the primary owner and responsible producer for the agencies. Farr allegedly misappropriated escrow funds collected by the agencies, according to the announcement.

Title insurers Dakota Homestead and Attorneys Title underwrite or have underwritten policies for the agencies, the division stated in the announcement.

Earlier this year, the division launched an investigation of ownership arrangements among the roughly 500 licensed title insurance entities in the state and those who refer business to the agencies.

The investigation was prompted by an explosion in the number of title agencies seeking licensure, and complaints that the agencies were created solely to provide kickbacks to Realtors and lenders who referred business to the agencies, the division reported. Federal and state law prohibits title agencies from providing compensation for business referrals.

Following Colorado’s lead, insurance agencies in other states have taken several title insurers to task over industry practices. Regulators in Washington and California, for example, have also initiated investigations focusing on the alleged payment of kickbacks to real estate brokerages, lenders and others in exchange for referred business.

Earlier this month, Inman News reported that Fidelity National entered into a $2.5 million settlement with the Washington state Department of Insurance for alleged kickbacks. The settlement provides that nearly 600 Washington consumers will share in the settlement. Also, Fidelity signed an agreement with the California Department of Insurance to reimburse California consumers $7.7 million, pay monetary penalties of about $5.4 million, and pay an additional $175,000 to reimburse the state department.

The Title Insurance Working Group within the National Association of Insurance Commissioners worked with Colorado and Washington state insurance regulators to probe a series of alleged phony reinsurance contracts between title companies and subsidiaries of real estate agents, developers and lenders. Under these alleged 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. The parent companies of those captives would in turn refer business to the title insurer.

Such arrangements, say insurance regulators, are designed to funnel a large share of the title-insurance premium in exchange for the referral of the customer to the title company, which is illegal and harms consumers by potentially forcing up title insurance rates.

The Colorado Division of Insurance noted that Farr’s companies were the first to be investigated, and the investigation reportedly revealed that some of the agencies “performed no title services, had few or no employees, and in at least one case, had no physical office location. In addition, Mr. Farr and the agencies failed to pay one of the agencies’ underwriters, Attorneys Title, approximately $500,000 in premium. Consequently, several thousand Colorado consumers did not receive title insurance policies. The division is working with the underwriter to ensure no consumers are harmed.”

Erin Toll, Colorado’s deputy insurance commissioner, said that the division will allow the suspended title agencies to continue processing title insurance for real estate transactions that are in the closing process, but they cannot accept new business.

The division is informally investigating companies that provided insurance underwriting for title insurance policies issued by the suspended agencies, she said. As for the roughly $500,000 in premium that Farr and his title agencies allegedly failed to pay to Attorneys Title, Toll said, “We are going to look at Attorneys Title records and make sure this isn’t happening with any other companies’ agencies.”

Toll said that the establishment of multiple title agency offices under a single licensee seems to be a common thread that the division has found in its continuing investigations of alleged title kickback schemes. “Sometimes these office locations are right across from a lender’s office,” she said.

More regulatory actions are expected as the investigation proceeds, the division reported. “Affiliated business arrangements are not inherently bad,” said Commissioner David Rivera. “However, sham agencies affect the ability of legitimate title agencies to compete fairly in the marketplace. It’s our goal to take appropriate regulatory actions to level the playing field and ensure a competitive title insurance marketplace that will benefit Colorado’s consumers.”

The agencies closed by the Colorado Division of Insurance include: Neighborhood Title Services LLC, Westminster, Colo.; CPR Title Inc., Westminster, Colo.; CPR Title of Crested Butte LLC, Denver, Colo.; Fidelity Title LLC, Denver, Colo.; First Choice Title LLC, Greenwood Village, Colo.; Freedom Title & Escrow LLC, Denver, Colo.; Lenders Title LLC, Greenwood Village, Colo.; Top Notch Title LLC, Denver, Colo.; Tri City Title LLC, Westminster, Colo.; and Uptown Title & Escrow LLC, Westminster, Colo.

The division, in an “Order of Summary Suspension,” charged that Farr has “deliberately and willfully violated Colorado insurance laws and regulations” and ordered a suspension of all of the licenses of the title agencies under Farr. The division also announced that a hearing is scheduled on Dec. 9 to set the time of an informal pre-hearing conference with an administrative law judge who will consider whether the license of Farr and his associated title agencies “should be revoked, suspended or subjected to other lawful discipline” and whether to impose civil penalties.

Inman News was unable to reach Farr for comment. The phone number listed with Farr’s licensing information at the Division of Insurance Web site is no longer current.

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Send tips or a Letter to the Editor to glenn@inman.com or call (510) 658-9252, ext. 137.

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