A national mortgage lender and two major home builders who engaged in captive title reinsurance have reached a $1.6 million settlement with the Department of Housing and Urban Development, HUD announced today.

HUD has reached a $650,000 settlement with CitiMortgage Inc. and its captive title reinsurance company, Chesapeake Reinsurance; a $675,000 settlement with M.D.C. Holdings Inc., some of its Richmond American Homes home-building subsidiaries, and AHT Reinsurance; and a $305,000 settlement with WL Homes, which does business as John Laing Homes, a California and Colorado builder.

HUD maintains that captive title reinsurance — in which a title insurance company transfers a portion of the risk and title premium to a company owned by the builder, lender or real estate broker referring the title business — violates the Real Estate Settlement Procedures Act (RESPA) when payments exceed the value of the reinsurance.

HUD frowns on such deals when they involve an entity that is in a position to refer business to the primary title insurer, claiming they are designed to generate referral fees and that few or no claims are paid.

“There is almost never any legitimate need or business purpose for title reinsurance on a single-family residence,” said HUD Assistant Secretary for Housing Brian D. Montgomery in a press release. “HUD will continue to work with the states to investigate captive arrangements to make certain that they aren’t created for the purpose of obscuring referral fees.”

California, Colorado and several other states are also investigating captive title reinsurance practices. In November, two of the nation’s largest title insurers, Fidelity National Financial and First American Title Insurance Co., agreed to pay a total of $22.7 million to consumers in settlement agreements with California Insurance Commissioner John Garamendi over alleged rebate activities.

Colorado Deputy Insurance Commissioner Erin Toll is credited with sparking dozens of investigations nationwide after her investigation of nine title insurers led to the refunding of about $24 million to consumers by First American Title Insurance Co. (which admitted no wrongdoing). Nevada and Washington state have also reached settlements with title insurers.

HUD says the latest settlements are the first in the nation involving the recipients of payments made by title companies to captive companies for reinsurance. The companies that settled with HUD have agreed not to enter into any new captive title arrangements and to stop writing new captive title reinsurance business.

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