First American Title Insurance Co. has agreed to pay a $500,000 civil penalty to Minnesota regulators to settle allegations that it created 35 sham businesses that generated referrals from partners including real estate agents and brokers, mortgage originators, building contractors and land developers.

First American, which in December agreed to pay California regulators $10 million to settle accusations that it provided cash payments and other inducements to real estate professionals in exchange for referrals, maintains that the affiliated businesses it created in Minnesota were operated in accordance with state and federal law.

In a consent order, First American agreed to close the businesses down, pay a $500,000 penalty, and create educational material for consumers to be posted on the Minnesota Department of Commerce’s Web site.

“This action is in keeping with First American’s previously announced plan to meet with insurance regulators across the nation, share the details of its corporate compliance program and address regulators’ views on changing and emerging standards of good practice,” the company said in a prepared statement. “Although First American believes it operated the joint ventures consistent with then-existing state and federal law, it recognizes that the regulatory landscape is changing and the company is adapting accordingly.”

In the consent order, Minnesota officials characterized the 35 affiliated businesses First American created with more than 600 partners as “sham” businesses as defined by the Real Estate Settlement Procedures Act, or RESPA.

Although RESPA does not prohibit affiliated businesses arrangements, or ABAs, they cannot be used as a conduit for illegal kickbacks and must have their own employees, separate offices, phones and capital.

Companies that send customers to affiliated title insurance companies must disclose their financial interests in them, and cannot require their clients to do business with a company they are affiliated with.

First American began creating affiliated businesses in Minnesota in 1995, officials said, forming a wholly owned subsidiary, Universal Title Co. The subsidiary acted as an intermediate holding company for Universal Partnerships Inc., which held direct interests in the companies.

In exchange for a typical investment of $500, partners were granted an 80 percent interest in the companies, which First American managed without compensation. According to the consent order, First American hired, trained and supervised employees of the businesses, some of which shared workers, office space and equipment.

First American’s partners, including individual real estate agents, small and mid-sized real estate brokerage firms, mortgage brokers, individual mortgage loan officers, builders and developers, were encouraged to direct their customers to the affiliated businesses for closing services and title insurance.

Because the affiliated businesses were not considered settlement service providers under RESPA, Minnesota regulators and the U.S. Department of Housing and Urban Development contend that the distribution of their profits to First American’s partners violated the act.

Minnesota officials said First American also violated state law by paying commissions or other compensation to employees of the affiliated businesses who sold title insurance but were not licensed by the state as insurance producers.

First American failed to “completely or accurately disclose” its affiliated business arrangement, the consent order alleged.

Under the terms of the settlement, First American will prepare a schedule of rates and a rate calculator for the Department of Commerce Web site, along with a primer explaining title insurance and its role in real estate transactions and a “frequently asked questions” section.

Minnesota and HUD officials announced a crackdown on affiliated business arrangements in November, issuing a consent order against St. Paul-based Five Star Mortgage that provided for $19,812 in fines and restitution. Five Star was accused of forming a sham affiliated business, Five Star Title, with Excel Title Holdings LLC.

Minnesota Department of Commerce officials announced Wednesday that other recent actions include:

  • A $500,000 civil penalty against Dale Dodge, owner of Bloomington-based Verity Title and Abstract for allegedly misappropriating customers’ funds. The Department of Commerce has identified $2.4 million in outstanding claims against Verity Title, and said the company has filed for bankruptcy protection.

  • Gibraltar Title Agency of Edina signed a consent order agreeing to close down their affiliated businesses, including Clear Title, Star Title, AM Title and Sound Title. Gibraltar agreed to reimburse customers $100,000 and pay a $10,000 civil penalty.

  • American Residential Mortgage of Maplewood signed a consent order agreeing to a $5,000 civil penalty. The Department alleged that ARM failed to disclose an affiliated business arrangement with Titles Plus.

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