Property I.D., a company that shared the profits it made providing natural hazard disclosure reports to home buyers with real estate brokers, says it’s filed suit to end a nearly two-year-long investigation of the company’s business practices by federal regulators.

The investigation of Property I.D. dates to August 2005 when officials at the Department of Housing and Urban Development and the Federal Trade Commission notified the company’s partners in a joint venture — Cendant and Coldwell Banker Residential Brokerage Corp. — that they were looking into whether the arrangement violated the Real Estate Settlement Provisions Act, or RESPA.

In its suit against HUD, Property I.D. maintains that natural hazard disclosure reports are not subject to RESPA requirements because they are not settlement services.

California and some other states require that sellers provide natural hazard disclosures for properties located in areas known to be prone to flooding, fire, earthquake or landslides. The disclosures must be made on standardized forms, which can be prepared by the seller, the seller’s agent, or a third-party consultant.

The HUD and FTC investigation followed a civil suit by a Southern California home buyer alleging that Coldwell Banker and perhaps other Cendant affiliates entered into joint ventures with Property I.D. to evade RESPA’s anti-kickback and fee-splitting provisions (see Inman News story).

Cendant acknowledged forming a joint venture with Property I.D. called Property I.D. Associates LLC but denied that the arrangement violated RESPA. Coldwell Banker is now under the umbrella of Realogy Corp., which Cendant’s real estate division spun off last year as an independent, publicly traded company.

Last year, Coldwell Banker and Realogy filed a $3 million breach-of-contract suit against Property I.D., alleging that the company tried to bilk them out their fair share of the profits in the joint venture (see story).

The Sept. 7 lawsuit accused Property I.D. of failing to make quarterly distributions of cash, blocking access to the joint venture’s books and records, and failing to provide independently reviewed financial statements.

The joint venture was scheduled to continue through May 31, 2008, but was terminated last summer. Based on earnings before the joint venture was dissolved, Realogy and Coldwell Banker claim early termination of the agreement cost them $2 million.

In a separate unfair competition lawsuit filed Sept. 1, Coldwell Banker and Realogy claimed Property I.D. sent unsolicited disclosure reports to real estate agents, along with requests for payment.

“Congratulations on your new listing! We would like to thank you for choosing Property I.D. to meet your disclosure needs,” the payment requests allegedly said. “To avoid future collection issues regarding the payment of the enclosed reports, please be sure that the attached invoice of the report is forwarded to escrow.”

In announcing their own lawsuit against HUD Tuesday, Property I.D. officials said the department lacks the authority to investigate the company because its hazard disclosure reports are not a settlement service governed by RESPA.

“To fall under the jurisdiction of RESPA, the product sold by Property I.D. would have to be a settlement service,” the company said in a press release. “However, natural hazard disclosure reports are not settlement services, and not part of escrow.”

In its complaint against HUD, Property I.D. alleges that the legal definition of settlement services is “unconstitutionally vague,” and that RESPA itself, as interpreted by HUD, is unconstitutional “because it authorizes excessive penalties and violates due process.”

HUD spokesman Brian Sullivan said the department has no comment on the Property I.D. lawsuit at this time.

Barry Himmelstein, an attorney representing the Southern California homeowner who filed the Aug. 12, 2005, suit against Property I.D., called the arguments in the suit against HUD “flat out ridiculous.”

“We’ve looked at the (RESPA) issue, and we don’t think there’s anything to their argument,” Himmelstein said. “It looks like a desperate, last-gasp effort on their part.”

Himmelstein is seeking class-action status to represent other homeowners who purchased hazard disclosure reports from Property I.D. The lawsuit claims homeowner Mark Berger and his wife paid $114 through escrow for a Property I.D. hazard disclosure report, when competitors offered similar products for as little as $29.50.

Property I.D. has successfully defended itself against at least one other similar suit. In March 2003, an Orange County (Calif.) Superior Court judge dismissed a complaint alleging that Property I.D. overcharged a home buyer for a report purchased through a brokerage company it had an affiliated business arrangement with.

The Real Estate Settlement Procedures Act, or RESPA, allows affiliated business arrangements but requires that companies have their own employees, separate offices, phones and capital. RESPA stipulates that agents who refer clients to affiliated title insurance companies must disclose their financial interests in them, and cannot require their clients to do business with them.

Partners in affiliated businesses may share in their profits based on their share of ownership in the joint ventures, but the revenue they receive cannot be tied to the number of referrals generated.

State and federal regulators have conducted numerous investigations of affiliated business arrangements in the title insurance industry, in some cases issuing fines or reaching large settlements when it was determined that kickbacks or fees were paid for client referrals.

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Send tips or a Letter to the Editor to matt@inman.com, or call (510) 658-9252, ext. 150.

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