A legal dispute between RE/MAX International Inc. and First American Residential Group Inc. over a $600,000-a-year marketing agreement has attracted the attention of Colorado regulators, who want to know more about how First American benefited from the deal and why it decided to pull the plug on the agreement last year.
According a lawsuit filed by RE/MAX in March, First American paid the real estate franchisor more than $2.4 million over four years for the exclusive right to market its title insurance and related services to RE/MAX franchises and agents.
RE/MAX sued after First American terminated the agreement in April 2007 and allegedly failed to make a scheduled payment of $693,000 the following July.
The lawsuit caught the attention of the Colorado Division of Real Estate’s director, Erin Toll, known for her past investigations of kickbacks paid by title insurers to win business from real estate agents, developers and lenders when Toll was the state’s deputy insurance commissioner.
Toll said she wants to know exactly what First American was getting for the more than $600,000 a year it paid RE/MAX under the agreement and why the company pulled out.
The Colorado Division of Real Estate has subpoenaed RE/MAX franchisees and staff members, and is investigating whether RE/MAX agents were provided with incentives such as vacation time or company-generated leads to steer consumers into purchasing title insurance from First American.
Toll noted that the agreement between RE/MAX and First American gave both parties the right to back out if they were faced with allegations by regulators that it violated the Real Estate Settlement Procedures Act, or RESPA, which prohibits kickbacks or payments made in exchange for the referral of business.
In 2005, Toll’s probe of kickbacks paid through captive reinsurance arrangements sparked other investigations and eventually led First American Title Insurance to refund $24 million to consumers nationwide (see Inman News story).
In December 2006, First American agreed to pay $10 million to settle allegations by California regulators that the company generated business by making illegal cash payments and other inducements to real estate professionals, including free software, tickets to rock concerts, and trips.
First American said at the time that the settlement with California regulators was in keeping with a previously announced plan "to meet with insurance regulators across the nation, to proactively share the details of its corporate compliance program and address and resolve all pre-existing compliance matters" (see story).
Toll said she believes First American may have decided to terminate its agreement with RE/MAX as part of the company’s efforts to become RESPA-compliant. The fact that such a clause was included in the agreement "says that somebody thought this might be a RESPA violation," Toll said.
Although First American did not respond to a request for comment, RE/MAX Chief Counsel and Senior Vice President Geoff Lewis said that as a franchisor the company is not a real estate broker or settlement services provider, and is therefore not subject to RESPA.
Lewis said RE/MAX has marketing agreements with 123 companies that want to pitch their services to more than 4,000 RE/MAX franchisees. They include "any kind of company you can imagine," ranging from AT&T and Office Depot to makers of yard signs and refrigerator magnets, he said.
"In essence, they are essentially buying a mailing list from us," Lewis said. "We don’t control those franchises, or have any way to require who they do business with."
In its marketing agreement with First American, RE/MAX describes itself as being "in the business primarily of marketing, selling and servicing real estate brokerage franchises."
"We are very comfortable with this agreement from a legal standpoint," Lewis said. "The fact that we sued First American to enforce the agreement should be the strongest indication of how comfortable we are."
All told, RE/MAX has five marketing agreements with settlement services providers, including First American, Lewis said. Although he would not name other settlement services providers RE/MAX has marketing agreements with, he said First American was the lone title insurance provider.
Only First American officials can say why they backed out of the marketing agreement, Lewis said, but added that "we all know the real estate market is down, and we’re all looking for ways to cut costs."
Toll said that while it’s ultimately up to federal regulators at the Department of Housing and Urban Development to determine whether RE/MAX International is subject to RESPA, the franchisor’s actions "trickle down to their brokers," and that Colorado regulators do have jurisdiction over them.
"Where the rubber hits the road is when we start interviewing the guys in the trenches," Toll said, and learn if RE/MAX agents were offered incentives such as points toward vacations or company-generated leads to sell First American’s services. "We’re hearing that’s going on in one of those companies," she added.
The July 2006 marketing agreement that’s at the center of RE/MAX’s lawsuit is the successor to an April 2003 agreement in which First American agreed to pay RE/MAX International $600,000 a year.
In the lawsuit, RE/MAX claims that before the original three-year agreement was set to expire in early 2006, the companies entered into a new agreement that was to extend to July 2008. First American made a first annual payment of $660,000 under the new agreement in July 2006, but terminated the deal in an April 26, 2007, letter and failed to make a second payment of $693,000 in July 2007, RE/MAX said in its March 20 complaint.
The marketing agreement called for RE/MAX to "exclusively market, endorse, support and promote the (First American) products and services to RE/MAX franchisees."
According to RE/MAX, the agreement did not require the broker or its franchisees to provide any information concerning First American directly to home buyers, or refer or generate any business for First American. First American acknowledged that RE/MAX franchisees could enter into title insurance relationships with other companies.
But RE/MAX agreed to make regional vice presidents, regional directors and franchise development consultants available to First American "for training on, and updating of, products and services" for two days each year. The agreement called for First American to sponsor a welcome reception at the RE/MAX summer broker-owner conference in 2006 and 2007, at a cost of $60,000, the complaint said. RE/MAX charges First American did not follow through on its sponsorship of the summer 2007 conference, held for franchisees and sales associates but not home buyers.
In addition, the marketing agreement provided that First American would produce co-branded marketing material and otherwise market directly to RE/MAX franchisees.
RE/MAX agreed to publish one article provided by First American and a half-page color advertisement in a newspaper distributed to all RE/MAX franchisees, and "prominently promote and advertise" First American as the "exclusive RE/MAX supplier for title services" in all brochures, catalogs, convention materials and other print media.
On the Web, RE/MAX agreed to maintain and host on its server a co-branded Web page with one page of editorial and promotional content.
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