Wells Fargo, Citibank under investigation in alleged kickback schemes

March 7, 2005

Banks deny involvement in fee-splitting arrangements

By Janis Mara
Inman News

California Department of Insurance Commissioner John Garamendi is investigating Wells Fargo and Citibank for possible involvement in alleged schemes in which title companies are said to be paying kickbacks to home builders, real estate agents and lenders, in exchange for volumes of business, Inman News has learned.

Both banks have set up captive reinsurance companies domiciled in Vermont under the names Home Services Title Reinsurance Co., a subsidiary of Wells Fargo, and Chesapeake Title Reinsurance Co., a subsidiary of Citibank, according to Len Crouse, deputy commissioner of the Captive Insurance Division of Vermont's Department of Banking, Insurance, Securities and Health Care Administration.

Citibank and Wells Fargo each say their captive reinsurance companies were not involved in any alleged kickback schemes.

Captive title reinsurance companies are at the center of investigations in Colorado and California. In the alleged schemes, builders are said to be directing home buyers to title insurance companies that are splitting part of their fees with the builders via captive title reinsurance arrangements. Banks allegedly are participating in similar schemes.

Such practices violate Colorado statutes and the federal Real Estate Settlement Procedures Act.

All but one of the 14 captive title reinsurance companies in Colorado's investigation are domiciled in Vermont.

"Citibank's program sharply contrasts with the 'sponsored captive' reinsurance companies that it understands are the focus of these investigations," said Anita Gupta, a Citibank spokeswoman. "We are confident that our reinsurance arrangements are lawful and appropriate."

The spokeswoman said to the best of her knowledge, Citibank is not being investigated. Asked if the captive has suffered any losses, Gupta said she would not comment further on the subject.

Julia Tunis, a Wells Fargo spokeswoman, said, "Wells Fargo does not participate in the activities alleged by California's insurance commissioner."

Kevin Waetke, a Wells Fargo Home Mortgage spokesman, acknowledged that Wells Fargo participates in title insurance through its subsidiary company, Home Services Title Reinsurance Co.

"Home Services has reinsured title policies for a portion of the loans originated through Wells Fargo Home Mortgage's centralized telesales platform," Waetke said.

The telesales platform represents less than 1 percent of the company's retail mortgage loans, he said. Wells Fargo is continuing to operate the company, which became wholly owned in 1994, he said. He said he was not authorized to say how many claims the reinsurance captive has had to pay and could not disclose if it has suffered any losses.

According to insurance experts, one measure of a reinsurance company's legitimacy is whether it has suffered losses. "It is a fundamental principal of insurance that companies are writing policies with the expectation there would be losses on those policies," said Frank Nutter, president of the Reinsurance Association of America.

The annual reports and actuarial reports of Vermont captives are protected by the state's confidentiality laws and cannot be accessed without a court order by anyone other than a regulator, according to Crouse.

The Colorado and California investigations have sparked other states to look into possible kickback practices in real estate transactions.

Florida's Department of Financial Services is investigating 50 title insurance companies for alleged referral incentives. Also, that state's attorney general launched a broad investigation into the state's title insurance industry in late February.

Minnesota regulators are investigating alleged kickback schemes among title insurance companies, home builders, real estate agents and others, according to the Pioneer Press. Washington State and a number of other states are also conducting investigations.

Copyright 2005 Inman News

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