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Title Insurance Companies Probed in Scheme

February 23, 2005

Title Insurance Companies Are Being Investigated in California Kickback Scheme

SACRAMENTO, Calif. (AP) -- State Insurance Commissioner John Garamendi said he was investigating kickbacks paid by title insurers to developers, lenders and real estate agents who referred home buyers to the insurance companies.

Garamendi's announcement Tuesday came a day after the state of Colorado announced a consent agreement with First American Title Insurance Co., based in Santa Ana, to refund consumers $24 million they paid in similar agreements.

"In the name of greed, title insurers are paying kickbacks by unnecessarily raising the price of premiums and splitting the overcharge with the other conspirators," Garamendi said. "These corrupt arrangements are an outrage."

Garamendi said he wants to drive down the rates, open up competition and reimburse homeowners.

The Department of Insurance sent subpoenas Tuesday to two title insurance companies -- Fidelity National Financial Inc. and LandAmerica Financial Group Inc. -- that do business in California, ordering them to turn over documents and force executives to testify at a hearing in April. First American was not subpoenaed because it was cooperating with the state.

Garamendi said the widespread practice has fleeced hundreds of thousands of homeowners since its inception in 1997, costing some more than $1,000 a home. He said the fees violated state and federal laws.

LandAmerica issued a statement on its Web site Wednesday saying it "is extremely concerned with statements made by Colorado and California to the press regarding alleged improper conduct of LandAmerica and its captive reinsurance arrangements. The company believes these statements are untrue and misleading."

Larry Seay, chief financial officer for Meritage Homes Corp., which participated in the deals, said the company had decided to voluntarily break its relationship with title insurers.

"We don't want to do anything that is perceived to be incorrect," Seay said.

He said the relationship was disclosed to buyers and the company thought it was able to get better deals for home buyers through the practice.

"It's not like someone's being paid something under the table at all," Seay said.

Lenders require title insurance to guarantee there are no other ownership claims on a property they are financing. In California, three companies do about 75 percent of the title insurance business, Garamendi said.

Garamendi said the kickbacks were paid through a scheme to have subsidiaries of the developers, lenders and real estate agencies underwrite part of the insurance coverage. A home builder with such a subsidiary would agree to send all its customers to a certain title company and they would split the premium. Although the subsidiary would assume some of the risk, Garamendi said they never paid claims.

While Colorado regulators said $325 was spent in kickbacks on the average $1,000 title insurance fee, a First American executive said it was incorrect to conclude it could cut rates by 30 percent. The $24 million the company agreed to reimburse represents a tiny share of $5 billion to $7 billion in policies it wrote nationwide since 2000, said James Dufficy, vice president of First American Corp., the parent of First American Title Insurance Co.

While the company will reconsider its rates and is putting a stop to the practice, Dufficy said it hoped to rework the deals so they would be acceptable in the future.

A spokesman for an industry group said the First American agreement reflected an infinitesimal share of the $16 billion annual industry. "It sounds like most of the participants are stopping the practice and if they're stopping the practice I don't know what kind of impact it could have on the business," said James Maher, executive vice president of the American Land Title Association.

"While we cannot speak for the arrangements of our competitors, LandAmerica's captive reinsurance arrangements have not resulted in any injury to consumers," said Michelle Gluck, a lawyer for LandAmerica. "LandAmerica's title insurance rates are the same regardless of whether these reinsurance arrangements are utilized."

LandAmerica stock rose 39 cents to $53.51 in late morning trading on the New York Stock Exchange Wednesday. LandAmerica has been trading in a range of $35.51 to $57.57 per share over the past year.

Fidelity National did not immediately return calls.

Copyright Associated Press

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