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First American settles kickback probe for $680,000

July 14, 2005

Title insurer accused of sham business partnerships

By Janis Mara
Inman News

First American Title has agreed to pay $680,000 in a settlement with the Department of Housing and Urban Development over a probe of alleged kickbacks involving sham affiliated business partnerships, HUD said today.

HUD claimed First American Title Insurance Co., doing business as Memphis Title Co., made payments through alleged sham affiliated businesses in the Memphis area in violation of anti-kickback and unearned fee provisions of the Real Estate Settlement Procedures Act, known as RESPA.

First American agreed to make payment to the U.S. Treasury and cease any further business operations involving the alleged sham business partnerships.

"The law is clear on this point," said Brian Montgomery, HUD's assistant secretary for housing and FHA commissioner. "Parties that perform real work in the mortgage transaction deserve bona fide compensation, but fabricating sham affiliations for the purpose of obscuring kickbacks violates the law."

First American spokesman David Schulz said, "At this point in time the company is not commenting on this title situation."

Affiliated business arrangements are partnerships between real estate entities such as title insurance companies, mortgage lenders and real estate brokers. The arrangements are legal under RESPA, as long as certain guidelines are followed, such as disclosing the relationships to consumers. RESPA regulates referrals and other practices in the real estate closing process.

Companies engaged in affiliated business partnerships say they go to great lengths to ensure they are properly following regulations.

HUD said today that its investigation determined that First American created or acquired eight affiliated title companies with various builders, real estate agents and mortgage brokers.

According to HUD, the agency found that the companies were paid for certain title and settlement work they did not perform – services that were essentially provided by First American. HUD concluded that the companies were sham businesses used to make referral payments back to the builders, real estate agents and mortgage brokers in violation of RESPA, the agency said.

Section 8 of RESPA prohibits a person from giving or accepting anything of value in exchange for the referral of settlement service business, according to a description on HUD's Web site. It also prohibits a person from giving or accepting any part of a charge for services that are not performed. TAKE PART IN OUR NATIONAL SURVEY! Provide valuable input on how you're spending your advertising resources as part of our national ad trend report. Results to be revealed at the end of July! Take survey.

In its settlement with HUD, First American made several additional agreements.

These were: that if it formed affiliated companies in the Memphis area in the future, each company would have sufficient initial and operating capital to perform settlement services; that it would be staffed with employees who work for that entity and are not shared with any other settlement service provider.

First American also agreed that each company would have an office for its use in conducting business that is separate and apart from that of any other title entity; and that it would comply with HUD policy statements with regard to the performance and payment for title services.

In addition, First American agreed that each company would compete for title insurance business and seek business from parties other than the builders, real estate agents and mortgage brokers or other settlement service providers with which it has an affiliate relationship; and refrain from practices providing unearned fees or kickbacks for the referral of settlement service business.

Affiliated business arrangements have come under increased scrutiny in the wake of investigations into title insurance industry referral practices.

Colorado's insurance division is investigating real estate title insurers for alleged kickbacks. The investigation set off a national probe of title insurance companies in several other states. In the alleged schemes, title insurers agreed to give about half of the premium on title insurance policies to captive reinsurance companies created by the other conspirators. The parent companies of those captives would in turn refer business to the title insurer.

In the Colorado probe, First American agreed to refund about $24 million to consumers nationwide without admitting liability or wrongdoing. Erin Toll Erin Toll, Colorado's deputy insurance commissioner

Recently, Colorado Deputy Insurance Commissioner Erin Toll began investigating ABAs for possible similar misdeeds.

Several years ago, the U.S. Department of Housing and Urban Development, which polices RESPA, began allowing title insurance companies, private mortgage insurance companies and others to form affiliated business arrangements.

In a typical arrangement, a real estate brokerage will set up a joint venture with a mortgage lender, for example. The partnership typically provides an in-house, one-stop shopping experience for the home buyer or seller, offering brokerage, lending, and even closing services under one roof.

Copyright 2005 Inman News



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