State Investigating Title Company Kickbacks
State regulators are investigating allegations that some California title companies routinely give real estate brokers and agents kickbacks in exchange for lucrative title insurance business.
The title firms say that to keep competitive in what for years was a lackluster housing market, they are often forced to give incentives to real estate agents--everything from cash payments and computers to free printing and mailing services, according to state regulators.
“We found this problem so ingrained and widespread,” said state Insurance Commissioner Chuck Quackenbush, whose agency regulates title firms. “We saw that if we went after one title firm in a sense it’s discriminatory because, in fact, everyone is doing it. We want everyone to stop doing it.”
Dennis Ward, chief of enforcement for the state Department of Insurance, said the agency is investigating three title companies in California, none of which it would name. If the situation doesn’t improve, the department said it will widen the scope of its investigation.
The state Department of Real Estate, which regulates brokers, is also investigating.
While the problems have simmered in years as the real estate market has slowed, the issue erupted this summer when state officials stepped up enforcement efforts and title companies tried to hammer out ways to self-police their industry.
“It’s out of control,” said Gary Beeny, president of North American Title in Glendale, who has asked the state for clearer regulations and more enforcement.
“It’s an intolerable situation. We have worked all summer to try and resolve this problem. We want to figure out what is a lawful inducement as opposed to an unlawful inducement,” he said.
Such quid-pro-quo business deals violate state and federal laws governing the real estate industry. They also can ultimately boost the costs of title insurance for some home buyers, who may trust their real estate agent to select title policies never knowing if there are side deals involved, officials warn.
Under a federal law known as RESPA, no one may receive or charge “any fee, kickback or thing of value” for referring business in mortgage transactions. With a maximum penalty of $10,000 or a year in jail, the law is administered by the federal Department of Housing and Urban Development.
In July 1995, the state Department of Insurance put out a bulletin detailing state codes that govern title rebates and warned that they intended to “fully enforce the unlawful title-rebate sections of the insurance code.”
Abuses include title companies paying for brokers’ advertising, industry fees or salaries of brokers themselves.
While title companies and brokers can engage in joint advertising as long as “each pays for its own correct portion of the advertising costs,” regulators say the situation has gotten out of control, with title companies paying all the printing costs.
Many real estate agents and title companies defend their industries, saying there are only a few lawbreakers.
Regulators, however, disagree.
Title executives “came to me with a kind of ‘Stop me before I sin again’ ” approach, Quackenbush said. “We’re talking about the survival of their industry here. They don’t want to fall into disrepute.”
This year, a Tarzana printing company that relied on real estate brokers for business sued eight title firms in Los Angeles County Superior Court charging they had violated the Unfair Business Practices Act by printing advertising material and fliers for real estate agents at no cost.
That lost the small company business worth $300,000, court documents said.
The title firms allege that they are being coerced by real estate brokers to step over lines they never wanted to cross.
But Marcia Salkin, manager of public policy for the California Assn. of Realtors, defends her group.
“To say this is broker-driven is unfair,” she said. “Most of the Realtors do say no, but as in any situation there are those who are ignorant about the law and those who abuse it.”
A typical title insurance policy in California costs the consumer about $300 to $1,000, depending on the cost of the home. The policy is required by all lenders. It protects the consumer against any liens or past legal problems with the property.
But, typically, sellers or buyers have little concern about which title insurance they use, relying on their broker to recommend a policy.
“Printing all the (real estate agents’) advertising for free is totally illegal but we’re all doing it,” said one Orange County title executive who declined to be named. “Paying for parties is illegal, but we all do it. It’s systemic. Real estate agents have become totally dependent on the title companies.”
While title firms have lost business, the ranks of real estate agents also have thinned, making survivors more willing to push the envelope and cut costs with subsidies from title firms.
“You want to play by the rules but your competitors aren’t playing by the rules and it creates an unlevel playing field,” said Jason Hartman, a broker with RE/MAX Realtors in Irvine. “Nobody’s enforcing these rules and it’s a mess.”
Meanwhile, state regulators such as Quackenbush don’t have “the staff or the inclination to go after the title companies,” said Bill Simmons, president-elect of the San Diego Assn. of Realtors, which represents 3,700 real estate agents.
“Title firms have learned he is unwilling or unable to enforce his own rules,” Simmons said.
Although the San Diego Assn. of Realtors recently joined with title companies in San Diego to try to stop the problem, a written agreement was deemed unenforceable by the group’s lawyers, Simmons said.
“Agents need all the support they can get-it’s been a tough six years in Southern California--and if they can get it from title companies, they are going to take it,” he said.
Consumer groups have also heard about the problems for years, but faced with so many other incidents of consumer fraud, have done little to investigate.
“Clearly, buyers are getting steered to certain title insurance, but because it happens infrequently--only when someone buys a house--it doesn’t wind up on the top list of consumer issues,” said Ben Ahern, senior policy analyst at the Consumers Union’s West Coast regional office in San Francisco.
In an unusual step, Beeny, who is also a past president of the California Land and Title Assn., a title lobbying group, said the group voted Thursday) to ask the state to establish a Title Insurance Consumer Protection Officer.
“We voted to curtail the enormous amount of printing” for brokers, said Beeny. “We’re trying to cut that stuff out.”
The group voted to contribute more than $100,000 to enforcement activity and pay for a new title consumer-protection officer’s salary. It approved a set of clarified and more detailed guidelines.
Chief executives of the top firms have also agreed to sign affidavits by Nov. 1 promising not to abuse the rules against kickbacks.
Still, any reforms may be too late for some small business, particularly printing companies that make glossy brochures and mailers for real estate agents. They have lost lucrative contracts and some are finding it hard to stay profitable.
Frank Verrill, president of Real Estate Image, a 10-year-old Santa Ana printing shop, said he has lost more than $1 million of business in recent years.
“What the title firms have done is a step forward but it’s a PR step,” he said.
Last week, two real estate agents canceled a total of $16,000 in printing orders at Verrill’s firm, saying a title company had offered to print the fliers and brochures for free, he said.
“It is worse than it’s ever been--the title firms are so competitive. Agents are taking whatever they can get,” Verrill said.
Paul Vreede, president of Real Estate Espress, a Tarzana advertising and printing firm, sued several title firms earlier this year.
“All over the place, firms are being driven out of business,” said Vreede. “Title companies have printing firms in their basements and agents tell me their title reps will mow their lawns, do anything for them to get their business.”
In court documents, lawyers for title firms such as Fidelity National Title Insurance Co. in Irvine argued that printing fliers and giving gifts to real estate brokers does not violate the unfair business practices rules.
“If the rule were otherwise, savings and loans would certainly have been sued by toaster manufacturers for their ‘unfair practice’ of trying to run toaster sellers out of business by giving them away with every new account,” the lawyers contend.
The case was settled for an undisclosed amount, although some title firms paid and others didn’t, lawyers for both sides said.
