State Investigating Alleged 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 in order to stay competitive in what for years has been 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, state regulators say.

“We found this problem . . . 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 department is investigating three title companies in California, which he would not name. The department said it will widen its investigation if the situation doesn’t improve.

The state Department of Real Estate, which regulates brokers, is also investigating.

While the problems have simmered in California for years as the real estate market slowed, the issue erupted this summer when state officials stepped up enforcement efforts and title companies tried to hammer out ways for their industry to police itself.

“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 home buyers, who may naively trust Realtors to select title insurers without knowing if side deals are 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 penalty of $10,000 or a year in jail, the law is administered by the U.S. 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 all of a brokers’ advertising, paying for industry fees or paying salaries of brokers.

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 bad apples. Regulators, however, disagree.

Quackenbush met with top title executives earlier this year. Title officials are attempting to crack down on abusers in their firms and Quackenbush has threatened increased enforcement.

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 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 Realtors 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 Realtors 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. 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 $300 to $1,000, depending on the cost of the home. It is required by all lenders. The policy 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 have also 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.”

State regulators like 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 Realtors.

“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 agree 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, they 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.

Beeny, who is also a past president of the California Land and Title Assn., a title lobbying group, said that the group, in an unusual step, voted last Thursday) to ask the state to establish a title insurance consumer protection officer.

“We voted to curtail the enormous amount of printing that is occurring” for brokers, Beeny said. “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. They approved a set of more clarified and specific guidelines. CEOs 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 businesses, particularly printing companies that make glossy brochures and mailers for real estate agents.

Frank Verrill, president of Real Estate Image, a 10-year-old Santa Ana printing shop, said he has lost more than $1 million worth of business in recent years

Last week, two real estate agents canceled a total of $16,000 in printing orders at Verrill’s firm, saying that a title company had offered to print the fliers and brochures 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 Express, a Tarzana advertising and printing firm, sued several title firms earlier this year.

“All over the place, firms are being driven out of business,” Vreede said. “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 brokers did 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 case was settled for an undisclosed amount, although some title firms paid and others didn’t, lawyers for both sides said.

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What Is Title Insurance?

Title insurers search property transfer records for errors and disputes affecting legal ownership (title) of a property. After discrepancies are resolved, insurer issues a policy protecting purchaser from claims others may have against the property. Examples: Unpaid property tax or income tax liens, civil judgments, forged signatures on deeds, claims by former spouses, easements guaranteeing others access to the property.

Who Needs Title Insurance?

Real estate purchasers and lenders. Two types of policies are issued: An “owners policy” insuring the purchaser for as long as property is owned; “lender’s policy” insuring the priority of the lender’s security interest over claims others may have on the property.

How Much Does It Cost?

Usually amounts to less than 1% of purchase price and less than 10% of total closing costs. It is a one-time fee and no additional premiums are required. Costs can range from $300 to $1,000.

Is Title Insurance Required by Law?

No, but lenders require it before approving a loan. Although owner’s policies are not required, a policy is usually substantially cheaper than legal fees needed to pay to fight a claim against the property. Cash buyers stand to lose 100% of equity if an uninsured title defect arises. Sellers who carry financing in a real estate transaction should require a lender’s title insurance policy.

Who Pays?

Customary practices vary among counties, with buyer paying in some, seller in others. But in others, the seller pays for the owner’s title policy and the buyer pays for the lender’s policy. In Orange and Los Angeles counties, the seller normally pays for title. Final decision is a matter of agreement between buyer and seller.

Who Provides Title Insurance?

In some counties, policies are issued by escrow firms; in others, including Orange and Los Angeles counties, policy is written by separate title insurance companies.

How Is Title Different From a Deed?

A deed is a notarized document including a description of the property being transferred and the names of the old and new owners. It is signed by the person transferring the property and a copy is recorded and placed on file at the county recorder’s office. It does not guarantee against any claims to the property made by others.

Source: California Land Title Assn.

Researched by JANICE L. JONES / Los Angeles Times

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What’s Illegal Under State Insurance Code

Paying, directly or indirectly, any commission, compensation, or other consideration to any person as an inducement for the placement or referral of title business.

Broker renting space in an office to one title company paying the broker more than fair market value, and preventing other title companies from soliciting business.

Title company paying salaries of real estate brokers.

Title company paying for radio, newspaper or other forms of advertisements for brokers. (Does not apply to joint advertising where both sides pay correct portion of costs.)

Title company buying equipment for brokers.

Source: State Department of Insurance

Researched by DEBORA VRANA / Los Angeles Times