Regulators Cracking Down on Title Insurance Kickbacks

The state Department of Insurance, rejecting part of a compromise reached two months ago with the title insurance industry, is expected to issue new rules today that prohibit insurers from paying any financial incentives to real estate brokers and agents.

The agency, in an effort to stop rampant kickbacks paid to gain more business, specifically outlawed a year-old exemption that had allowed title companies to advertise jointly with real estate brokers and agents.

“We’ve seen so many abuses of joint advertising--so many that were well documented--that we just decided to get rid of it altogether,” said Mark Lowder, deputy insurance commissioner for enforcement.

In a bulletin being sent today to the industry, the department reiterates its warning of a year ago that it will enforce rules prohibiting illegal rebates that have curtailed competition and increased costs to consumers in recent years.

Such abuses as under-the-table payoffs, car and computer payments and closed-shop arrangements between brokers and title companies became widespread in recent years as title carriers and real estate agents chased a dwindling number of deals.

Title companies and the independent printers whose businesses were hurt under the joint advertising rules hailed the department’s decision. But some executives questioned whether the rebates would really end.

“Unless they do something to enforce it, it’s not going to do any good,” said one title executive.

To help enforce the rules, the state agency expects to receive $840,000 over three years from the industry’s trade group, the California Land Title Assn., to hire two investigators and a support staff dedicated to eradicating the abuses. The payment needs legislative approval.

Without the industry’s financial support, Lowder said, the agency would be hard-pressed to devote much of its scarce resources toward halting rebate violations.

Both title company executives and real estate agents have previously described the various unlawful arrangements as “out of control” and “a mess.” Insurance Commissioner Chuck Quackenbush has called the problems “ingrained and widespread.”

Quid pro quo business arrangements violate both state and federal law.

Under a federal law known as RESPA, the Real Estate Settlement Procedures Act, no one may receive or charge “any fee, kickback or thing of value” for referring business in mortgage transactions. Violators face a $10,000 fine or a year in jail, but industry experts say the law is rarely enforced.

Two months ago, the industry proposed a self-policing structure and a clearer policy on the right to advertise jointly with real estate companies and others. The agency tentatively agreed, but said it would police the industry itself.

Under that agreement, which was to be unveiled in early November, agents would have had to pay their share of the costs and title companies would have had to keep separate accounts of the printing jobs. Regulators would have spent huge sums just auditing the transactions.

But opposition from printers and others persuaded the agency to revise its agreement with the industry and ban all joint advertising.

“I like what they’re saying. It’s a step in the right direction,” said Frank Verrill, who runs Real Estate Image Inc., a Santa Ana print shop that had lost business to the free services that title companies were providing.

John L. Marconi, chairman of Orange Coast Title Insurance Co. in Tustin, said the industry supports the latest language.

“Because of concerns over monitoring what could be printed and what couldn’t, we agreed with the idea of halting it all,” said Marconi, who, as president of the industry’s trade group, headed industry negotiations on the rebate issue.

William P. Foley II, chairman of Fidelity National Financial Inc., said the larger title insurers have been pushing for a long time for the ban and for better enforcement. While Fidelity, like others, has its own print shop to produce its own products, it also printed fliers for realty agents to protect its market share.

“All the title companies are playing one-upmanship and wasting money with these fliers,” Foley said. “Some of the fliers were very elaborate, and they cost a lot of money.”

The Insurance Department’s bulletin provides eight other examples of illegal rebates. One, for example, appears to prevent a title company from agreeing with real estate offices to offer only that title company’s policies, shutting out other insurers.

Such closed-shop practices are routine in Southern California and are usually based on the idea that such arrangements can lead to discounts for consumers, even though title insurance premiums are fixed by the state, industry experts said.

But that practice could lead to additional fees if consumers choose other insurance carriers. Marconi of Orange Coast Title said he isn’t sure the rules halt the exclusive deals--or that the state can do much about it. “There are closed shops everywhere in the county,” he said.

First American Financial Corp. in Santa Ana, the nation’s largest title insurer, would welcome a ban on closed shops, said its president, Parker S. Kennedy.

“If closed shops are outlawed, that’s fine with me, as long as the law is clear,” he said. He figures that the rules are fairly clear now but that test cases may need to be brought to clarify certain areas such as the closed-shop deals.

The state agency’s latest edict, Kennedy believes, is “going to work well.”