Four title insurance firms have agreed to pay nearly $3.3 million to settle civil claims that they’ve engaged in kickbacks with real estate agents through joint ventures in the Washington, D.C. area, according to the Attorney General for the District of Columbia
Allied Title & Escrow, LLC (Allied), KVS Title, LLC (KVS), Modern Settlements, LLC (Modern), and Union Settlements, LLC (Union) will pay $1.9 million, $1 million, $325,000 and $65,000, respectively. D.C. Attorney General’s Brian Schwalb said that up to $1.75 million from the settlements will go toward restitution payments for affected consumers.
All of the firms denied any wrongdoing in their settlement agreements.
The four title companies involved in the settlements were affiliated businesses that were created by real estate professionals and brokerages investing in the start up costs of the firms. As investors, the real estate agents then received profit payments distributed based on their ownership interest.
However, due to D.C. code, including Section 31-5031.15, which states that the insured “shall not give or receive, directly or indirectly, any consideration for the referral of title insurance business or escrow or other service provided by a title insurer,” and makes no exceptions for joint ventures of affiliated businesses, the attorney general’s office found these companies to be in violation of local law.
“As part of the scheme, title companies offered real estate agents discounted ownership interests and lucrative profit sharing in exchange for business referrals that boosted the companies’ revenues,” Schwalb said in a statement. “OAG’s investigations found that Allied, KVS, Modern, and Union violated District law by providing real estate agents exclusive, lucrative, and discounted investment opportunities either in the companies themselves or in shell entities they created to induce the real estate agents to make business referrals that generated increased revenues for the companies. In return for the referrals, the agents received kickbacks in the form of a split of the profits.”
The civil charges were brought only under the D.C. code, as the federal law governing these businesses, the Real Estate Settlement Procedures Act (RESPA), allows for affiliated business agreements that meet certain criteria.
“The affiliated title agencies were formed and operated in complete compliance with the Real Estate Settlement Procedures Act, which expressly permits the existence of title agencies with investors who are business referral sources, such as real estate sales associates and provides that they payment of profits to those investors is not an impermissible referral fee or kickback, pursuant to section 8(c)(4),” said Francis “Trip” Riley, a partner at Saul Ewing LLP who represented Allied. “Allied and its affiliates met all the requirements for this section to apply. That is why the DCOAG never alleged a violation of RESPA, but rather asserted that Allied’s affiliated business violated a section of the DC Code which in reality addresses only impermissible referral fees and kickbacks of premium to the insured.”
The attorney general’s office also claims that the affiliated title companies created anticompetitive arrangements and limited homebuyer’s ability to shop around for a title insurance provider, harming consumers and “law-abiding competitors.”
Riley took issue with this characterization, stating that the agents at Allied always provided consumers with the necessary disclosures about their ownership interest in Allied and suggested that they shop around for a title provider.
The disclosure also expressly encourages those being referred to the affiliated business to compare the rates and services of the affiliated with other title agencies and goes as far as identifying its rates as part of the disclosure so the consumer can in fact comparison shop.
The rates, fees and charges of non-affiliated title agencies many times are in excess of those charged by Allied’ affiliated title agencies, Riley said. “In effect, by getting rid of affiliated businesses in D.C., they haven’t increased competition, they have decreased competition and they have handed consumers to non-affiliated companies who have higher fees.”
He also noted that many of the investor agents referred less than half of their customers to their affiliated title business.
“They viewed the ability to invest as a thing of value (“kickback”) that the title companies were providing to agents and then the payment of the profit distribution as a fee for referrals; which is categorically wrong,” Riley wrote. “The dollars invested by investor agents was a legitimate payment for ownership interest and based was solely on a their pro rata capital contribution requirement based on their ownership interest. So that investment amount is not arbitrary chosen or based on how many referrals they made.”
Riley also noted that the D.C. Department of Insurance had approved all of the title firms in questions knowing that some of the investors were referral sources. Additionally, up until recently the department maintained a webpage describing, but not prohibiting, title insurance affiliated businesses.
“District residents are entitled to make fully informed decisions about how to spend their hard-earned money, especially when it comes to making the high stakes purchase of a home,” Schwalb said in a statement. “These four companies violated the most fundamental principles of a free and fair marketplace: they hid information from consumers, limited their choices, and hurt other businesses that play by the rules. Today, we’re exposing and putting an end to these elaborate, secretive, and illegal kickback schemes.”
Only one other firm returned HousingWire’s request for comment. KVS Title said it “strongly disagreed” that its JVs operated improperly or harmed consumers, but settled the claims to avoid costly and protracted litigation.
