May, 2005
News in Brief
Inspection News and Views from the American Society of Home Inspectors

Regulators investigating affiliated business arrangements


Following are excerpts from two articles by Janis Mara, published in Inman News in March, and one by Glenn Roberts, April 1, 2005. All report recent action regarding real estate transaction kickback arrangements or inducements. Inman News ( is a subscription e-newsletter covering the real estate industry.

Regulators investigating affiliated business arrangements

Colorado puts real estate ABAs under microscope

Colorado's deputy insurance commissioner is launching an investigation of affiliated business arrangements among real estate service providers, Inman News has learned.

"The committee will be looking at affiliated business arrangements," Colorado Deputy Insurance Commissioner Erin Toll said Thursday. She was referring to the Title Insurance Working Group, a National Association of Insurance Commissioners committee that she heads.

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 the Real Estate Settlement Procedures Act, 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.

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 homebuyer or seller, offering brokerage, lending, and even closing services under one roof.

Back in Colorado Thursday from the NAIC's national conference this week, Toll said of ABAs, "Some of those arrangements are just shams. They are not really affiliated businesses that are doing actual work. As a committee, this is the next issue we will examine."

In her role as deputy insurance commissioner for the state of Colorado, Toll is investigating nine real estate title insurers for alleged kickbacks, which set off a national probe of title insurance companies in several other states. In the alleged schemes, title insurers agree 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.

Now, Toll and her NAIC Title Insurance Working Group are going after affiliated business arrangements for suspected similar kickback schemes, Toll said.

While Toll is justified in pursuing the issues, not all ABAs are in violation of RESPA, said Craig Focardi, a senior analyst at the Tower Group.

"I think the key issue from a consumer perspective is if there are excess profits being shared between the service provider and the loan originator, then instead of having these revenues go to the originator, the service providers ought to be able to lower the insurance premiums they charge," Focardi said.

Industry insiders have noted a significant upswing in these types of affiliated partnerships in recent years. Such partnerships must comply with RESPA, and many participants work with RESPA attorneys to ensure they are not violating the rules.

Still, critics of affiliated business arrangements say the partnerships encourage kickbacks by making it easier to hide them.

"Under HUD, with ABAs you're supposed to split only profits. But that's not the way many of them are being run. Too often, ABAs offer two things: an opportunity to hide kickbacks and a way to make kickbacks legal," said Everett Ives, an Austin, Texas-based mortgage consultant.

"Rather than have a very clear boundary between the appraiser, the lender making the loan, the title insurance company and the private mortgage company, HUD allows these different companies to share a little bit in each other's fees through these ABAs," he said.

Technically, they are not splitting fees, they're sharing profits through these joint ventures, Ives said. But, he claims, it has the same effect. As a result, all the different service providers are sharing each other's fees, Ives said.

-Janis Mara, Inman News

Department triples enforcement staff, doubles budget

HUD supercharges RESPA enforcement

The Department of Housing and Urban Development is ramping up enforcement of the Real Estate Settlement Procedures Act, tripling its enforcement staff and doubling its enforcement budget.

HUD is currently pursuing 60 investigations into alleged violations of RESPA's Section 8, the principal anti-kickback section of the act, a HUD spokesman said.

"This department is a whole new department when it comes to enforcing the law," said Brian Sullivan of HUD. The department has tripled its staff and doubled its
budget over the last three years, Sullivan said.

In addition, the department is using contract investigators to pursue the investigations, Sullivan said.

Lenders, builders, title companies and other settlement service providers are under investigation for possible violations of Section 8, the principal anti-kickback section of RESPA, Sullivan confirmed.

Additionally, HUD last week announced two related settlements involving allegations that several Tulsa, Okla.-area home builders, real estate companies and title companies were attempting to skirt RESPA's anti-kickback provisions.

Combined, the companies agreed to pay $450,000 and cease their business practices that triggered HUD's investigation, according to a statement from HUD.
HUD claimed that the parties violated Section 8 of RESPA, which prohibits anyone from giving or accepting a kickback in exchange for referrals of settlement service business, by creating middleman companies that distributed a portion of the affiliated title companies' profits to the real estate agents and home builders in exchange for steering customers to the title companies.

Last week's announcement came on the heels of nationwide investigations of title insurance industry practices in which investigators allege similar kickback schemes exist among title insurers, real estate brokerage companies, banks and home builders.

However, Sullivan said the ramp-up in enforcement is not because of the national attention over alleged title insurance

Sullivan said that HUD has, over the past three years, significantly ramped up its enforcement activity with regard to RESPA, as well as the Interstate Land Sales Full Disclosure Act. The latter act is primarily a disclosure law that requires land developers and sellers of undeveloped land to register with HUD and provide purchasers with property reports.

In addition to ramping up its RESPA enforcement initiatives, HUD is also looking to make reforms to the federal act to make the homebuying process easier for consumers to understand. HUD Secretary Alphonso Jackson earlier this month said proposals are underway and will be submitted to Congress for input within two months.

HUD's previous attempts to make changes to RESPA to simplify the homebuying process for consumers came to a halt in March 2004 when Jackson withdrew the agency's proposal from the White House Office of Management and Budget. At that time, Jackson said HUD would re-examine the rule, revise it if necessary and re-propose it.

This time, HUD will seek input from members of Congress before releasing proposals for public comment.

"Once we get (Congress') input, we will go back to the industry, and let the industry group make their comments...I can assure you that once that is done, we will not hold (the rule) in abatement as we did last time," Jackson told the House Financial Services Committee at a hearing in March.

-Janis Mara, Inman News

Real estate rebate debate moves to the courts

Reactions to DOJ lawsuit against Kentucky Real Estate Commission
Kentucky real estate broker Pat Hayden said he wasn't surprised to hear that the U.S. Justice Department is suing the state's Real Estate Commission over its prohibition on real estate inducements and rebates for

Before the Justice Department stepped into the fray, there was exhaustive debate among real estate professionals in the state. The real estate commission conducted a survey of licensed real estate brokers in the state on whether they favored any changes to state law to allow licensed agents and
brokers to offer inducements or rebates to potential clients or customers.

The responses were overwhelmingly against any changes to the state law. An estimated 81.1 percent of 1,384 participants in this survey said they are "in favor of keeping Kentucky law the same, which prohibits the offering of inducements or rebates."

Norman Brown, executive director for the Kentucky Real Estate Commission, said the commission decided not to pursue changes to the current law until the Justice Depart-ment case is resolved. "We decided to wait until we got a ruling on this issue in order to make any changes. We just think we need an interpretation of our law," he said.

An inducement, as defined by the Kentucky Real Estate Commission, is money, a prize, a free gift, or any other thing of value that an agent or broker would offer to a prospective client or customer as an incentive to working with them. A rebate is a refund or return of a portion of monies or commissions that the agent or broker has received.

While Kentucky law does not allow any form of inducement or rebate-and even prevents Realtors(r) from paying for a consumer's lunch, for example-a task force formed by the state's Real Estate Commission and the Kentucky Association of Realtors(r) has proposed changes to the law that would legalize some forms of inducements.

The proposal provides that real estate agents and brokers can pay for meals and drinks consumed by clients, customers or pros-pective clients or customers, for example, and also provides that agents and brokers can offer prizes or free gifts at fairs, trade shows and other community events, as long as the value does not exceed $500 per event per branch office. Also, the proposal would allow the distribution of free marketing materials such as matchbooks, magnets and calendars, as long as those items have a cost of no more than $10 per item.

-Glenn Roberts Jr., Inman News