Homeowners title insurance and "affiliated business" joint ventures between title agents, Realtors and lenders came in for withering criticism last week on Capitol Hill.
At a House financial services subcommittee hearing, state and federal regulators, consumer groups and even a title agent from Minnesota, charged that widespread illegal kickbacks, sham and "shell" companies have led to excessive title fees for millions of home purchasers.
Representatives of the title and affiliated settlement industries disputed the claim that fees are too high, but generally applauded state and federal regulators' efforts to crack down on illegal kickback schemes.
HUD deputy assistant secretary Gary M. Cunningham recounted numerous recent settlements in which investigators alleged illegal kickbacks to mortgage companies, home builders and realty brokers in exchange for referrals of consumer title and settlement business. Among them were:
- A title company in Memphis, Tenn. that paid the federal government $680,000 to settle charges of kickbacks for referrals from realty and building partners. The builders paid the government another $226,000 in a separate settlement.
- Settlements in Boston, Detroit, Tulsa, Atlanta and Houston involving allegedly illegal payments to realty and home building firms. In some of the cases, realty agents were alleged to have received non-cash kickbacks such as baseball and concert tickets, free vacations and advertisements.
Federal law prohibits realty settlement kickbacks or provision of "anything of value" in exchange for referrals of consumer business. Cunningham also hinted at future title industry-related crackdowns that may be in the works. In one case, he said, a home builder allegedly required purchasers to use a particular title insurance company -- a violation of the federal real estate settlement law (RESPA) in itself -- but then pocketed substantial fees kicked back from the title insurer and paid to the builder's in-house title company affiliate.
A consumer group representative, J.Robert Hunter of the Consumer Federation of America, broadened the focus of the hearing to the huge revenues paid by home purchasers and refinancers compared with the minuscule claims paid out by title insurers. Hunter, a former Federal Insurance Administrator, said consumers spent $17 billion on title premiums last year -- twice what they paid in 2000 and four times what they spent in 1995.
Claims paid out by insurers were about 5 percent -- compared with 86 percent of premiums for HMOs and 60 percent for auto insurance. Equally significant, said Hunter, is the fact that 80 to 92 percent of the premiums paid for title insurance go to middlemen -- title and settlement agents, escrow agents and lawyers -- who in turn often split their fees with affiliated realty and mortgage partners.
A title agent from Minneapolis, Douglas Miller, president and CEO of Title One, Inc., agreed with Hunter's critique, arguing that the "title insurance industry and the real estate industry have locked up almost the entire marketplace through controlled business schemes." Although Miller said his firm's fees are the lowest in metropolitan Minneapolis-St. Paul, he has to struggle to get the attention of home buyers because "9 out of 10" realty transactions involve "steering consumers into overpriced ancillary (title and settlement) services for secret profits." Miller's firm refuses to participate in joint ventures with realty or mortgage firms.
Thomas Stevens, president of the National Association of Realtors, defended legitimate, RESPA-compliant affiliated business arrangements as good for home buyers and for competition.
"Real estate firms that establish joint ventures with title companies do so in order to offer clients the convenience of on-site services, bring efficiency to the transaction and ensure a smooth and timely closing," he said. Affiliated business arrangements are also good for Realtors' bottom lines, added Stevens. He called them "an essential component of (Realtors') future business model for expanding their professional services and profit base beyond that of traditional brokerage activities."
The Government Accountability Office (GAO) has begun a year-long study of title insurance industry pricing and business practices. It offered no advance conclusions or recommendations for reforms at the hearing. But Financial Services Committee chairman Rep. Michael G. Oxley (R-OH) was surprisingly critical of the industry. He said GAO had already found that consumers have been overcharged "tens of millions of dollars" because of illegal kickbacks and sham tie-ins among title, realty, mortgage and building firms.
"At some point," he said, "(Congress) will have to address" the problem, presumably with corrective legislation.