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Title Companies Investigated -- Again

Written by Posted On Tuesday, 01 March 2005 00:00

The title insurance industry is the latest real estate industry sector caught in a growing web of law enforcement activity to head off what appears to be a pandemic of industry fraud that's costing consumers millions -- if not billions.

How much real estate industry crime is costing consumers is not clear, but those costs are increasing rapidly as a fast growing number of industry outlaws seek to cash in on the quick run up in property values and prices.

Insurance regulators in California, Colorado, and Washington state recently joined investigative forces to stop what they allege are kickbacks from title insurance companies to real estate agents, lenders, and developers.

Investigators in Alaska, Florida, and Minnesota were also individually looking into the matter.

Title insurers have voluntarily halted practices under investigation and at least one, First American Title, has agreed to give back $24 million to consumers nationwide while denying any wrongdoing.

Title companies are hired, in part, to issue title insurance protection -- which consumers pay for -- after the company has investigated a title to make sure it is clear of any encumbrances, such as liens or judgments; forgeries or fraud and any other title anomalies. Depending on the region, some title companies also act as escrow companies -- the neutral third party that handles the paperwork, money, transaction instructions, and other details of a home purchase or mortgage refinance.

At issue this time are "reinsurance" policies, a legitimate practice when a second company buys a portion of real risk from a primary title insurance company. A portion of the premium collected from the consumer goes to the second company to cover its portion of the risk.

The California Department of Insurance investigation says the loss-ratio for the typical title policy is very low (3 percent to 5 percent for simple single-family properties) "so there is no real need for reinsurance, which has, in the past, rarely been used for such title policies."

While the contracts transferred little or no risk to the reinsurer, the reinsurer collected nearly half the premium, in what amounts to, California's insurance commissioner says, a rebate to the real estate agent, developer, or lender for sending the title business to the title insurer.

That, says the California investigation and others, is an illegal kickback and a violation of federal and state law.

Erin Toll, deputy commissioner for compliance with the Colorado Division of Insurance said, none of the reinsurers had paid a claim over several years in any of the cases under investigation, and that gave the appearance the reinsurance companies were simply a ruse to give money back to home builders -- and in some cases lenders and real estate agents -- in exchange for guaranteed business.

"These kick-backs are illegal under state and federal law. Nevertheless, they were used to fleece homeowners of vast sums -- often more than $1,000 per home. I will not tolerate such conduct by any company that I regulate," said California's insurance commissioner John Garamendi.

LandAmerica, and other title insurance companies under scrutiny, say they have not violated regulations and have been cooperating with investigations that began a year ago by the National Association of Insurance Commissioners which also recently developed an On-Line Fraud Reporting System .

"LandAmerica's title insurance rates are the same regardless of whether these reinsurance arrangements are utilized. LandAmerica's agreements with home builders, brokers, and lenders who have interests in captive insurance companies, require disclosure to the consumer that the home builder, broker, or lender stands to gain financially under the arrangement and to advise consumers that they can opt out of having the title reinsured by a captive reinsurance company with no difference in cost," said general counsel Michelle Gluck in a prepared LandAmerica statement .

Nevertheless, LandAmerica and Fidelity National Financial , along with First American Title, voluntarily stopped issuing reinsurance policies nationwide and were negotiating a settlements in some states.

It's not the first time in the past half decade title companies say they've gotten a raw deal from investigative scrutiny.

Among some of the largest cases, in 2003, Garamendi ordered an investigation of the title and escrow rates of five of California's largest title insurance sellers after Consumers Union surveyed the rates of the six companies, that sell 84 percent of all title insurance in the state. The survey found that major title insurance companies were quoting title insurance rates that averaged twice what title industry representatives themselves said where available.

The industry said, in the fast-paced refinance market of the era, consumers simply weren't aware of certain discounts and the industry later took steps to make them more aware.

In 1999, First American agreed to pay California and Utah $2.6 million, and halt service and monetary kick back activities.

Also in 1999, the nation's largest action against the title and escrow industry, a class-action suit by California's Controller Kathleen Connell sought a half billion dollars in escrow funds the suit said some 200 title and escrow companies wrongfully withheld from the state's consumers. The state collected at least $20 million.

The latest title industry flap joins a growing rash of investigations into questionable and blatantly illegal real estate industry activities often spawned by a fast run up in property values and real estate prices that have crooks, con artists, grifters, and sharks salivating with greed.

Viewed as a group, the activities are not unlike racketeering typically associated with organized crime and it's costing consumers at least a half million dollars a year -- a number that appears to be growing exponentially.

The Federal Bureau of Investigations says 80 percent of all reported mortgage fraud losses involve collaboration or collusion by industry insiders -- lawyers, appraisers, mortgage lenders, title and escrow workers, mortgage brokers, and real estate agents -- who conspire to get mortgages for more than the actual value of the property and then walk off with the difference.

Acting with growing impudence, an underworld of grifters have spawned a pandemic of mortgage fraud involving investigations by the Secret Service, FBI and other federal law enforcement agencies, as well as local peace keepers.

The FBI received 17,127 reports of mortgage fraud in the fiscal year that ended Sept. 30, 2004, compared to only 6,936 reports in the previous fiscal year. A Google search of current news articles on the morning of Feb. 23 revealed 120 hits for current news stories about "mortgage fraud." By Feb. 28 the number was 133.

The Internal Revenue Service said last week that the number of newly opened real estate fraud cases doubled in the past three fiscal years, and the crimes are getting larger, and more brash if the sentences handed down after convictions are any indication.

The average prison term handed out by federal judges to convicted real estate fraud perpetrators went from 27 months to 41 months during the same period. Last year's investigations produced a record 92.3 percent incarceration rate for people convicted of real estate frauds and con games.

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Broderick Perkins

A journalist for more than 35-years, Broderick Perkins parlayed an old-school, daily newspaper career into a digital news service - Silicon Valley, CA-based DeadlineNews.Com. DeadlineNews.Com offers editorial consulting services and editorial content covering real estate, personal finance and consumer news. You can find DeadlineNews.Com on LinkedIn, Facebook, Twitter  and Google+

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