The federal government and state regulators are targeting other housing-related misdeeds that can cost consumers, -- especially under-the-table kickbacks among builders, real estate brokers, loan officers, mortgage bankers and title insurers. Buyers and sellers are rarely aware of the cash changing hands, and as a result they are paying needlessly higher prices for services.
In a series of legal moves during the last five weeks, regulators have reached settlements with six major home builders and one of the largest title insurers in the country. Under the settlement terms, the firms are scheduled to pay the government a total of $6.4 million, while denying they committed any illegal acts.
The largest settlement was announced the week before Thanksgiving. First American Title Insurance Co. agreed to shut down 84 "affiliated partnerships" in Florida with real-estate brokers, mortgage brokers, banks and builders. Federal and state investigators charged that although the affiliates claimed to be title companies, they were actually referral conduits that performed few, if any, title services. Officials said they existed primarily to steer business to First American, which split consumers' insurance premiums with participating "partners."
In effect, according to the investigators, builders, lenders and realty firms could pocket part of buyers' closing costs without their customers' knowledge. On paper, the partnership affiliates appeared to be ordinary title agencies, carrying names such as Security First Title, USA Title Partners, Discount Title Servicesand the like.
But investigators from the federal Department of Housing and Urban Development and Florida insurance regulatory agencies found that "all regular title services required to effect title insurance were performed by First American, not the limited partnership agency," which was essentially a shell entity constructed "to compensate for the referral of the business."
Payments for referrals of home real estate business when little or no services are performed violate the federal Real Estate Settlement Procedures Act, which is enforced by HUD.
Though no example was provided in the settlement agreement, title company referral conduits often work like this: Say you, the home buyer, are charged $2,000 for lender and owner title insurance policies. Your real estate agent has partnered with a title company and agreed to steer all business to the affiliate. All the work is performed by the title insurance underwriter, which receives a steady and profitable flow of business from the referring "partners."
Revenues may be split according to the size of individual partners' stakes in the affiliate. If the stake is 25%, the realty agent or mortgage broker might get $500 out of your $2,000 title insurance premium. If the stake is half, the split might be $1,000.
Buyers typically are provided a disclosure -- along with the paperwork that accompanies a mortgage closing -- that an "affiliated business" relationship exists between the realty firm or mortgage broker and the title partnership. But the boilerplate does not reveal the magnitude of the financial compensation. Otherwise, customers might take their business elsewhere.
The settlements with the six home builders -- Pulte Homes, KB Home, Beazer Homes USA, Ryland Group, Meritage Homes and Technical Olympic USA -- also involved alleged kickbacks from title insurers. HUD investigators charged that the builders' participation in so-called "captive reinsurance" schemes amounted to illegal splits of home buyers' insurance premiums rather than actual sharing of risks with the underwriters.
Bottom line: Before agreeing to direct your title and settlement business to an "affiliate," shop the market for lower fees.
Ask the person trying to steer your business to an affiliate: What financial split will you -- or your firm -- receive from my title insurance premium and other settlement fees? What proof can you offer to me that the fees received by you or your firm will result in cost savings to me?
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source: latimes.com
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