The Minnesota Department of Commerce is cracking down on a kickback scheme in which title insurance companies set up sham affiliated businesses with real estate agents, mortgage originators and developers in order to get around state and federal laws prohibiting direct payments for referrals.
These actions are part of a year long investigation by the Department of Commerce that will result in additional enforcement actions. The department is working in cooperation with the U.S. Department of Housing and Urban Development (HUD).
The department announced four separate enforcement actions that include over $1 million in civil penalties against title insurance companies and their referral partners.
“We are sending a clear message today that these sham business arrangements need to end immediately,” said Glenn Wilson, Commissioner of the Minnesota Department of Commerce. “Minnesota consumers are paying too much for title insurance in order to support these illegal kickbacks, and most of the time they don’t even know it is happening.”
While it is against federal and state laws to directly compensate someone for a referral for real estate settlement services, the law does allow “affiliated business arrangements.” HUD rules require the affiliated business to provide “bona fide settlement services,” not simply a referral.
In the largest enforcement action, First American Title Insurance Company of Santa Ana, California, agreed to close down their sham affiliated businesses and pay a $500,000 civil penalty to the State of Minnesota.
Commerce Department investigators identified 35 affiliated business arrangements between First American and over 600 referral partners that included real estate agents and brokers, mortgage originators, building contractors, land developers, and others.
First American set up partnerships or limited liability companies, offering 80 percent ownership to their referral partners while retaining 20 percent ownership for themselves. The referral partners’ initial investment was typically $500.
According to the consent order, First American allegedly set up offices, hired and trained employees and directly supervised those employees. Some of the affiliated businesses even shared employees and office space. In some instances, officers of First American were listed as the office manager or “responsible person” for the affiliated business.
The referral partners and their associates were allegedly encouraged to direct their customers to the affiliated businesses for closing services and title insurance and, in return, receive an annual dividend from the business.
While neither admitting nor denying the department’s allegations, First American agreed to pay a civil penalty of $500,000 and will also help the Department of Commerce inform consumers about title insurance by developing content for the department’s website.
The department also announced four other recent enforcement actions related to the title insurance industry:
• The Department of Commerce recently imposed a $500,000 civil penalty against Dale Dodge, owner of Verity Title and Abstract , Bloomington, MN, for allegedly misappropriating funds owed to its customers so Dodge could support an extravagant lifestyle. To date, the Department of Commerce has been able to identify a total of $2.4 million in outstanding claims against Verity Title. The company has filed for bankruptcy protection.
• Gibraltar Title Agency of Edina, Minnesota signed a consent order agreeing to close down their affiliated businesses including Clear Title, Star Title, AM Title, and Sound Title. They also agreed to reimburse customers a total of $100,000 and pay a $10,000 civil penalty to the State of Minnesota.
• American Residential Mortgage of Maplewood, Minnesota signed a consent order agreeing to a $5,000 civil penalty. The Department alleged that American Residential Mortgage failed to disclose their affiliated business arrangement with Titles Plus.
• In September 2005, the Department of Commerce entered into a consent agreement with Powerhouse Title, LLC of Lino Lakes, Minnesota, requiring them to cease and desist from selling title insurance without a license and pay a $100,000 civil penalty to the state. Powerhouse was alleged to have sold title insurance without a license and accepted commissions from Chicago Title Insurance Company in violation of Minnesota law. They also failed to properly disclose their affiliated business relationships, also a violation of Minnesota law and the Real Estate Settlement Procedures Act (RESPA).