States Probe a Kickback Scam
Title insurance is focus of investigation
Once again, state regulators are investigating wrongdoing in the financial services sector. This time, title insurance companies are in the spotlight for allegedly giving kickbacks to builders, developers and real estate brokers who send business their way. Insurance commissioners in half a dozen states are looking into the practice, and one multimillion-dollar settlement has already been reached.
The scheme begins with sellers, lenders and agents creating subsidiaries, known as "captive" reinsurers, to write reinsurance policies. They then steer business to a particular title insurance company in exchange for the company ceding big chunks of the premium back to the reinsurer, in effect saving builders and others hundreds of dollars on each transaction. The cost to home buyers, who are required to carry title insurance to protect against losses in case a property title is questioned, remains the same or may even be higher.
"These contracts are nothing less than commercial bribes," says California Insurance Commissioner John Garamendi, who is calling executives of top title companies to testify at a public hearing April 4.
The Colorado Division of Insurance is also taking action. In February, it announced a settlement with First American Title Insurance Co., which will send refunds totaling $24 million to consumers, and it is also negotiating a settlement with another company. Deputy Insurance Commissioner Erin Toll said that nine of the 24 title companies doing business in Colorado are facing sanctions for alleged kickbacks, an arrangement that she says has served to shut out smaller companies that don't offer the payments.
A First American spokesman said the company settled with Colorado to avoid any appearance of a conflict, and the other companies under investigation also deny wrongdoing. According to Lloyd Osgood of LandAmerica, reinsurers only get a share of premiums in exchange for taking on a real share of the risk and consumers have the option to shop around among title companies. "Our captive reinsurance arrangements have not resulted in any injury to consumers," she says.