In an action filed by the California Department of Insurance (CDI), American Home Shield of California, Inc. faces allegations stating the company violated California Insurance Code §12760 and RESPA’s kickback provision.
American Home Shield is a home protection company licensed to operate as a home warranty business on Dec. 30, 1980. It is authorized to provide home warranties for household systems and appliances in California, covering the repair or replacement of electrical, plumbing, central heating and air conditioning systems, water heaters, and other household systems and appliances. It has issued 312,670 home warranty contracts and written $186 million in total net contract fees.
In April 2020, the company rolled out a program called WarrantyLink, where it would pay real estate brokerage offices to collect and certify contact information on parties in a property transaction. This included the names, phone numbers, and email addresses of the buyers or sellers involved in a transaction. American Home Shield would pay $50 for a seller’s information, $75 for a buyer’s information, and $100 for both. As of Dec. 1, 2021, 20 California real estate brokerages participated in the program.
“The company claims that this program is necessary because it is often unaware of any information concerning a home protection contact other than the address of the covered property,” the CDI’s complaint stated. “In the company’s experience, this is because the order for the contract is placed before a buyer has been identified, or a real estate brokerage firm is either unable or unwilling to provide the insured’s contact information.
“The company also claims that home protection competitors that are affiliates of companies providing other settlement services, such as title insurance, do not have the same issues with obtaining accurate contact information because its affiliates provide it to them.”
However, the CDI stated home protection companies like American Home Shield routinely collect or otherwise identify the contact information of insureds without paying real estate brokerages to do so.
Based on the WarrantyLink program, CDI asserted the company has paid a commission to a person as an inducement or compensation for the issuance, purchase, or acquisition of a home protection contract in violation of Calif. Ins. Code §12760, and gave a fee, kickback or thing of value pursuant to an agreement that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to a person in violation of 12 U.S.C. § 2607(a).
This, the agency stated, is grounds for the insurance commissioner to suspend American Home Shield’s license for a period not exceeding one year and for the Insurance Commission to bring the current action to enjoin further RESPA violations.
Franzén and Salzano, P.C. President Loretta Salzano spoke with RESPA News about the importance of the case and why the industry should be paying attention.
“It’s very common in the mortgage and real estate space to buy and sell leads and data,” Salzano said. “We’re all extrapolating from guidance regarding the purchases of customer lists from back in the ’90’s when Grant Mitchell was at HUD and applying the 8(c)2 exception in this fast-evolving area to justify payments for goods, facilities, and services.”
Salzano said this is the first case she has seen in the lead and data purchase space, and the industry has been waiting to hear updated guidance in this area because of how these types of agreements have been “proliferating with new players, different types of data and its transmittal, and payment at points throughout the funnel.”
Salzano mentioned multiple factors need to be considered in situations like these where a real estate professional may be entering into agreements with other settlement services providers to provide leads or customer data. Considerations include whether the data the purchaser is seeking is readily available through another avenue or if the data is even necessary.
Once it’s determined an agreement between the companies is the best or only way to get the information sought, then how is a fair market value determined to show it does not include any kickback or value for a referral? Salzano said it can be hard to substantiate.
“It’s always hard to come up with these numbers,” she said. “In the absence of a referral, under the idea of just buying a customer list or buying data from someone who has no relationship with the lead, some folks say, ‘there is no referral, so you don’t even need to worry that the amount you pay is reasonable.’ I think that’s imprudent, but it is not necessarily untenable as a position.”
Salzano said it would be wise for settlement service providers to think about how they are structuring their data and lead purchase agreements.
“Sometimes, so goes California, as go other regulators,” she said. “This action could be a catalyst for movement in this space. The industry should be especially sensitive to what it is being purchased and how available it is on the market to be able to justify the business necessity as well as the cost.
“RESPA does not have a business necessity component within its statute, nor does Regulation X require a business necessity,” she continued. “But the story is important. The narrative sets the tone. The very same activity either can be compliant or not based on the rationale, and we’re always thinking of that whenever a settlement services provider is paying a referral source.”