The Office of the Attorney General (AG) for the District of Columbia (D.C.) settled with four title insurance companies after an investigation into the joint ventures indicated “the widespread use of illegal kickback schemes” that limited D.C. homebuyers ability to shop for the best price and quality of work from settlement services providers.

D.C. AG Brian Schwalb announced Allied Title & Escrow, LLC (Allied), KVS Title, LLC (KVS), Modern Settlements, LLC (Modern), and Union Settlements, LLC (Union) will pay a combined $3.29 million after an investigation by the AG’s office revealed the widespread use of illegal kickback schemes.

According to the AG, title companies offered real estate agents discounted ownership interests and lucrative profit sharing in exchange for business referrals that boosted the companies’ revenues.

“These conflict of interest-plagued, anticompetitive arrangements limited district homebuyers’ ability to shop for the best price and service when purchasing title insurance and escrow services and hurt law-abiding competitors in the title insurance industry, in violation of the District’s Consumer Protection Procedures Act (CPPA),” the AG’s office stated in a release.

“District residents are entitled to make fully informed decisions about how to spend their hard-earned money, especially when it comes to making the high stakes purchase of a home,” Schwalb said. “These four companies violated the most fundamental principles of a free and fair marketplace: they hid information from consumers, limited their choices, and hurt other businesses that play by the rules. Today, we’re exposing and putting an end to these elaborate, secretive, and illegal kickback schemes.”

The AG’s investigations indicated Allied, KVS, Modern, and Union violated D.C. law by providing real estate agents exclusive, lucrative, and discounted investment opportunities either in the companies themselves or in shell entities they created to induce the real estate agents to make business referrals that generated increased revenues for the companies, the office said in a release. In return for the referrals, the agents received kickbacks in the form of a split of the profits.

According to the AG’s investigation, Modern and Union were created for the explicit purpose of recruiting real estate agents to refer title insurance business to them in return for a share of the profits. Allied and KVS created shell companies for the same purpose, the office added.

The AG’s office stated in addition to profits from referrals, Allied compensated real estate agents for participating in the scheme by organizing and hosting multiple parties on yachts in the Chesapeake Bay area. The AG’s release stated these yacht parties rewarded the agents for referrals, sought to ensure their continued loyalty, and incentivized future referrals.

“[The AG’s] investigation revealed that the financial incentives these companies provided to real estate agents led those agents to aggressively steer their homebuying clients to the companies in ways that reduced buyers’ ability to shop for the best price or service,” the office stated. “This behavior inhibited competition in the district’s title insurance and escrow market, and it harmed other title companies that followed the law but lost business to the companies operating the unlawful schemes.”

Under the terms of the agreements, Allied will pay $1.9 million, KVS $1 million, Union will pay $325,000, and Modern $65,000, to D.C., which will devote up to $1.75 million from these settlements to restitution for affected consumers.

Importantly, the assurances of voluntary compliance agreed to by all four companies stated they were to end the practice of giving real estate agents consideration for the referral of title insurance business and will either cease their title insurance operations in D.C. or divest real estate agents from their ownership interests in the shell companies.

“OAG appreciates KVS immediately ceasing its practices and cooperating with the investigation,” the office stated. “Modern and Union were also cooperative with OAG’s investigation, and all four companies quickly agreed to end these practices before the investigation concluded.”

The office added it will continue to investigate the issue of kickbacks across the title insurance industry to protect consumers, provide a level playing field for companies that follow the law, and ensure a competitive marketplace. 

Saul Ewing Partner Francis “Trip” Riley, III, who represents one of the settling title agencies and their affiliates, was critical of the office’s portrayal of the title insurance agency affiliated businesses formation and operations. He pointed out the investors/agents provided their customers to whom they referred to a title agency in which they were investors the RESPA compliant disclosure that identified their ownership in the title agency and encouraged consumers to shop for settlement services. Schwalb’s claims that these companies hid information from consumers and hurt other businesses seemed to contradict the fact the disclosures inform consumers about their right to shop and the other businesses, aka competitor title agencies, which, on average, have higher fees.

“The AG has actually hurt consumers by limiting competition,” Riley told RESPA News in an email. “Agent investors in these AfBAs would never risk the good-will they need to prosper by referring consumers to a poorly run and overpriced agency.”

He also added that the D.C. AG’s office never established affiliated business arrangements (AfBAs) in general have higher prices that are the result of artificially inflation. 

“AfBAs actually have lower costs given the economies of scale which they have,” Riley explained. “RESPA actually has an exception from the prohibition against kickbacks for AfBAs (both as to the investment and the profit distribution aspect of same).”

Wanna know more about the RESPA safe harbor? Check out our “The ABCs of RESPA: Getting Back to Basics” report.  

Riley also added that the AG office never explained or established how the agents who were part of the AfBAs received discounted investments.

“The investment amounts were not artificially created; they were based on the needed capital requirements of the company – as a start-up,” Riley said. “Moreover, the investment amounts reflected that the investors had no management or day-to-day authority, and the ownership interest could not be sold, transferred or assigned, and lastly that interest was dilutable with the advent of new investors. So how were the investment dollars ‘discounted?’ No answer from the [AG’s office].”

As for the accusations about multiple yacht parties, Riley explained the AG’s office was provided evidence confirming these events were investor meetings and success celebrations paid for out of the AfBA’s profit dollars, i.e. the investors were indirectly paying for these events as their distributions were reduced based on cost of these events.

Riley also noted that while the AG’s office claimed the investor agents “aggressively steer[ed] their homebuying clients to the AfBA companies in ways that reduced buyer’s ability to shop for the best price or service, many of the investor agents in these companies referred less than half of their customers to the AfBA for settlement services.”

This is a developing story – RESPA News has reached out to our legal and industry experts for what this may mean for you going forward. See Friday’s RESPA News for more.