Real estate agents allegedly bribed by title insurance giant.
Issue Date: RealLawCentral.com - January 2007, Posted On: 1/24/2007
Regulatory Update
Agents received royal treatment from First American, regulators allege Real estate professionals were allegedly bribed by the title insurance giant with extravagant gifts of chartered fishing trips, riverboat dinner cruises and even tickets to the Teen Choice Awards and concerts hosted by U2, Elton John and the Eagles. As HUD cracks down on kickback receivers, will this settlement put Realtors next in line for a slap on the wrist?
Outgoing California Department of Insurance (CDI) Commissioner John Garamendi had one last parting gift for the title industry before taking office as lieutenant governor: A $10 million settlement with First American for alleged illegal rebating activities.
In an agreement signed Jan. 3, First American agreed to pay $10 million to the CDI to settle accusations that the company paid the accommodations and entertainment expenses of settlement service providers in an inducement to refer business in violation of state anti-rebate laws and RESPA Section 8(a).
The settlement does not constitute an admission of liability or wrongdoing by First American. However, according to the stipulation and waiver agreement reached between First American and the CDI, the CDI could take future action to enforce the stipulation and waiver if it believes First American is not in compliance with the agreement.
RESPA attorney Jeffrey Arouh, partner with Holland & Knight LLP, said he found the settlement interesting “on a variety of levels.” In particular, the CDI’s accusations were indicative of the very keen interest state regulators have taken in the rebating activities of title insurers, he said.
“As far as I am concerned, this is a continuation of the effort we have seen for the last year of state regulators taking enforcement actions against companies they perceive to be commiting more egregious and identifiable violations of state anti-rebate and inducement laws,” Arouh said. “They have a focus now that before, hadn’t been quite as apparent.”
But while industry leaders debate how damaging the settlement may be to the entire California title insurance community, the long-running debate over ambiguity in California’s rebating laws doesn’t seem to apply here, Arouh said.
“There certainly are ambiguities in state laws that relate to rebating, but I think the kinds of allegations that are being made in this accusation are not the kind that I think result from potential ambiguities,” Arouh said.
The CDI’s allegations
According to an accusation dated Nov. 6, the CDI began examining First American’s operations after it received 72 written complaints alleging illegal rebating activities by the company from February 2005 to February 2006. The examination occurred in First American’s San Bernadino County office, according to the accusation.
Following a series of interviews with First American employees and an examination of the company’s books and records, the CDI in November filed an accusation against First American, alleging that between February 2005 and November 2005, the company made cash payments to settlement service providers for the referral of title insurance business. The company also paid the business support expenses of other providers which were unrelated to the business of title insurance, the accusation alleged.
Specifically, the accusation alleged that First American paid the accommodations and entertainment expenses of other settlement service providers, including food and beverages, transportation expenses, gifts, gift certificates, gift cards and other miscellaneous gifts and merchandise — all in an inducement to refer business.
According to the accusation, in one instance, First American entered into a Selected Service Provider Agreement with Frontier Homes LLC, whereby First American agreed to “pay Frontier $100 for each closed First American title insurance order” if Frontier “provide[d] … Transaction Coordination services to First American in the counties of Riverside, San Bernadino and Los Angeles, Calif.
First American tendered 15 payments to Frontier Homes totaling $106,000 as part of this agreement, according to the CDI.
“First American’s Selected Service Provider Agreement constitutes a per se inducement for the placement or referral of title insurance business in that the Transaction Coordination services provided by Frontier are unrelated to the business of title insurance,” the CDI said.
First American also submitted receipts, invoices and expense reports totaling $477,690.13 for business report expenses, the CDI alleged. In addition, First American county managers, sales managers and sales representatives submitted 33 receipts and invoices documenting expenditures for the business support expenses of 12,404 people which were unrelated to the business of title insurance.
Examples from those receipts and invoices, according to the CDI, were consulting, license and training fees paid to Farbod McCubbin of WebRealtySolutions.com related to its Realty DataLink software program and to Eudicor Consultants related to its DailyContact.com online Direct Mail Solution Program. First American also printed raffle prize tickets for Realtor association events and underwrote the costs for real estate agents and brokers to attend annual award meetings, the CDI alleged.
The CDI also alleged that First American employees submitted 66 receipts totaling $41,117.74 for accommodations and entertainment expenses, including accommodations at the Marriot Hotel in Palm Desert prior to a golf tournament; tickets for a college football game in Texas; tickets to an NFL football game in Minnesota; chartered fishing trips; riverboat dinner cruises; Del Mar racetrack trips; and tickets to football, baseball and soccer games, musicals, comedy clubs, the Teen Choice Awards and concerts hosted by Gwen Stefani, U2, Elton John, Velvet Revolver, the Eagles and Paul McCartney.
First American employees also submitted 179 receipts, invoices and expense reports totaling $17,694.93 for gifts, gift certificates, gift cards, miscellaneous gifts and other merchandise including Starbucks gift cards; theater gift cards; movie ticket gift cards; Blockbuster gift cards; restaurant gift certificates; amusement park certificates; department store gift certificates; flowers; books; Thomas Guides; gift baskets; computer monitors; cigars; and wine, the CDI alleged.
According to the CDI, First American employees also submitted 732 receipts totaling $113,375.99 for food and beverages for training meetings; open houses; grand openings; holiday and birthday parties; broker caravans; concerts; MLS tours; cocktail parties; Monday Night Football events; a chocolate fountain for the RE/MAX grand opening; Broker of the Year ceremonies; and sporting events.
Finally, First American employees submitted 17 receipts, invoices and expensed reports totaling $15,612.04 for transportation expenses, including limousine rides and chartered bus trips to Realtor award dinners’ baseball games; casinos; and racetracks, the CDI alleged.
Discretionary violations
According to the CDI, these activities violated several provisions of the California Insurance Code, one of which, Section 790.035 states, “any person who engages in any unfair method of competition or any unfair or deceptive act or practice … is liable to the state for a civil penalty to be fixed by the commissioner, not to exceed $5,000 for each act, or if the practice was willful, a civil penalty not to exceed $10,000 for each act. The commissioner shall have the discretion to establish what constitutes an act.”
The CDI’s “discretion to establish what constitutes an act” has long been considered by California title insurance professionals to be ambiguous guidance on which business practices are legal and permissible.
However, in this case, the law was pretty plain, Arouh said.
“One of the things we’ve pretty much come to understand is that workshare arrangements are permissible if they are structured properly and if the services in question were actual and necessary and compensated for at a reasonable level,” Arouh said. “One of the accusations here included a workshare agreement that was unrelated to the title insurance business — which means the services were not actual and necessary in order to provide the title insurance services being rendered. It’s hard to judge the extent to which this may be true, but it tends to fit back into the category of a business decision having been made to take these events and hopefully put them behind First American for the time being.”
The CDI also alleged that the activities violated Section 8(a) of RESPA, which states that “no person shall give and no person shall accept any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be transferred to any person.”
RESPA Section 8(d) gives state insurance commissioners the concurrent authority to enforce the federal statute by fining violators up to $10,000 per act and/or prison time as well as an amount equal to three times the amount of any charge paid for settlement services.
Terms of the agreement
According to a stipulation and waiver dated Jan. 3, First American waived its right to a hearing and agreed to pay $9,949,500 to the CDI as a monetary penalty. In addition, First American agreed to pay $45,500 to reimburse the CDI for the costs of its investigation and an additional $5,000 for the CDI’s determination that it failed to comply with a November 2005 order concerning its activities.
First American also agreed to cease and desist the activities outlined in the CDI’s accusations and to appoint a company officer to review and monitor its compliance with state anti-rebate laws.
By electing to settle the allegations, First American saved itself over $7 million, as the CDI’s fine totaled $17,243,853.28. The CDI also could have suspended or revoked the company’s license to operate in California.
The agreement was signed by First American Chairman and CEO Parker Kennedy Dec. 27.
First American could not be immediately reached for comment.
Arouh said that while the settlement was meaningful in terms of the amount, it’s difficult to judge whether the claims were valid or accurate.
“Any time a company finds itself facing claims of this magnitude, using up internal resources to defend them, it may be better to just take care of it and move on,” Arouh said. “If I am sitting in First American’s position, I may just have made a business decision as to the resolution of these issues, paid the amount and moved on.”
January 25 2007 03:40 pm | Bribes
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