Why RESPA Needs to be Fixed – an Example

For a business intent on paying illegal kickbacks it is only a matter of performing a cost benefit analysis to determine that it is a profitable proposition to violate the law.  The cost of a potential enforcement action is far outweighed by the financial benefits of violating it.  For example, in 2007 First American Title Insurance Company was fined $500,000 in Minnesota for operating what the Minnesota Department of Commerce said were “sham title agencies that provided illegal referral kickbacks to local real estate agents, mortgage brokers, developers and other industry players”  (click here for the Star Tribune article – article has been removed by Star Tribune).

First American was forced to shut down their remaining 35 agencies in Minnesota.  However, those agencies had operated for years likely making tens of millions of dollars.  Their individual closing agents had developed close ties with their referrers, which meant that First American could continue to benefit from their activity long after their agents were shut down.  And for competitors who complained about the conduct, they were likely to be boycotted by the Realtors and other real estate professionals who were forced to be shut down.   First American gained a competitive edge.  For the small price tag of $500,000, the violation was well worth it. 

The Minnesota Commerce Department did not order First American to make restitution to consumers either.  The department decided it was better to negotiate an end to the long-standing practices rather than get tied up in litigation that could take years, said Paul Hanson, the department’s chief investigator.  In other words, the Commerce Department felt a slap on the wrist would suffice.  In a search of the Commerce Department enforcement actions, the First American case has vanished from their site. 

If RESPA had a 6 year statute of limitations, the Minnesota Department of Commerce and HUD could have exacted a more meaningful fine and restitution that would likely have added up to tens of millions of dollars instead of $500,000.