Minnesota's TitleSmart fined $50,000 for Illegal Kickbacks
Realtors and Loan Officers Should Just Say No
While it may seem like a nice gesture at the time, a thank you from a title company could be a ticket to a licensing enforcement action and a hefty fine. The Minnesota Department of Commerce fined TitleSmart $50,000 (inlcuding $5,000 investigation costs) for allegedly paying illegal kickbacks to Realtors, lenders and other real estate professionals for the referral of title business (download the Consent Order here). And they may have exposed everyone on their free dinner boat cruises (with free alcohol, food and gifts) to the risk of an enforcement action for receiving kickbacks.
Title companies provide a vital role in real estate transactions. They investigate and examine title and make important investigative, examination and closing decisions. Selecting or recommending a title company should be free from even the appearance of impropriety, especially for fiduciaries like real estate and mortgage licensees.
The CFPB and the Minnesota Department of Commerce have made it clear for a very long time that they will define RESPA’s anti-kickback law very broadly. RESPA’s “thing of value” standard has been construed to mean all sorts of things including free sporting tickets, free continuing education, sham title companies, and many Marketing Service Agreements (MSA's). This latest action should come as no surprise to those familiar with RESPA.
"Routine Networking Opportunities?" We don't think so...
In a recent Star Tribune article, Ms. Koebele, president and owner of TitleSmart, characterized these dinner cruises as "routine networking opportunities," and said that they "vigorously disagreed with their interpretation of the code." It would seem that others disagree with her interpretation of federal and state law. From that same article, "Prentiss Cox, associate professor of law at the University of Minnesota Law School, said that such events are "rampant"....And Cox said that RESPA, "holds recipients responsible as well, so the Commerce Department could have taken action against the licensees who participated in the cruises." (Read that Star Tribune article here)
Ms. Koebele went on to say, "...that many businesses in real estate host similar events. “Whether it be a boat ride on the river or Lake Minnetonka, golf outing, baseball game … there are an endless number of networking events where the venue and food are paid for by a hosting company,” she said. That comment could draw the attention of federal regulators to Minnesota because it would appear that Ms. Koebele is speaking from personal knowledge that she may be aware of many other Minnesota events that could be characterized as kickbacks.
Kickbacks do a lot of damage to both the marketplace and consumers. It creates a "pay to play" environment with one of the most important safeguard services in the entire real estate transaction. When it comes to kickbacks, Richard Cordray, Director of the CFPB has said, “Kickbacks harm consumers by hampering fair market competition and by unnecessarily increasing the costs of getting a mortgage.” “The CFPB will continue to take action against schemes designed to let service providers profit through unscrupulous and illegal business practices.”
TitleSmart's Alleged RESPA Kickback Violation
In the words of the Minnesota Department of Commerce (partial text):
"3. TitleSmart, a provider of settlement services, provided a thing of value to real estate agents and mortgage loan officers in exchange for the referral of real estate settlement services involving federally related mortgage loans.
4. Specifically, TitleSmart hosted two boat cruises on the St. Croix River. The first cruise was held on 14 September 2012. the second cruise was held on 13 September 2013. Two hundred and forty-three (243) mortgage brokers, loan officers, real estate salespersons, and real estate brokers are known to have attended along with their guests in one or both years. Those individual licensees were in a position to refer settlement services business to TitleSmart, a settlement services provider. Total known attendance, excluding TitleSmart employees and contractors, was 142 in 2012 and 359 in 2013...."
6. Based upon the Respondent's incomplete data, every entity represented on the cruises referred business to TitleSmart.
7. TitleSmart violated the prohibition against kickbacks contained in the Real Estate Settlement Procedures Act (RESPA).... TitleSmart violated Minn. Stat. 45.027, subd. 7(a)(2)(2014) and demonstrated untrustworthiness in violation of Minn. Stat. 45.027, subd. 7(a)(4)."
State Licensing Law Trumps RESPA if State Law Provides More Consumer Protection
While Ms.Koebele and her firm came under scrutiny for violations of the federal anti-kickback law called RESPA, they also were alleged to have violated state insurance licensing laws.This is very important because of the extraordinary amount of liability exposure it places on licensees when it comes to recommending a title firm with any kind of financial ties (including what many consider to be "routine networking opportunities").
Few of the national RESPA speakers invited to speak at Realtor events ever talk about the most relevant section of RESPA for real estate professionals, Section 1024.5 (c) of RESPA - Relation to State Laws. In a nutshell, state laws that give more protection to consumers will take precedence over RESPA. In regards to affiliated business arrangements, state laws that give more protection to consumers and/or competition will take precedence. In Minnesota that means that licensees need to be looking at both RESPA and state laws. And some of those state laws deserve a closer examination, especially since state law has a much longer statute of limitations than RESPA's one year look back period.
State law should also be of particular concern for individual licensees because state law holds licensees to much higher standards when it comes to recommending a title company. Minnesota insurance law prohibits the solicitation (broadly defined) of insurance without a license and real estate licensing laws impose all sorts of fiduciary duties including the duty to engage in due diligence. Few brokers with in-house title companies or independent title companies with Marketing Service Agreements like to talk about these laws because it directly impacts their ability to influence the choice of title firms. However, this is one area in which agents should really do their own research independent of the brokers and title firms that profit from referrals.
Minnesota State Law Violation - Unlicensed Solicitation of Insurance
In addition to the RESPA violation, perhaps the most poignant aspect of TitleSmart’s enforcement action is the Minnesota Department of Commerce’s (“DOC’s”) interpretation of the insurance statutes. In their Consent Order they stated that the boat cruise constituted, “…valuable consideration to persons not licensed as insurance producers for negotiating and/or soliciting insurance in repeated violation of Minn. Stat. § 60.K.48, subd. 1 (2014).” That means you need an insurance license if you are going to recommend a title company for which you, your relatives, your broker or parent company (“you”) profit.
When you refer your purchaser client (with new financing) to a title company it is almost certain that your client will be buying at least a lender’s title insurance policy. An insurance license is required if you “…urge(sp) a person to apply for a particular kind of insurance from a particular company.” Minn. Stat. §60K.31 Subd. 15.
If you steer someone to a title company where you know that they will be purchasing title insurance and you (broadly defined) profit in any way from that referral, you are likely engaging in the unlicensed solicitation of insurance. The inverse is true if you pay an unlicensed individual to steer someone to your title company. That is the TitleSmart violation the DOC alleged.
While these laws have been in existence for a long time, this is the first that we have seen insurance licensing laws applied in this way. And if history repeats itself it is likely that this will be only the first of many actions.
Real Estate Agents Held to Even Higher Standard
Real estate professionals are considered to be highly trained experts who are relied upon for their expertise and trusted advice. If there is even an appearance of impropriety when it comes to their recommendations it hurts the whole industry and consumers. Interfering in any way with the advice and counsel of such trusted advisors is part of the reason the anti-kickback prohibitions were created. But the primary reason is that kickbacks drive up title fees. Someone has to pay for those free things… In title, LESS is usually MORE, unlike other industries where paying more often means better service and product. In title paying more may be an indication that the title company is involved in some form of captured audience marketing that creates conflicts of interests and drives fees unnecessarily higher.
How to Find a Title Company
Avoid Realtors and Loan Officers Who Use Forms to Steer Title Business.
Real estate professionals and consumers should avoid pre-printed forms that direct clients to an in-house title firm. At the very least, professionals should encourage clients to make their title decision later after they have had an opportunity to compare title firms. Professionals should not encourage clients to use their in-house title company as that appears to also fit within the parameters of the DOC’s interpretation of “unlicensed solicitation of insurance.” Professionals should avoid title firms that offer anything of value. If they are sending business to a firm that sponsors open houses, provides free education, has free dinner boat cruises, free sports tickets or pays better commission splits or reduced rent based on referrals, those could be red flags for a DOC enforcement action.
Avoid Title Companies that Utilize Marketing Service Agreements.
Watch out for title firms that do joint advertising with Realtors and Loan Officers. Since title companies will rarely succeed marketing directly to consumers, it makes little sense for them to participate in joint marketing efforts to consumers. So even though there may be some very limited situations in which Marketing Service Agreements (MSA’s) may be legal, most are likely to be construed to be kickbacks (read the CFPB’s Lighthouse Order that pretty much states exactly that).
Do these things:
Research licensing violations at the MN Commerce Department to see if the title company you’re considering has any enforcement actions against it: (click here and select “insurance”)
Professionals should fullfill licensing due diligence requirements on behalf of clients and research title firms. They should learn what they do, understand the difference between the products that they offer, and learn about their pricing.
Less is More.
Don’t be afraid to go with a lower-priced title company. There is a lot of talk about how it is worth it to spend more on a title company if they are providing above par service and relationships. Unfortunately, in Minnesota the higher priced title firms are likely the ones that have unfair and anticompetitive pricing practices and lesser product and service. Although service and relationships are certainly some of the most important aspects of a title company, higher fees are not the way to find them. In fact higher fees are more likely an indication of a captured audience referral and marketing system that costs consumers money. Lower fees are an indication that the title company is not spending money on inducements and affiliations.