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Four title companies in the District of Columbia have agreed to pay a total of about $3 million for alleged “illegal kickback schemes” in which the companies gave financial and other perks to real estate agents in return for homebuyer referrals.
District of Columbia Attorney General Brian Schwalb announced the settlement on Thursday, saying the “conflict of interest-plagued, anticompetitive arrangements” hurt homebuyers’ ability to shop around for the best service and artificially inflated their homebuying costs.
“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,” Attorney General Schwalb said in a statement.
The companies, which denied wrongdoing, are affiliated businesses that were allegedly created by title insurers to split profits with real estate agents who referred business to them.
The Real Estate Settlement Procedures Act (RESPA) – federal law governing the provision of mortgage-related services – allows such affiliated business arrangements if they meet specific requirements intended to protect consumers.
Washington, D.C. law “is more stringent and does not have such an exception,” prosecutors noted in announcing the settlement.
“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.”
As agents know, title insurance is required by lenders in order to protect the lender against unexpected costs that might arise from a challenged property title (borrowers can also purchase owner’s title insurance separately). It is not uncommon for homebuyers to be connected with title companies through the guidance of their real estate agent, and the fees often end up being some of the most expensive that they pay at the closing table, after agent commissions.
With the findings from Schwalb’s office, officials are now wondering just how widespread the practice of agents steering buyers to certain title companies in return for a cut of the profit is, and how much it is impacting homebuyer costs across the country.
The title companies that Schwalb’s office identified as engaging in the schemes included Allied Title, KVS Title (which was acquired by Compass in 2021), Modern Settlements and Union Settlements. The Attorney General’s office found that all four companies gave real estate agents discounted investment opportunities if they referred clients to the company. Modern also offered ownership interests in the partnership without requiring agents to make an upfront investment, and Allied gave agents yacht parties on the Chesapeake Bay in exchange for referrals.
As part of the civil settlements, all companies denied wrongdoing.
The practice of kickbacks in exchange for referrals became more widespread in the wake of the pandemic when the housing market surged, academics and real estate professionals told The Wall Street Journal, as a means for title companies to gain more market share.
The findings are just another knock on the title insurance industry, however, which has already been scrutinized by the Biden administration because of how much its services add to homebuyer expenses. The administration has been looking for ways to lower upfront mortgage costs, and Fannie Mae has requested permission to launch a test pilot program that would waive title insurance on low-risk mortgage refinancings.
The settlement also contributes to the poor public reputation that real estate agents have faced in the wake of the National Association of Realtors (NAR) antitrust settlement, which followed accusations from homesellers that agents and other industry players artificially inflated commissions, increasing costs to homesellers. Yet another allegation of anticompetitive practices that potentially harm consumers while filling agents’ pockets could significantly damage the industry’s already weakened reputation.
Update: This story was updated on Aug. 30, 2024, to note that KVS Title was acquired by Compass in 2021.
Editor’s note: This story has been updated to note that federal law allows affiliated businesses that meet consumer protection requirements mandated by the Real Estate Settlement Procedures Act (RESPA).
