RESPA protects consumers by outlawing kickbacks and referral fees that increase settlement costs in a real estate sale, but it can take many forms and sometimes enter gray areas. Last week, the Department of Housing and Urban Development (HUD) reached a $1.6 million agreement with CitiMortgage Inc. and two homebuilders, saying the company used a captive title reinsurance company to violate RESPA rules.
The agreements included a $650,000 settlement with CitiMortgage Inc., and its captive title reinsurance company Chesapeake Reinsurance; a $675,000 settlement with M.D.C. Holdings, Inc., certain of its Richmond American Homes homebuilding subsidiaries and AHT Reinsurance; and, a $305,000 settlement with WL Homes, which does business as John Laing Homes, a California and Colorado builder.
Captive title reinsurance is a practice whereby a title insurance company transfers a portion of the risk and title premium to a company owned by the builder, lender or real estate broker referring the title business. In HUD's view, illegal RESPA kickbacks may occur in these arrangements if the money paid to the developer-owned title company exceeds a reasonable amount necessary to shield against the accompanying risk of the corresponding insurance policy. HUD says there is "particular concern" when these arrangements involve an entity that is in a position to refer business to the primary title insurer.
"There is almost never any legitimate need or business purpose for title reinsurance on a single-family residence," says HUD Assistant Secretary for Housing Brian D. Montgomery. "HUD will continue to work with the states to investigate captive arrangements to make certain that they aren't created for the purpose of obscuring referral fees."
The companies cooperated with HUD in reaching settlements. In addition to the settlement payments, the companies agreed not to enter into any new captive title arrangements and to cease writing new captive title reinsurance business.
These are the first settlements in the nation involving the recipients of payments made by title companies to captive companies for reinsurance. The settlements come in the wake of recent settlements states have obtained from title insurance companies who paid significant portions of the premiums they received to such captive companies.
The Real Estate Settlement Procedures Act was enacted in 1974 to provide consumers advance disclosures of settlement charges and to curtail excessive fees in the home buying process. Section 8 of RESPA prohibits a person from giving or accepting anything of value in exchange for the referral of settlement service business.
