State regulators across the country are conducting a widening investigation into what they call a kickback scheme under which developers and lenders steer title insurance business to certain companies.
The practice, they say, improperly raises closing costs for homeowners, but Illinois officials stress no kickback relationships exist here.
Officials in California and Colorado have announced investigations of the practice, with Colorado regulators revealing a settlement under which First American Title Insurance Co. will refund $24 million to consumers.
In addition, California Insurance Commissioner John Garamendi this week announced he is conducting an investigation into what he called the illegal practices. “These contracts were nothing less than commercial bribes,” he said in announcing his probe.
Under the practice, Garamendi said, real estate agents, lenders and developers would create subsidiaries to write reinsurance policies, known as “captive” reinsurers.
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They then steer business to a particular title insurance company in exchange for it “ceding” a large chunk of the premium back to the reinsurer, he said.
Lenders require title insurance to guarantee there are no other ownership claims on a property they are financing.
Garamendi said that in a $1,350 premium on a $350,000 policy, roughly $500 would go to the reinsurer.
Susan Hofer, spokeswoman for the Illinois Department of Financial and Professional Regulation, said that for various reasons–including that, in Illinois, sellers rather than buyers must obtain the title insurance–these sorts of arrangements are not an issue.
“Captive agreements just are not happening in Illinois,” she said.
Michael Sinacore, vice president of Majestic Mortgage in Mundelein, said relationships are cemented by offering the builders of new homes deep discounts on their portion of title insurance costs.
On a $300,000 home, for instance, the seller’s portion of title insurance normally costs around $940, said Sinacore, who spent 10 years working in the title business. To create a relationship with a home builder who is selling 1,000 homes, this might be discounted to around $200, he said.
“Meanwhile, the buyer’s portion of the transaction remains the same, at between $400 and $600 per home,” he said.
Among the companies California’s Garamendi said he is investigating are Chicago Title parent Fidelity National Financial Inc. and LandAmerica Financial Group Inc.
Fidelity National said it is cooperating with the probe and has agreed to discontinue all reinsurance agreements. It said it has ceded roughly $10 million under these agreements over their existence.
LandAmerica officials, meanwhile, contested the allegations.
“LandAmerica’s captive reinsurance arrangements have not resulted in any injury to consumers,” general counsel Michelle Gluck said in a statement.
Gail O’Connor, spokeswoman for Illinois Atty. Gen. Lisa Madigan, said the office does not have any pending investigations of LandAmerica, Fidelity National or First American.