For
more
than
two
years,

a
storm
has
been
brewing
in
the

title
insurance
industry.
Last
week,
the
first
raindrops
began
to
fall
when
the

Office
of
the
Attorney
General

for
the
District
of
Columbia
(OAG)

announced
settlements
with
four
title
firms
over

alleged
kickback
schemes.

As
a
result
of
the
settlements,

Allied
Title
&
Escrow
LLC,

KVS
Title
LLC,

Modern
Settlements
LLC
and Union
Settlements
will
collectively
pay
more
than
$3.2
million.

The
four
firms
in
question
all
had
joint
ventures
(JVs)
or
affiliated
business
arrangements
(ABAs)
in
which
real
estate
agents,
who
were
also
business
referral
sources,
were
investors.
As
part
of
the
settlement,
the
firms
agreed
to
end
the
practice
of
giving
real
estate
agents
consideration
for
the
referral
of
title
insurance
business,
and
they
will
cease
their
title
insurance
operations
in
Washington,
D.C.,
or
divest
real
estate
agents
from
their
ownership
interests.

Opposing
viewpoints

Typically,
when
kickbacks
are
discussed
in
the
real
estate
industry,
the

Real
Estate
Settlement
Procedures
Act (RESPA)
takes
center
stage,
but
that
was
not
the
case
in
D.C.

District
Attorney
General
Brian
Schwalb
brought
the
action
under
the
District
of
Columbia
Code,
which
states
that
a
title
insurer
“shall
not
give
or
receive,
directly
or
indirectly,
any
consideration
for
the
referral
of
title
insurance
business
or
escrow
or
other
service
provided
by
a
title
insurer.”
Unlike
RESPA,
the
D.C.
code
does
not
contain
a
carve-out
provision
for
joint
ventures
or
affiliated
businesses.

Because
these
title
firms
were
all
licensed
by
the

D.C.
Department
of
Insurance,
Securities
and
Banking,
many
in
the
title
industry
are
frustrated
by
Schwalb’s
actions.

“The
DC
AG
applied §
31–5031.15.
Prohibition
of
rebate
and
fee
splitting
…
which
is
in
the
Underwriting
part
of
the
code
(Chapter
50A),
not
the

Title
Producer
(Agency)
part
of
the
code
(Chapter
50B).
The
JVs
were
title
agencies,
not
underwriters,”
Ken
Trepeta,
executive
director
of
the

Real
Estate
Services
Providers
Council
(RESPRO),
wrote
in
an
email.

“Both
Chapter
50A
and
50B
authorize
the
enforcement
of
RESPA
which
implies
RESPA
and
all
of
its
section
(and
exemptions)
are
valid
in
DC.
Otherwise,
they
would
have
had
additional
language
limiting
RESPA. So,
I
don’t
think
what
the
AG
did
is
in
the
spirit
of
the
law
and
is
certainly
not
in
line
with
what
the
Department
of
Insurance
has
done
over
the
years.”

Todd
Ewing,
the
founder
and
CEO
of
D.C.
area-based Federal
Title
&
Escrow,
feels
that
the
news
is
“another
black
eye”
for
the
industry, saying
“it
was
just
a
matter
of
time
before
the
DC
OAG
brought
enforcement
actions.”

“Overall,
I
think
the
industry
should
be
applauding
the
actions
taken
by
the
OAG
to
help
clean
up
the
industry,”
Ewing
said.
“From
our
perspective
as
an
independent
title
company
that
doesn’t
participate
in
these
sham
arrangements
—
and
I
do
recognize
that
these
arrangements
can
be
done
legally
and
we
aren’t
opposed
to
those
that
are
compliant
—
but
I
think
it
is
high
time
that
the
industry
recognizes
that
there
are
some
bad
actors
out
there
who
don’t
run
their
affiliated businesses
or
joint
ventures
correctly.
And
a
lot
of
people
in
the
industry
feel
they are
distorting
the
marketplace
and
gaining
an
unfair
competitive
advantage.

“I
think
a
lot
of
people
forget
that
these
statutes
that
are
consumer
protection
statutes,
like
the
D.C.
statute
or
RESPA
or
the

Consumer
Financial
Protection
Act,
are
intended
not
only
as
consumer
protection
statutes
but
also
market
protection
statutes
that protect
against
unfair
trade
practices,”
he
added.

He
went
on
to
say
that
he does
not feel
the
D.C.
statute
was
misapplied.
“I’ve
seen
the council’s legislative
history,
and
it
could
not
be
clearer
that
the
intent
of
the
statute
was
to
protect
consumers
in
this
way,”
Ewing
said.

’Lack
of
clear
boundaries’

Regardless
of
the
view
one
takes
on
enforcement,
everyone
appears
to
agree
that
the
absence
of
the
Department
of
Insurance
in
this
case
was
a
bit
surprising.
But
as
industry
and
compliance
experts
noted,
enforcement
actions
can
come
from
a
variety
of
places.

Although
the
D.C.
attorney
general
can
bring
action
against
a
company
even
if
it
falls
under
the
jurisdiction
of
another
department
—
especially
if
that
department
requests
the
OAG’s
intervention
—
sources
told

HousingWire
it
is
unclear
whether
the
Department
of
Insurance
requested
the
OAG
to
take
action.

“This
is
where
there
is
widespread
concern
about
regulation
enforcement,
as
there
is
a
lack
of
clear
boundaries,”
said
Chuck
Cain,
a
senior
vice
president
at


Fidelity
National
Financial.
“It
makes
is
very
difficult
for
businesses
to
operate,
as
they
can
operate
under
known
rules
and
known
enforcement,
but
when
you
don’t
know
where
the
sidelines
are,
how
do
you
know
if
you
are
in
bounds
or
not?”

Cain
noted
that
while
title
companies
may
expect
actions
to
come
from
an
insurance
regulator,
they
could
come
from
the
attorney
general’s
office
as
was
the
case
in
D.C.,
the


Consumer
Financial
Protection
Bureau
(CFPB)
or
even
their
state’s
real
estate
commission.

“I
think
it
is
certainly
alarming
for
everyone
who
is
in
the
affiliate
business
world,”
Cain
said.
“You
have
to
be
very
mindful
of
state
law,
state
regulations
and
the
mood
of
the
regulators
in
those
states.
Because
you’ll
have
some
states
like
Texas,
where
you
know
the
department
of
insurance
is
an
extremely
vigorous
regulator,
and
then
you
have
Kentucky
where
there
isn’t
even
a
licensing
requirement
in
regard
to
title
insurance
there.”

Jeff
Ehrlich,
the
former
deputy
enforcement
director
at
the
CFPB
and
an
attorney
at

McGuireWoods
LLP,
noted
that
in
D.C.,
the
Department
of
Insurance
cannot
repeal
a
law
enacted
by
the
D.C.
Council.

“It
is
also
worth
noting
that
JVs
between
title
companies
and
real-estate
agents
are
not
necessarily
unlawful;
only
those
that
give
consideration
for
referrals
violate
§
31-5031.15,”
Ehrlich

wrote
in
a
post
on

LinkedIn.
“Thus,
a
JV
could
comply
with
the
D.C.
Code
by
deducting
from
the
agents’
distributions
any
profits
derived
from
the
agents’
referrals.”

According
to
Ehrlich,
none
of
the
joint
ventures
or
affiliated
businesses
operate
this
way
as
it
would
“defeat
the
point”
of
the
firms,
which
he
claims
is
for
real
estate
agents
to
get
paid
for
steering
consumers
to
certain
firms.

“If
the
JVs
did
not
compensate
the
agents
for
their
referrals,
the
agents
would
no
longer
steer
their
customers
to
the
JVs,
and
the
whole
corrupt
scheme
would
collapse,”
Ehrlich
wrote.

Level
of
capitalization

While
Ehrlich
agrees
with
the
actions
brought
under
the
D.C.
Code,
he
believes
that
based
on
the
comments
made
by
the
attorney
general’s
office,
the
actions
could
have
been
brought
under
RESPA
as
well.
He
is
not
the
only
one
who
thinks
so.

At
the
center
of
this
debate
is
the
level
at
which
some
of
the
firms
were
capitalized.
Under
RESPA
and
the
Unfair,
Deceptive
or
Abusive
Acts
or
Practices
(UDAAP)
compliance
best
practices,
joint
ventures
and
affiliated
business
arrangements
should
be
capitalized
to
operate
for
four
to
six
months,
assuming
that
no
profits
are
made.

Francis
“Trip”
Riley,
a
partner
at Saul
Ewing
LLP who
represented
Allied
Title
&
Escrow,
noted
that
the
firm
was
capitalized
at
$60,000,
which
he
claims
“was
the
amount
needed
to
stand
up
the
agencies
and
operate
it
for
three
to
four
months
as
if
no
revenue
was
being
received
during
that
time.”

“Why
would
it
need
to
be
more?”
he
said
in
an
email.
“If
the
[affiliated
business]
was
a
wholly
owned
subsidiary
of
say
a
lender,
does
DCOAG’s
discounted
assertion
mean
that
the
lender
needs
to
invest
more
than
the
amount
needed
to
stand
up
and
run
the
title
agency
for
3
to
4
months?
If
so,
why
and
where’s
the
authority
for
that?”

Ewing
of
Federal
Title
&
Escrow
is
one
who
believes
that
firms
like
Allied
were
capitalized
far
below
fair
market
value.

“I’ve
been
doing
this
for
30
years,
and
if
I
were
to
start
a
new
title
company, servicing
the
same
volume
of
business
as
some
of
these
sham
title
companies,
the
capitalization
costs
would
be
at
least
10
times
the
amount
of
capitalization
identified
in
the
OAG’s
findings,”
Ewing
said. 

He
also
recommended
that
anyone
interested
in
entering
into
a
JV
or
ABA
have
outside
counsel
review
the
business
arrangements
and
offer
an
opinion
on
whether
they
believe
it
is
a
fair
investment.

The
attorneys
and
title
professionals
consulted
by
HousingWire
consulted
for
this
article
would
not
specify
an
amount
they
believe
to
be
adequate
for
capitalizing
a
joint
venture.

“It
is
kind
of
a
can
of
worms
in
the
industry
in
the
sense
that
there
is
no
good
guidance
on
what
is
OK,”
said
Trepeta
of
RESPRO.
“It
almost
needs
to
be
statutory
and,
actually,

we
did
that
in
Utah
when
we
reformed
the
affiliated
business
laws
there
a
few
years
ago.”

Gray
area
risks

In
addition
to
adequate
capitalization,
RESPA
experts
noted
that
for
firms
to
be
established
and
operate
in
a
compliant
manner,
they
also
need
to
have
their
own
office
space
and
employees.

“None
of
those
things
are
required
by
law,
which
is
really
the
interesting
part
of
this,”
said
Loretta
Salzano,
the
president
and
founding
partner
at

Franzen
&
Salzano
LP.
“Under
the
law,
you
have
to
give
a
timely
and
accurate
disclosure
of
what
your
relationship
to
the
affiliated
business
or
joint
venture
is,
and
you
can’t
require
them
to
use
the
affiliate
or
tell
them
if
they
don’t
the
transaction
won’t
close.”

Additionally,
Salzano
noted
that
profits
or
dividends
generated
by
the
affiliated
business
can
only
be
distributed
based
on
investment
share
and
not
the
number
of
referrals.

Given
the
large
amount
of
grey
area
surrounding
how
RESPA
and
similar
state
statutes
are
interpreted
and
enforced,
it
is
understandable
there
are
differing
views
on
what
the
D.C.
attorney
general’s
actions
mean
for
the
future
of
real
estate
agent
and
title
insurance
joint
ventures
and
affiliated
businesses,
both
locally
and
nationwide.

In
his
LinkedIn
post,
Ehrlich
referenced
a
title
industry
attorney
who
anonymously
stated
that
the
way
the
“D.C.
attorney
general
is
applying
this
new
interpretation,
basically
makes
all
affiliations
in
D.C.
illegal.”

“Indeed,
any
title
company
or
real-estate
agent
who
participates
in
a
joint
venture
in
the
District
of
Columbia
risks
being
on
the
wrong
end
of
an
OAG
enforcement
action,”
Ehrlich
wrote.

But
others
don’t
quite
feel
that
way.
Riley
of
Saul
Ewing
noted
that
the
enforcement
action
means
that
all
affiliated
businesses
can
continue
to
operate
in
D.C.,
but
as
he
sees
it,
“none
of
the
profits
from
D.C.
revenue
can
be
part
of
the
profit
distribution.”

“Some
will
simply
stop
doing
business
in
D.C.,”
he
added.

Ripple
effects

So
far,
enforcement
actions
have
only
been
undertaken
in
D.C.,
but
industry
experts
believe
other
states
may
follow
suit.

“It
is
possible
other
jurisdictions
could
apply
non-RESPA
statutes
(if
they
have
them)
to
attack
RESPA
compliant
JVs
but
they
have
not
done
so,
so
far,”
Trepeta
wrote.
“Other
jurisdictions
focus
on
RESPA
and
its
associated
best
practices
when
scrutinizing
JVs. 

“The
long-held
assumption
is
that
unless
specifically
contradicted
(for
example,
Utah
caps
the
amount
of
business
a
JV
can
get
internally
at
70%)
then
RESPA
rules,
exemptions
and
best
practices
apply.”

But
Trepeta
agrees
that
given
the
D.C.
attorney
general’s
clear
stance
against
real
estate
and
title
joint
ventures,
it
would
be
unwise
to
attempt
more
of
these
types
of
business
structures
in
the
future.

Looking
at
the
rest
of
the
country,
industry
professionals
told
HousingWire
they
expect
to
see
settlements
or
other
enforcement
actions
taken
in
Pennsylvania,
Michigan,
Maryland,
New
York
and
Arizona.

“When
people
engaged
in
affiliated
business,
they
need
to
be
very,
very
mindful
of
state
laws
and
state
requirements,”
Fidelity
National’s
Cain
said.
“RESPA
is
a
federal
law,
but
if
a
state
has
a
greater
restriction
than
RESPA
may
lay
out,
then
the
state
law
supersedes.”

In
addition
to
action
in
other
jurisdictions,
Cain
is
anticipating
more
enforcement
in
D.C.

“Generally,
I
don’t
think
the
D.C.
regulator
is
done,”
Cain
said.
“They
may
be
done
with
title,
but
I
think
their
next
stop
is
that
they
are
going
to
look
at
mortgage
entities
where
referrals
of
business,
such
as
real
estate
professionals,
have
ownership
interest.”

Riley
shares
a
similar
view.

“The
next
question
is
whether
DCOAG
will
go
after
title
agencies
owned
by
banks,
non-depositor
lenders,
developers,
who
would
seem
to
have
the
same
steering
capabilities
that
the
DCOAG
seems
to
think
agent
investors
are
doing,”
Riley
wrote.

“Then,
what
about
mortgage
lenders
and
brokerages
whose
owners
are
agents
and
the
others
I
just
mentioned?
While
there
is
no
licensing
anti-kickback
code
like
the
one
alleged
by
DCOAG
to
apply
to
title
agencies
and
underwriters,
the
DCOAG
also
cited
to
DC’s
consumer
protection
code
(UDAAP)
to
have
alleged
these
ABAs
allowed
for
deceptive
actions.”

If
other
jurisdictions
do
take
action,
Ehrlich
said
it
should
not
be
a
surprise.

“Congress
anticipated
that
states
might
impose
greater
restrictions
on
settlement-services
providers,
and
RESPA
specifically
allows
for
this.
While
RESPA
preempts
inconsistent
state
laws,
it
also
provides
that
a
state
law
is
not
preempted
if
it
’gives
greater
protection
to
the
consumer,’”
Ehrlich
wrote.

As
the
title
industry
looks
ahead
to
a
variety
of
other
challenges
—
including

new
anti-money
laundering
reporting
rules,
the
growing
prevalence
of

attorney
opinion
letters,
the


Federal
Housing
Finance
Agency’s

title
waiver
pilot
program
and
the
CFPB’s
interest
in
possibly
changing

who
pays
for
a
lender’s
title
policy
—
some
view
the
D.C.
attorney
general’s
action
as
a
continuation
of
these
obstacles.

“The
title
industry
is
really
being
attacked
right
now,”
Salzano
said.
“Of
course,
there
is
a
big
movement
to
lower
closing
costs
for
homeowners
so
that
more
people
can
get
into
a
home
—
which
is
fabulous,
and
we
would
all
like
to
lower
costs
—
but
it
is
my
understanding
that
there
are

studies
and
evidence
that
demonstrate
that
affiliated
business
arrangements
do
not
result
in
higher
prices.

“So,
I
think
this
attack
on
the
industry
is
unfounded
and
that
there
are
very
legitimate
protections
to
be
gained
from
title
insurance.
And
getting
rid
of
it
won’t
necessarily
help
all
the
people
they
are
trying
to
help.”

Marx
Sterbcow,
the
managing
attorney
at

Sterbcow
Law
Group,
agrees
with
Salzano.
He
feels
that
to
a
certain
extent,
these
actions
are
being
used
to
scare
title
firms.
He
also
noted
that
many
in
the
industry
who
feel
these
firms
did
nothing
wrong
lack
clarity
on
why
the
attorney
general’s
actions
were
taken.
To
fill
this
void,
Sterbcow
has
looked
at
tweets
issued
by
Schwalb.

“DC
has
the
highest
housing
closing
costs
in
the
country,”
Schwalb

wrote
in
a
post
in
late
August.
“We
need
fair
competition
between
title
insurance
companies
to
ensure
District
residents
get
a
good
deal.”

“Everything
is
about
consumers
paying
high
title
insurance
premiums,”
Sterbcow
said.
“That
is
all
we
keep
hearing
from
regulators
and
enforcement
staff,
but
what
does
that
have
to
do
with
a
title
insurance
joint
venture?”

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