Freebies from title companies

Beware settlement-service providers bearing gifts.

by Ron Walker  During the past several years, it has not been uncommon for title companies, as part of their marketing efforts, to offer brokers and agents items such as virtual tours, fliers, and postcards in the hope that the broker or agent would direct business to the title company. The U.S. Department of Housing and Urban Development believes that such freebies violate the Real Estate Settlement and Procedures Act (RESPA). Recently, HUD investigated seven title companies in the Austin area. The investigation concerned the giving of virtual tours by title companies to brokers and agents.

Section 8(a) of RESPA states: "No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person." HUD believes that by providing virtual tours at no cost to brokers and agents, the title companies provided a "thing of value" in exchange for the referral of business in violation of Section 8(a). HUD may investigate and take action against brokers and agents who received the virtual tours.

Settlements were reached in the investigations, and the title companies paid fines that, in total, exceeded $130,000 (varying from $1,260 to $43,500). The title companies agreed that before providing virtual tours, the title companies will charge and collect fees for the virtual tours that the title companies provide to persons who are in positions to refer business. The title companies agreed not to provide virtual tours for free. The fee for a virtual tour may not be less than the actual cost to the title company of providing the virtual tour. Any fee that equals or exceeds the actual cost of the virtual tour to the title company is deemed reasonable. The title companies also agreed that virtual tours, at each title company’s going price, will be available to any person who wishes to purchase the virtual tour. The title companies agreed to notify each broker who requests a virtual tour that there is no agreement, understanding, or requirement to refer business. The title companies may not refuse to provide a virtual tour to any person on the basis that the person does not refer business to the title company.

Although the settlement agreements discussed only virtual tours, it is not difficult to see that the same type of practice and concerns will apply to any product or service that a broker or agent receives from a title company, mortgage lender, or any other settlement-service provider. Several brokers recently reported receiving "price sheets" from a few title companies showing the prices for the products and services the title company may provide to the broker.

HUD’s recent action does not affect a title company’s or settlement-service provider’s right to advertise its services. For example, a title company may purchase ad space in a broker’s magazines, fliers, or Web sites. Both the broker and title company should exercise care to ensure that the price paid for the ad space reflects a market price, the purchase of the ad space is not conditioned on the referral of business, the parties execute a written advertising contract, the broker does not limit which title companies or settlement-service providers may purchase ads, and the advertisement is clearly identified as an advertisement in the publication.

In 1996, the Texas insurance commissioner issued a title bulletin in response to similar inquiries at that time. Article 9.30(A) of the Texas Insurance Code prohibits the giving of a rebate, discount, commission, or anything of value directly or indirectly for soliciting or referring title-insurance business. With respect to controlled business arrangements, the commissioner stated that a builder or broker may own stock or a partnership share in a title company, but forms of ownership may not be utilized to pay dividends or profits in any way based upon the shareholder’s performance in referring or soliciting title-insurance business.

The commissioner also noted that the giving or receipt of anything of value to another person for soliciting or referring title insurance business constitutes the unauthorized practice of insurance. The commissioner noted that the following are considered illegal rebates to brokers and builders: vacation trips; sponsoring or promoting open houses; gifts; providing personnel, equipment, or office space; providing profile or "farming" reports and brochures promoting the broker’s or builder’s business; renting space from a broker or builder at an inflated cost; providing prizes for drawings at educational or promotional events; or providing free meals at seminars. The commissioner later clarified that title companies may purchase (at a fair price) advertising rights (banners, announcements, rights to distribute promotional items) from local associations at association events.

The bottom line is that title companies and brokers should avoid the giving and receipt of anything of value that is or appears to be an inducement for the referral of business.

Ron Walker is director of legal affairs for the Texas Association of REALTORS®.

Photos © PhotoDisc.

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