State Insurance Commissioner John Garamendi said Tuesday that he was investigating two big title insurers as part of a probe into alleged kickbacks paid to builders, lenders and Realtors in exchange for client referrals.
Garamendi said Fidelity National Financial Inc. and LandAmerica Financial Group Inc. had been involved in complex arrangements that amounted to paying bribes for referrals while jacking up the cost of title insurance for home buyers. He issued subpoenas ordering the companies to produce documents and their executives to appear at a public hearing in April.
"Title insurers are paying kickbacks by unnecessarily raising the price of premiums and splitting the overcharge with other conspirators," said Garamendi, making the announcement at a new-home tract in Sacramento, where he said buyers were being "fleeced" by as much as $1,000 per transaction. "This is wrong."
An as-yet-unknown number of home buyers may have been overcharged hundreds of millions of dollars in title insurance premiums, Garamendi said. State and federal law prohibits title companies or others involved in real estate transactions from paying incentives or referral fees to generate business.
Mortgage lenders Citigroup Inc. and Wells Fargo & Co. and at least two real estate companies -- Re/Max International Inc. and a unit of Century 21 Real Estate Corp. -- played roles in the schemes, Garamendi said.
Because he has no jurisdiction over those companies, Garamendi said, he has asked Gov. Arnold Schwarzenegger to have the appropriate regulators investigate.
Tuesday's announcement comes on the heels of a settlement reached Friday between Colorado regulators and another major title insurer, Santa Ana-based First American Corp., which agreed to pay $24 million to consumers nationwide -- including those in California -- without admitting liability or wrongdoing.
The investigations by the California Department of Insurance and other state regulators represent a new line of inquiry into the insurance industry, which last year became the target of a bid-rigging probe by New York Atty. Gen. Eliot Spitzer. No title insurers have been linked to Spitzer's investigation.
Title insurance is required by lenders to guarantee that there are no other ownership claims on a property they are financing.
The three title companies write about 75% of the policies in California. Garamendi is alleging that Fidelity National and LandAmerica paid kickbacks by setting up so-called reinsurance companies with builders, banks and Realtors, and then sharing some of their premiums with those reinsurers.
There is virtually no risk -- and no need -- for the reinsurers, Garamendi said, because the loss rate on typical title policies is a "very low" 3% to 5%.
"These contracts were nothing less than commercial bribes," said Garamendi, adding that he has been working with regulators in Colorado and Washington state.
Executives at Jacksonville, Fla.-based Fidelity National, whose Chicago Title unit is a big player in California, did not return calls seeking comment. Before Garamendi's announcement, Fidelity Senior Vice President Daniel Murphy told Bloomberg News that the company had stopped all reinsurance contracts with builders and was in settlement talks with Colorado regulators.
LandAmerica spokeswoman Lloyd Osgood said the Richmond, Va.-based company had been cooperating with Garamendi's office since it was first contacted in November. The company also is in discussions with Colorado regulators.
LandAmerica's reinsurance arrangement was designed in accordance with the Real Estate Settlement and Procedures Act, the federal law that governs real estate transactions. "There was a real transfer of risk so the arrangement was not a scam," Osgood said.
The federal government has said that reinsurance is a legitimate business when it comes to the mortgage industry, and through the Department of Housing and Urban Development has set up guidelines for lenders and insurers to follow. Beginning in 1997, title insurers began applying the same guidelines to arrangements with builders as well as lenders and real estate firms, and the practice proliferated.
But no regulator -- federal or state -- has vigorously reviewed the arrangements until now.
"We've been waiting for clarity," said Jim Dufficy, vice president and regulatory counsel for First American. "Everybody was interested in what the regulators had to say."
When the states began their investigations last fall, First American decided to "stand up and eliminate any question of impropriety" by settling with Colorado and cooperating with California, Dufficy said. Among the states' concerns is whether buyers are being overcharged.
Osgood of LandAmerica said that buyers had an "opt out option" that allowed them to purchase title insurance from another company. But as with many line items in a real estate transaction, consumers often are overwhelmed or simply don't know that certain property settlement fees are negotiable.
Garamendi acknowledged Tuesday that when he refinanced his home recently, he was unaware that he could have shopped around for a more competitive title insurance rate.
First American said that because of its settlement with Colorado, it would take a fourth-quarter pretax charge of $24 million and report fully diluted earnings per share of 76 cents for the fourth quarter and $3.83 for the full year 2004.
Shares of all three title companies fell in New York Stock Exchange trading Tuesday. LandAmerica shares lost 3.3%, or $1.83, to $53.12. Fidelity National shares fell 2.9%, or $1.33, to $44.01. And First American slipped 1.4%, or 51 cents, to $35.61.
Bloomberg News and Associated Press were used in compiling this report.