State says no to quid pro quo

New opinion says brokerages can’t give special treatment to lawyers who feed them title-insurance business
By Catherine Curan | July 28, 2011 06:41PM

A law aiming to prevent improper quid pro quos for title insurance agents just got a new set of sharp teeth — causing a furor in the already embattled industry.

In late May, the Office of the General Counsel of the state’s Insurance Department issued an opinion about whether it’s legal for a residential brokerage to place lawyers on “recommended” lists, which are distributed to homebuyers, in exchange for those lawyers referring clients to the brokerage’s title insurance affiliate.

The answer was a resounding no. The state agency ruled that this kind of quid pro quo is a violation of state law. As a result, brokerages are now prohibited from rewarding lawyers for using their firm’s affiliated title agency, or “punishing” those who don’t by removing them from recommended lists. (Until now, industry sources say that lawyers who failed to refer back business to the firms were often nixed from these lists.) Those who violate the law will now be slapped with a $1,000 fine or five times the amount of the financial inducement, whichever is larger.

While the law has been on the books since the 1970s, this new opinion interpreting it is expected to have far-reaching consequences for the industry, which has seen more and more title insurance companies partner with real estate firms in recent years.

“These inside, preferred deals have hindered our market for years, and the end result was a poor system that often closed an eye to title issues and conflicts of interest,” said attorney Luigi Rosabianca, general counsel to the independent Manhattan title-insurance provider Loranca Settlement Services Corp.

Title insurance executives, especially those not affiliated with brokerage firms, said the change will level the playing field.

The new rules “will take away the slightly unfair advantage [brokerages with affiliated title insurance companies] had to influence where title insurance was purchased,” said Marc Lawrence, a principal and senior managing director at independent title insurance firm American Land Services.

Several big New York residential firms now have affiliated title agencies. For example, Manhattan’s Skyline Title is owned and operated by Title Resource Group, which shares a parent company, the massive Realogy Corporation, with NRT, the owner of Corcoran and Citi Habitats.

Meanwhile, Prudential Douglas Elliman owns PDE Title, and Westchester brokerage Houlihan Lawrence partnered with Electronic Land Services to form Thoroughbred Title Services in 2009.

During the boom of the mid-2000s, these brokerages began to see title affiliates as a chance to make additional revenue. Plus, they felt they could effectively market title insurance to their existing clientele.

Real estate firms “did the math and saw they could make money on this venture,” said Lawrence.

Smaller, independent title insurance companies, by contrast, typically get referrals from other real estate professionals such as attorneys, mortgage bankers or mortgage brokers.

As affiliated businesses became more common, the question of referrals between them turned into a hot topic. But it’s recently reached a boiling point, as the slump in residential sales has sharpened competition for title insurance fees.

It’s legal for brokerages to refer customers to their affiliated title agents, as long as the title agency also gets a significant portion of its business from several other sources.

Still, discomfort with “recommended lists” has been growing for years among attorneys, who have ethical concerns about being pressured to use certain title agents in exchange for being on the lists, according to Denise Ward, president of the Mamaroneck-Harrison-Larchmont Bar Association.

In the last few years, members have approached her about the issue with increasing frequency, Ward said, noting that conditional referrals are a violation of the federal consumer protection law called the Real Estate Settlement Procedures Act. Lawyers also worried about being sued for malpractice, which could happen if an attorney uses a title agency solely to keep referrals flowing, because that could mean putting the lawyer’s interests ahead of clients’.

Now, many attorneys are relieved that the state has clarified the rules. “It helps attorneys who don’t want to be put in this box of, ‘you’re insisting I use your title company,’” said Ward.

As far as title insurance agents are concerned, the new opinion “reinforces the idea of a level playing field,” said Robert Treuber, executive vice president of the New York State Land Title Association, the industry’s local trade organization.

The news may not be as welcome to big real estate firms and their title agencies. PDE Title did not respond to requests for comment. Skyline issued a statement saying the insurance department’s opinion simply “restates a very long standing position of the Insurance Department, with which we fully comply.”

“[It] does not impact our business because we have always complied with and will continue to comply with New York law,” it said. Chris Meyers, the chief operating officer of Houlihan Lawrence, meanwhile, said his firm’s title insurance affiliate, Thoroughbred Title, already gets more than half its business from buyers who are not working with a Houlihan broker. Meyers acknowledged that Houlihan has recommended attorneys lists, but insisted the lists are not about quid pro quo.

“Attorneys are on our lists because they provide great legal representation, period,” said Meyers. “We expect only that attorneys respect a buyer’s request to use Thoroughbred if that is the buyer’s choice.”