It’s one of American real estate’s seamier practices, and it’s almost impossible for consumers to detect: Kickbacks and sweetheart payoffs among realty agents, title and escrow companies, lawyers and lenders for referrals of homebuyers’ mortgage or closing services.
Now the federal government is mounting its most aggressive campaign in decades to stamp out illegal referral-fee schemes. Though it hasn’t attracted widespread attention, the government’s anti-kickback effort in 2005 racked up more than six times the number of out-of court settlements with alleged violators compared to 2004.
The latest case, unveiled in November, involved a high-profile New England home mortgage lender, 1-800 East-West Mortgage Co. According to the settlement agreement, employees allegedly asked for and received “tens of thousands” of dollars worth of Boston Red Sox and New England Patriots tickets, plus restaurant gift certificates and concert tickets from attorneys, title companies, and appraisers to whom loan officers referred business.
An investigation by the U.S. Department of Housing and Urban Development and the Federal Deposit Insurance Corp. found that East-West maintained a “give-to-get” policy that pressured settlement professionals for “gifts … that East-West used as employee incentives,” according to HUD. East-West “expected certain attorneys and appraisers to pay for luxury seating at Red Sox games and concerts at Fenway Park. In addition, East-West induced attorneys and appraisers to pay for private barbeques and charitable galas with Patriot players.”
East-West’s president, David R. Bernotas, said in a statement that while “some providers of services, who had long-term relationships and frequent contact with some East-West employees, purchased seats at athletic events, restaurant gift certificates and the like,” referrals of borrower settlement services went “to those who provided high-quality services at the lowest possible cost.”
East-West denied any wrongdoing but agreed to pay $150,000 to the Treasury as part of the settlement and pledged not to accept referral-fee compensation.
Earlier scalps on the government’s real estate payoff list for 2005 include units of major realty brokerage companies, title insurance, and lending firms including Coldwell Banker Residential Real Estate Inc., First American Title Insurance Co., Chicago Title Insurance Co., Re/Max Masters Inc., and Prudential Locations LLC.
In the Prudential case, real estate agents who referred at least $1 million in new mortgage business to Wells Fargo Home Mortgage Hawaii LLC allegedly were given free trips to Thailand and Las Vegas, and even a three-year free lease of a Mercedes-Benz.
As of Dec. 1, HUD had completed 12 major kickback settlements thus far last year. For all of 2004, it had just two.
Under the Real Estate Settlement Procedures Act, the giving or receiving of anything of value in exchange for a referral of a homebuyer’s or borrower’s settlement services is prohibited. The law dates back to 1974, when Congress conducted hearings that found that consumers were being misled because of backdoor payoffs among realty, lending, title insurance, and other firms.
For decades, anti-kickback prohibitions were largely ignored by the industry, in large part because the federal agency tasked to enforce the law mounted only minimal efforts. It lacked the investigative staff, the funding and political will necessary to go after big names in real estate, banking and mortgage finance.
During the past three years, however, the Bush administration has added significant new enforcement staff, budgetary resources, plus contracted with gumshoe professionals – retired FBI, Customs, Treasury, and white-collar crime investigators – to track down realty industry players who are lining each others’ pockets illegally.
Brian Montgomery, federal housing commissioner and top gun for the anti-kickback campaign, says the law “couldn’t be any more clear” as far as “giving or receiving” referral payments. “The message to the industry should be equally clear – we will not only investigate those who give, but those who receive kickbacks.”
Montgomery’s office reportedly has large numbers of active investigations to pump up pressure in 2006, and is considering creating a Web site where tips about referral-fee schemes can be communicated to federal investigators.
As a result, maybe the word finally will get out: Real estate referral kickbacks are bad for consumers. They violate federal law, invite heavy financial penalties, and could even lead to jail time.
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Ken Harney is a real estate columnist with the Washington Post.