Did you know that a settlement agent providing a free home warranty may be illegally rebating title insurance?
January 27, 2017
Over the last several years, there has been an increasing trend for settlement agents to try to attract business by providing a free home warranty, home inspection, or other valuable items to consumers in order to induce the use of their settlement services. In such cases, there is not a third party payment in order to secure the business; rather, it is a direct benefit provided to the recipient of the settlement service. Vendors providing this type of incentive argued that because the incentive was provided directly to the consumer, it was permissible and not in violation of the Federal Real Estate Settlement Procedures Act (“RESPA”). Although RESPA may not be an issue, as discussed more fully below, a recent pronouncement from the Bureau of Insurance for Virginia confirms that the practice of settlement agents paying for such benefits is prohibited by state law as the “rebating” of title insurance premiums. The rationale applied by Virginia’s Bureau of Insurance would likely apply in Maryland and the District of Columbia as well.
RESPA provides in Section 8(a) that it is “Illegal for any person to give or receive a thing of value pursuant to an agreement or understanding to refer settlement services in connection with a federally related mortgage loan”. In Section 8(b), splitting any portion of the fees for real estate settlement services is prohibited except for services “actually performed”. The essence of these provisions is that kickbacks or payments cannot be given to a party that refers clients to agents, lenders or settlement entities. Conceptually, giving kickbacks increases the cost to the consumer without providing any tangible benefits in return. Included in such prohibited payments are not only cash payments, but gifts, tickets to events, and other things of value. Since the home warranty in the example discussed above is being provided directly to the consumer, rather than to a third party in return for the referral of business, there may not be a violation of RESPA, however, the practice is still prohibited by local law.
The analysis given in Virginia relates to title insurance rates. In all relevant jurisdictions, the rates permitted to be charged for title insurance are filed with the State Insurance Commissions. There may be some right to negotiate the rates in Virginia, for example, but clearly not in Maryland. The Code of Virginia absolutely prohibits the payment of any valuable consideration (gift, money, etc.) that is not specifically provided in the insurance rates and agreements filed in that State. Understandably, the home inspection payment or home warranty purchase are not explicitly conditioned on the purchase of a policy of title insurance. But Virginia recognizes the practical nature of the situation, which is that part of the title insurance premium is really being used to buy the home warranty. In many cases, the cost of the warranty or inspection exceeds the settlement fee, making it absolutely clear that the only other place to obtain funds to buy the benefit is from a portion of the title insurance policy. Virginia has stated, by written guidance to settlement agents issued on January 4, 2017, that providing such inducements, essentially for the purchase of title insurance (implicit in the transaction), is prohibited by Virginia law.
The same rationale could be applied in Maryland or the District of Columbia, and, in fact, now that Virginia has articulated the issue, it will be surprising if its neighboring jurisdictions do not follow suit. Unless the title insurance rates filed with the jurisdiction specifically identify the purchase of a home warranty, home inspection or similar benefit, paying for such items is likely to become a prohibited marketing tool for title companies in Maryland and D.C. as well. We will keep you updated on any new developments in this regard.
For more information regarding our Residential Real Estate Settlements Group or our general real estate transactions and litigation practice, please contact the Group Chair at 301-230-6574 or firstname.lastname@example.org.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.