When you see the phrase, “Seller to Select Services’, it is code for the listing agent to dictate the escrow and title companies for your transaction. The affiliated companies are big business, and the listing agent’s brokerage will typically get a piece of the pie – and it’s legal if they disclose it.
But some take it too far – HT to daytrip!
A new federal court suit alleging kickback violations by one of the country’s top-producing real estate sales teams raises an unsettling question for home buyers: Could your agent or broker be pocketing under the table large chunks of what you pay for title insurance?
Some legal analysts say the litigation should be a wake-up call for realty brokers and their customers nationwide. It focuses fresh attention on the often murky financial relationships that exist between title insurance agencies and realty firms — relationships that have been drawing increasing scrutiny from the federal Consumer Financial Protection Bureau.
The suit, which was filed in U.S. District Court in Baltimore this month, alleges that Creig Northrop Team P.C. — a real estate group ranked among the highest-grossing nationwide in recent years — received payments totaling $1.3 million from 2001 to 2014 from a title insurance company, which the complaint characterizes as illegal “kickbacks” that were never disclosed to buyers. The plaintiffs also allege that the defendants used “sham” employment and marketing agreements to disguise the true nature of the payments.
The filing seeks class action status, $11.2 million in “compensatory damages” for the plaintiffs, plus potentially millions more in other damages. A related suit sought and was granted class action status by the same federal court this year. In that case, the Northrop team and Long and Foster denied any wrongdoing. The court ultimately dropped Long and Foster from the class action, having found no evidence that Long and Foster had participated in the Northrop team’s alleged actions.
The new suit, brought by Nancy Wade and Janice Rulli, who bought a home in Ellicott City, Md., through the Northrop team, seeks to reinstate Long and Foster as a defendant with new allegations that an employee of the brokerage firm not only was aware of the allegedly illegal payments but also “admonished and disciplined” sales agents when they did not steer business to the title agency.
The complaint alleges that Carla Northrop, vice president of the team, received $775,000 from Lakeview Title over a six-year period under an “employment arrangement” that required little or no work — she had no office space, no set hours, no cellphone or business cards, yet was compensated with one-half of the title insurance premiums charged to home buyers who were referred by the Northrop team.
No one can predict how the court system ultimately will rule on the allegations in the Northrop case. But real estate industry experts say it highlights an area of growing sensitivity for brokers and agents: Though federal prohibitions against kickbacks for business referrals have been in place for decades, regulators and consumer attorneys are becoming more aggressive in challenging “marketing” and employment compensation deals that can add significant amounts to brokers’ incomes — but discourage their buyers from shopping for lower-cost or better settlement services.
Such arrangements are widespread, says New Orleans attorney Marx Sterbcow, and “a lot of them” are vulnerable to legal attack. According to Sterbcow, payments for questionable “marketing services” can amount to hundreds of thousands of dollars a month in the case of large brokers or involve more modest payments to small brokerages or even to individual agents who have negotiated arrangements with title and other vendors.
When there is little or no proportionality in the referral deal — say a broker or agent gets substantial sums of money but provides only vague services beyond the referral of customers — the arrangement is open to challenge, say realty industry legal experts.
The Consumer Financial Protection Bureau has begun stepping up its own investigations and enforcement actions against brokers and title companies — especially on alleged referral-fee arrangements and inadequate disclosures provided to consumers.
It recently settled with one large realty broker for $500,000.
“Affiliated business arrangements” that are disclosed to consumers and follow the regulatory rules are permitted under the law. Though it’s difficult for most consumers to detect illegal kickback arrangements, it’s easy to remember this: Under federal law you are free to shop for title and other services. Your realty firm may recommend an affiliated company as the best around, but you are free — and wise — to test that proposition by checking out the competition.