Bundled services have commonly been offered to purchasers of real estate in New York. For example, a real estate broker, wishing to enhance an affiliated title insurance company, has a program that encourages attorneys to refer their title business to the title company. A title agent provides tax reduction services as a benefit to its title customers. Mortgage providers may have an affiliation with a real estate broker. Purchasers may consider bundled services to be convenient and beneficial. They may be unfamiliar with the community in which they are purchasing or new to the process, giving them the tendency to trust recommendations of professionals that they have already selected. However, in some cases, bundled services predominantly benefit those entities to which the referral is made and do not necessarily result in better or less expensive service for the customer.
Title insurance companies are highly competitive entities that have fewer transactions to close since the “Great Recession”. In an effort to stand out among their competitors, it is not unusual for a title company to have an affiliated mortgage loan provider or title insurance company. They argue that closing issues can be resolved more readily since the servicers are constantly working with one another. Real estate brokers want to make sure that their purchaser can obtain financing, so referring to their affiliated entity is perceived by some as making the issuance of a loan commitment more likely. In some cases, they attempt to bring attorneys, who they select to be on an “approved list”, into the arrangement. Purchasers should be aware that in order to be on the “approved list”, an attorney may be requested to refer its title business to a particular entity on substantially all of his or her transactions, even those that did not result from the real estate broker with the affiliated title business.
Some title insurance companies that have lost transactions from attorneys on approved lists with other title companies are crying foul to this arrangement. They argue that the deck is stacked against them, in that the title company is in effect selected before the contract is even signed. While the real interest in the complaints may be to stifle the competition, there are legitimate reasons for some of the objections. New York’s Insurance Law provides that those who accept or receive a quid pro quo are subject to financial penalty. Title companies have been forbidden from providing goods of value as an inducement for future business. Expensive gifts and tickets to sporting events are of concern. Financial inducements (kickbacks) are prohibited. Invitations to continuing education events and office supplies are not considered an inducement for business. It is not unusual to refer business in any field to a golfing buddy, but if the service is deficient or too expensive, it only benefits the person who wants to keep playing golf, rather than the purchaser.
The main issue is the quality of the title insurance product provided to the purchaser. Is the policy backed by a major national underwriter with substantial reserves? Does the title insurance company have a full staff of experienced professionals who are readily available? Can your attorney easily reach the title company’s staff attorney to discuss closing issues? Will the title company promptly pay and file all fees, taxes and documents issued in connection with the transaction, so that the parties are not penalized? Any title company can collect your premium at closing, but not all will properly service the purchaser if issues arise after the closing. An experienced real estate attorney will objectively evaluate these issues and select the title company best suited to the particular transaction.
Excessive costs are another issue. If a payment is delivered as an inducement to obtain the referral, such cost is most likely passed on to the purchaser. Recently, the Consumer Financial Protection Bureau settled a complaint against four major mortgage insurers that made improper payments to lenders in exchange for business. Until this matter was resolved, some purchasers in effect paid more for mortgage insurance in order to support this kickback arrangement.
Since the financial crisis, regulations governing real estate transactions have become more onerous. The Real Estate Settlement and Procedures Act (“RESPA”) prohibits the receipt of compensation in exchange for referrals for real estate settlement services. Parties to real estate transactions should obtain advice from an independent professional who can confirm that the financial incentives of the other professionals in the transaction are not detrimental to the purchaser.