Sunday, December 13, 2009

Real Estate Ethics has Moved

We're getting ready to close down this blog and fire up our blog about consumerism in residential real estate at our new non-profit called Consumer Advocates in American Real Estate. If you received an e-mail when this blog post was created, then you're on our list. May we transfer your e-mail to our new blog e-mail subscription list?

Some of the topics you will read and be able to participate include:

1. Are buyer broker bonuses legal?
2. Is dual agency a bait and switch?
3. What role did Realtors play in the mortgage meltdown?
4. If a commission based provider owns a title company or is in a position to influence one, then why bother with that safeguard at all?

We're trying to raise awareness about conflicts of interest and how those conflicts have stripped away representation and neutralized safeguards in residential real estate. Come join us pro or con as we debate these topics.

Please go to and fill-in your e-mail address on the Feedburner subscription area on the right hand column of our site. Or just send me an e-mail at and I will add it for you.


Doug Miller
Executive Director
Consumer Advocates in American Real Estate

Monday, August 3, 2009

Consumer Advocates In American Real Estate

Doug Miller is now Executive Director of CAARE (a non-profit dedicated to consumerism in real estate) and will be shortly starting up a blog there. Please do visit and sign-up to receive updates.

CAARE seeks to eliminate conflicts of interest in residential real estate. We believe that nearly all the safeguards to residential real estate have been neutralized through inappropriate relationships that create at the very least a perception of coercion and undue influence.

Home Inspection, Appraisal, Home Warranties, Mortgage, Title Exam, Closing, Legal and Realtor services have all been affected. Currently the conflicts of interest with appraisal are coming under scrutiny. It is our plan to bring to light the other areas of concern.

CAARE's website is under construction, so please visit and be among the first to offer us suggestions for its improvement. In addition, CAARE is beginning a volunteer drive and we need lot's of help in each State to conduct all sorts of data collection and other projects. Please consider volunteering.

Thank you and hope to see you soon at CAARE's website.

Douglas Miller
Executive Director
Consumer Advocates in American Real Estate

Monday, January 14, 2008

Free Leads? You've got to be kidding....

"TruClose Financial Services Lead Services" Did I mention that they are a title company?

On the intro to their webpage they mention a possible RESPA violation with their program -

"DISCLAIMER: Due to possible RESPA violations in the future, TruClose Financial Services, LLC is no longer offering its lead program as an incentive. Leads can now be purchased from TruClose at very low rates. Please contact President and CEO, Jason Sheppard at 888-510-9665 x 66 for more details."

Yet, in advertisements on other websites I found this:

"We are a nationwide title insurance company who are revolutionizing the industry one loan at a time. We offer free leads in exhange for your title work, best Turn Around Times and cheapest rates. Better than any JV on the market today! We close in all 50 states

And from the first page of their CURRENT website:

"We specialize in providing ARM mailer lists, Bankruptcy mailer lists, Foreclosure bailout lists as well as complete our own mailers and forward live transfer calls to
our clients. CLICK HERE FOR SAMPLE MAILERS. We only ask that we complete the closing for the borrowers we provide to you."

This is a self proclaimed national title insurance company. And they are (or have been) in the business of paying lead generation kickbacks to loan officers in exchange for title work. Is there a more clear violation of RESPA out there? Or am I missing something?

My questions:
1. Does anyone have a list of favorite class action lawyers to whom they would like to forward this post? This might be worthy of an investigation.

2. When will people figure out that it is just plain wrong on all levels, morally, ethically and legally to pay someone for referring "their" title work business? Remember, it's not "their" business to refer, it is their "clients'" business. It's not "theirs" to refer!

3. Aren't loan officers often (if not almost always) in a position of trust and reliance? Don't they refer to their customers as clients? Don't their clients rely upon them for their expert advice and knowledge? And don't loan officers view themselves as trusted advisors? Doesn't that make most loan officers fiduciaries?

4. I wonder how many state commercial bribery laws this company may have violated? If they do what they say, and pay loan officers leads in exchange for closing business. And loan officers are construed as fiduciaries, well...

Friday, December 14, 2007

Why don't CBA's post their fees and policies?

Why don't real estate related One Stop Shops post their fees? Obtaining a fee quote from a controlled business arrangement in my town is next to impossible. It's as if their fees are a guarded secret. And what type of owner's title insurance policy do they issue? Another well guarded secret at many of these shops dependent upon a highly secret conspiracy for their "revenue streams."

Most of the real estate related Bundled Services in the Minneapolis/ St. Paul area are hidden so deeply within the real estate or mortgage organization that you can't find them in the phone book, on the internet or through any other means. Most have completely different names than the mortgage company and are so well buried in their web of deciet that a search reveals nothing. And as a real estate consumer, you only find out about the Affiliated Business Arrangement when you are told where to show up for closing. You aren't told about their fees, who their underwriter is, what other companies charge, what policy you're going to be issued or the advantages of having an unrelated and unbiased title company close your transaction.

In what other industries are pricing and product kept so well hidden? In what other industries are fiduciaries encouraged to scam their clients? What possible reasons could there be to keep this information secret, aside from an interest in gouging their clients and preventing competition?

Real estate consumers deserve more. They deserve to know before they sign up for a fiduciary relationship that their agent or broker has opted to place huge conflicts of interests between them and their representation. And at the very least, they deserve to know the existence of a captured audience trap and the fees and policy that are going to be forced upon them.

Monday, December 3, 2007

Countrywide - no more broker owned title companies?

It is about time that someone recognized the correlation between controlled business and the mortgage fraud crisis. It is my understanding that Countrywide Home Loans just announced (at least locally) that mortgage brokers will no longer be permitted to use their in-house title companies to close for Countrywide funded transactions.

The role of controlled business in the mortgage fraud crisis has been totally overlooked. If a true survey were to be done, I believe that you would find that most of the mortgage fraud transactions in this country were closed by controlled business (aka Affiliated Business Arrangements, AfBA's, One Stop Shopping, Bundled Services, kickback schemes, sham title companies, One Stop Robbing, Sophisticated Captured Audience Manipulation (S.C.A.M.)).

RESPRO claims that there is only a 25% market penetration of controlled business in this country. So if anything more than 25% of the mortgage fraud transactions has been closed by controlled business, RESPRO would either need to revise their survey (pretty easy for them since they dumpster dive for data) or they would need to admit that controlled business played a role in the current mortgage crisis.

When your livelihood is primarily made from the title industry, you need to be very careful with the risks you insure if you plan on staying in business. Despite what you hear, it is a highly risky business with most of the risk being borne by the individual agents and never getting reported to the underwriter. As an independent, you are not going to insure a bad deal because a high producing loan officer pressures you to do it.

However, if you work for a title company and your boss is THE loan officer, you're going to do what you're told. Loan officers who have $5,000 in loan fees riding on a deal for which the only hindrance to closing is a title defect are much more likely to close the deal if they own the title company. If it is their title company, for which they care little, you can bet that they're going to "insure over" that title defect. The "checks and balances" of an independent and impartial title examiner have been excised out of the transaction.

Or an even more likely scenario is the fraudulent misrepresentation of owner occupancy status. Apparently, a large percentage of the foreclosures in Minneapolis (and possibly in the U.S.) involve investors who fraudulently stated on their loan applications that they were the owner occupants of multiple properties. For lending institutions, it is a much higher risk to lend money on a property for which the investor is likely to simply walk away if the deal goes South. So for those deals, they require a much higher down payment and they charge a much higher interest rate.

Not so with someone's home. A homeowner will typically do everything possible to make things work out and are rewarded with much better interest rates and smaller down payment requirements.

So it should come as no surprise that a large portion of the current mortgage fraud crisis involves properties that were falsely claimed to be owner occupied. This is an area that has received little attention and deserves much more investigation.

For loan officers, misrepresenting owner occupied status can be the difference between a commission on a loan or no commission at all. The stakes are huge and the importance of an impartial Closer are quickly demonstrated by the current number of foreclosures that were closed by title companies under the control of loan officers or mortgage companies.

Look at the situation from the perspective of a loan officer who owns a title company. Again, let's assume there are $5000 in fees riding on one seemingly innocuous statement: "owner occupied." Now let's assume the loan officer wants to make the misrepresentation. The question now becomes, who will close this transaction with the "owner occupied" misrepresentation?

If the loan officer has made the decision to make the misrepresentation and he or she owns a title company, the deal is done. There are no checks and balances. On the other hand, if the loan officer wants to commit a fraud and the closing takes place at an independent title company, you have now introduced a very serious "check and balance" that is likely at the very least to be a deterrent and even more likely to stop the misconduct.

If it is true that owner occupancy misrepresentation constitutes a large percentage of the mortgage fraud cases in America and if it is true that most of those transactions were closed by controlled business, then you can conclude that controlled business is responsible for a large portion of the current real estate and mortgage crisis.

Tuesday, November 20, 2007

Phillip Schulman on the First American Settlement

An excerpt from Phillip L. Schulman on the First American Settlement:

"While this latest settlement may send tremors through the settlement service industries, it is important to remember that affiliated business arrangements remain lawful under RESPA. Both the statute and the implementing regulations expressly permit them, and HUD has provided a template for them in its RESPA Statement of Policy 1996-2. If affiliated businesses are set up properly under the guidelines, there is no reason why they should not continue and flourish."

See his website on this topic:

Schulman's legal practice includes representing large brokerages. And he gives them advice like this? I think this guy is burying his head in the sand and is just telling his clients what they want to hear.

Why doesn't he mention anything about the fiduciary duties his clients owe to their clients? Isn't he setting up his clients for huge lawsuits like the Burnet class action? If this guy really wanted to represent his clients wouldn't the proper advice be to avoid controlled business at all costs?

He's an attorney so that means he is trained in fiduciary relationships. He is a fiduciary! If there were a job description for an attorney, it would be that they are fiduciaries. And fiduciaries are required to avoid conflicts of interest. So would someone please explain to me why he thinks it is a good practice to place a gigantic financial conflict of interest between a client and their representation? Is Shulman a big fan of dual agency too? Maybe I should hire him to represent me in a lawsuit against one of his clients. I wonder if he would take the case...

I'm sorry Mr. Schulman, but you seem to be prostituting yourself. If you really cared about providing good advice to the large brokerages who depend upon your advice, you would have special advice for your clients who are fiduciaries - RESPA is a MINIMUM standard. And if you're a fiduciary and don't want to lose every lawsuit and possibly expose yourself to class action lawsuits and possibly even criminal liability, then you should avoid conflicts of interest like controlled business. Sophisticated Captured Audience Machines (SCAMs) are terrible conflicts (oh pardon me, I forgot to put the spin on that, I mean "One Stop Shopping"). Now that would be good advice.

You are an attorney Mr. Schulman but you seem to be talking out of both sides of your mouth. If you were in the same situation and representing a vulnerable buyer in a residential transaction, would you really rely upon the RESPA disclosure as you instructed your client to close at your title company? Would you engage in these same conflicts when representing your clients? Or does RESPA trump your duties to your clients too? I challenge you to do it. I'll file the professional responsibility complaint myself.

Fiduciaries are to be relied upon for their expert advice. Your clients often become fiduciaries because their clients are vulnerable and need someone who will give them absolute fidelity and impartiality when it comes to guiding them in the very complex real estate decision process.

Mr. Schulman, you went to law school right? So what about the most important parts about representing your clients? What about those duties of diligence, care, and loyalty? Do you remember how important it is to represent your client's best interests above all others, ESPECIALLY your own (anything else would be self-dealing)? Are you really a fan of telling your clients that you have a multitude of conflicts, but you would still be happy to represent them because it really helps your bottom line? Or rather, didn't you learn that you're supposed to back off from representation when a major conflict presents itself?

I don't know, maybe my recollection of fiduciary law is out of date. Or maybe no one has paid me enough to change my opinion...

Monday, November 19, 2007

First American Title Needs to Remove "American" from their name

What could be more un-American then removing competition from the American free market system? That's exactly what First American has done. Instead of competing for title insurance business, First American has a "business model" of bribing Realtors and Loan Officers to "advise" their clients to select First American as their title company. For the record First American, if you’re listening, commercial bribery is a violation of criminal law.

For those of you who haven't heard, First American Title is in hot water AGAIN for setting up sham title companies to try and skirt federal and state laws forbidding kickbacks. These sham title companies exist for no other purpose but to funnel kickbacks to real estate professionals. Florida just fined them five million dollars and required them to close down all 84 of their "sham" title companies there.

Here's the HUD Settlement Order

Last year, Minnesota fined them five hundred thousand dollars and required them to close down 35 shame - oops pardon me "sham" - title companies. Same laws, same violations. Wasn't that sufficient to put them on notice that their conduct was illegal? What is the matter with you First American? Are you that stupid, or are you completely without ethics? I vote the latter.

How much more egregious does their conduct have to be before they throw one of their executives in jail? Bribery is serious stuff. Imagine bribing an opposing attorney to advise their client to settle a lawsuit with you. Imagine bribing a doctor to advise their patients to see a certain psychiatrist who is known to prescribe your drugs. Imagine finding the real estate consumer's weakest point and then bribing a trusted financial advisor (Realtor or Loan Officer) to exploit it. Imagine no more.

Instead of trying to find good, ethical and honest business models to embrace the purpose of the anti-kickback laws, First American choose to just find another way to pay the kickbacks. Mel Boise, wherever you are, damn you for creating this.

What kind of arrogance does it take to have complete disregard for honest, ethical and moral conduct? Their conduct was already condemned as being reprehensible by Minnesota and HUD and yet they do it over and over again in other states until they are caught. Is profit that much of a motive that it trumps ethics for them?

It is their brand of corrupt business practices that is destroying our free market system. Good, honest competitors are losing their ability to compete on the things that should matter and as a result consumers are getting ripped off. No longer do price, service and product matter when First American is "competing." For them it’s all about finding the threshold of bribery dollars that will convince a trusted real estate professional to betray their clients.

Why bother competing for business on service, product and price when you can buy the business by just paying off a person in a position of trust and reliance? Why respect the duties of fidelity that a real estate professional owes their client, when a few dollars in their pocket will result in a referral?

I'm tired of you First American. And I have sympathy only for the poor consumers and real estate professionals who got ripped off by you. How many real estate professionals did you seduce by telling them that everything you were doing was ethical and legal? How many of them are now in trouble because of you? I hope these licensing prosecutions spawn into class action lawsuits and unfair business practice lawsuits for you. And I should be one of them.

My company tried for years to compete against your firm only to be told by real estate professionals that they had their "own" title company. Nothing could have been farther from the truth. They didn't care that your company cost more. They didn't care what was best for their clients because the success of your bribery scheme required them to send all their business to you. Please tell me how I am supposed to compete with that? Please tell me how a consumer is supposed to ever find out that there are other options out there when you've bought their advisor?

If First American feels that they can take "competition" out of the American free market system, then I say let's take "American" out of First American. Or at least change it to First Un-American.

Wednesday, November 14, 2007

Commission bonuses? Are they illegal?

The commission bonuses to which I refer are those bonuses that listing brokers offer to buyer brokers. Normally a commission co-operative (co-op)split is offered by the listing broker to the buyer broker who procures a ready, willing and able buyer who closes on the transaction. On a 6% listing commission, the listing broker might pay the buyer's broker a 3% co-op split (or 50% of the total commission, in Minnesota the standard co-op split is 45% of the total commission). The issues addressed in this post are for those states where the co-op split is not negotiated with the buyer or seller, not disclosed to the buyer or seller, and where commission bonuses are secretly paid to buyer brokers. This appears to be a very common circumstance.

In Minnesota the co-op commission split is hidden from both the seller and the buyer. The listing contract utilized in nearly 100% of the transactions in Minnesota is a non-standard form drafted by the local Realtor Association. The co-op split is not disclosed in the form. The form makes no attempt to facilitate the negotiation of the commission split to be offered to buyer brokers. The brokers decide this split for themselves.

There is a consumer friendly form available to sellers that does disclose commission splits. It is the Minnesota Bar Association's Listing Contract and can be viewed at Minnesota Listing Contract

Unfortunately, most sellers do not retain an attorney prior to retaining a broker and are almost never are made aware of this form.

Question 1: Should the commission split being offered to the buyer's broker be openly negotiated and disclosed to the principles of the transaction?

I can't think of any exceptions to this basic fiduciary duty to make a full accounting of all compensation to the client. And this is a pretty serious matter as both the listing and buyer broker's compensation is completely determined by the co-op split. I don't think it matters that there may be a "norm" out there for commission splits. The consumer doesn't know the norm. The amount of compensation better be disclosed or it is subject to forfeiture. That's the law.

And what about dual agency situations where the level of service is reduced? In a dual agency transaction the broker is limited in their services and representation. A key part of a broker's representation is severed in a dual agency transaction in that they can no longer advise their client in any way that might prove to be detrimental to the other side... That's a pretty big loss in service. Shouldn't the co-op split reflect that reduction in service?

At the very least, if that is a situation that often comes up for a broker, shouldn't they at least open negotiations to a reduced co-op split? Take a look at how the Bar Association incorporated the Consumer Federation of America's recommended co-op split for dual agency transactions in their listing contract. See link above.

My point is that compensation needs to be openly and freely negotiated and that the current forms do not facilitate this. Rather, they hide this aspect of the transaction from the client.

Question 2: If the commission split is not disclosed to the parties, is it appropriate to pay a secret bonus to a buyer broker?

Absolutely NOT. If the commission split is not disclosed, that's bad enough. However, if you take that already bad situation and then start offering secret compensation to the other party's agent, you are committing bribery. You have now removed yourself from the exclusive realm of civil liability and added criminal liability to the equation.

Paying a fiduciary anything of value with hopes of altering the advice that they provide to their clients is "commercial bribery" in most states. Just like you can't offer an opposing attorney a secret bonus if they convince their client to settle with you, you can't legally offer a secret bonus to a buyer broker if they convince their client to purchase your listing.

I've cited parts of the Minnesota Commercial Bribery Statute below as well as Hawaii's legislative commentary on their bribery statute below.

Minnesota Statute 609.86 COMMERCIAL BRIBERY.
Subd. 2. Acts constituting. Whoever does any of the following, when not consistent with usually accepted business practices, is guilty of commercial bribery and may be sentenced as provided in subdivision 3:
(1) corruptly offers, gives, or agrees to give, directly or indirectly, any benefit, consideration, compensation, or reward to any employee, agent or fiduciary of a person with the intent to influence the person's performance of duties as an employee, agent, or fiduciary in relation to the person's employer's or principal's business; or
(2) being an employee, agent or fiduciary of a person, corruptly requests, receives or agrees to receive, directly or indirectly, from another person any benefit, consideration, compensation, or reward with the understanding or agreement to be influenced in the performance of duties as an employee, agent, or fiduciary in relation to the employer's or principal's business.



This section is an attempt to reinforce civil rules of fidelity by penal sanction. To a lesser degree the section serves another secular function: it helps secure independency of business judgment. The premise is that business decisions ought to be made on merit to insure the optimal allocation of resources: bribery undermines this neutral decision-making process in the same way it undermines public administration.[1] Society's interest in promoting civil or commercial fidelity by penalizing those who intentionally violate those rules and in promoting the proper allocation of resources justifies the imposition of a misdemeanor sanction for this offense.

Subsection (1)(a) covers bribe offerors in the commercial context. It covers both agents and appraisers. "Agent" is defined broadly in subsection (2)(a) to cover all areas where a duty of fidelity is owed. The nature and scope of such duties are defined by common and statutory law regulating or creating the various legal relationships involved. Thus, for example, the duty of an employee to an employer may be not to give away trade secrets, whereas the duty of a fiduciary to the fiduciary's beneficiary or a union representative of an employee's welfare fund to employees may be to exercise independent judgment. "Appraiser" is defined broadly in subsection (2)(b) to include, in addition to conventional forms of appraisal, those forms of appraisal that have recently been involved in the "payola" scandals; for example, the bribery of disc jockeys, cinema, theatre and music reviewers, and the like, to "plug" or give favorable reviews to a certain recording, movie, play, composition, etc. Inherent is an element of "consumer protection": we are concerned that the commodity which the appraiser purports to market, that is independence, neutrality, and expertness of judgment, be protected from any undue influences.

Subsection (1)(b) covers commercial bribe solicitors or receivers. In addition to agents and appraisers, subsection (1)(b)(iii) adds a third category: an agent in charge of employment. The special abuses to which those with power to hire and fire are prone warrant subsection (1)(b)(iii), which sets forth a substantive rule that a benefit shall not be accepted with the intent that some person's status with respect to a job shall be affected thereby, regardless of whether the action constitutes a violation of a duty to a principal. Thus, even though an agent would probably be under a duty to employ the best qualified applicant, acceptance of a benefit from such an applicant should not be allowed.

Previous Hawaii law recognized no penal offense for bribery in the commercial context. There were provisions affecting bribery of appraisers and arbitrators, but these provisions were clearly concerned with bribery of public or quasi-public officials, rather than with private commercial bribery.[2]


Act 173, Session Laws 1979, amended subsection (3) to upgrade the offense of commercial bribery to a class C felony in certain instances. The Legislature found that the practice of exchanging monetary consideration to influence the discretion of officers in private corporations was perhaps more prevalent and of greater public concern than misdemeanor classification would warrant. Senate Standing Committee Report No. 856.

Thursday, October 25, 2007

When the Regulators are also the Regulated

This is just too much. How does the CEO of the Realtors trade assocation (the Colorado Association of Realtors "CAR") end up as the Director of the Colorado Division of Real Estate?

For those of you who don't know the lingo, the Association of Realtors represents the interests of the real estate industry and the Colorado Division of Real Estate is the government regulatory authority charged with enforcing the licensing laws. CAR represents the industry's interests and the government represents the consumers. Licensing laws are there to protect consumers from Realtors, not the other way around.

In the subject situation, we're talking about a Realtor in charge of regulating her own industry.

See for yourself:

Debbie E. Campagnola
CEO Association of Real Estate License Law Officials (ARELLO)

Debbie Campagnola took over as CEO for the Association of Real estate License Law officials, an international group for real estate regulators in August. Campagnola is the former Director of the Colorado Division of Real Estate, a state regulatory agency. Campagnola previously served as CEO for the Colorado Association of Realtors® trade group, and worked for the association for 15 years in various roles.

I should also mention that when she was done with Colorado she went on to become the CEO of the national organization of licensing officials called the Association of Real Estate License Law Officials.

And according to the Consumer Federation of America who conducted a study to see just how prevelant this problem was, the results were shocking:

CFA Report

With this sort of precedent, perhaps we should start having prisoners doubling as prison guards too? Heck, what good are checks and balances anyhow, they just detract from the overall profit of an industry.

Someone please tell me how consumers stand a chance?

We now have "consumer surveys" generously hosted by industry interests with industry data and industry designed questions crafted to obtain predetermined anti-consumer pro-industry results. We have industry "studies" using industry supplied data that is untrustworthy under the best possible light with off the wall conclusions that are spun to the public by the best marketing money can buy. Let's call this sophisticated captured audience marketing (S.C.A.M.) something that consumers can relate to and that has positive connotations... How does "One Stop Shopping" sound?

We have legislators who are all but paid Realtors. We have licensing laws that protect Realtors from consumers and grant freedoms to Realtors that make it possible to become a Realtor without obtaining a high school education and with minimal knowledge. They can engage in the normally illegal conduct of dual agency (they might call it facilitator or transactional in some states) with the signature on a "disclosure" form that doesn't begin to meet the common law standards necessary to obtain informed consent. We have Realtor drafted forms that only serve the Realtors' interest with glaring ommissions for the consumer. Realtors are the largest advertisers in many newspapers and many of the newspapers won't carry a negatively charged article about the industry unless it is a nationally syndicated article.

Consumers are subjected to dual agency (something attorneys can't even do and they're trained in conflict management), controlled business and are sometimes steered into transactions for no other reason than the Seller's Realtor might be offering a secret bonus to the buyer's agent. The list of atrocities goes on and on. But it is the Realtor Association that runs the real estate cartel in this nation.

And if it sounds like I'm anti-Realtor, I'm NOT. There are just as many Realtors out there who feel the same way that I do. They also believe that the current situation is wrong and that their Association seems fixated on representing only the interests of the large corporations and not the individual Realtors who make up most of their membership. Dual agency isn't good for Realtors, its good for the large corporations. Same with controlled business. These things make Realtors look bad.

Realtors serve a purpose, but lets get the attorneys back to handle the legal aspects of the transaction and to provide the legal representation (it will reduce liabilities for Realtors). Realtors, you do what your best at and let the other industries do what they're best at. Let's remove the conflicts of interest from the Realtors and lets reinstall the checks and balances in our regulatory system and get industry representatives out of the fricken government!

Tuesday, October 23, 2007

Ryland Homes gets their RESPA case dismissed

Disclaimer - I have not read this case but am commenting based upon limited knowledge acquired from RESPA Reports.

So Ryland Homes offered a discount to buyers if they used their affiliated business - not so bad right? WRONG. If it truly were a discount, it would still be bad (for reasons to be stated in another post), but these aren't discounts we're talking about. We're talking about masquerading "discounts" that far exceed the value of the mortgage and title services being "offered." This makes it impossible for the consumer to pick any other mortgage or title company without being penalized by the builder. This is extortion. Its bait and switch. Its unjust enrichment and... it may not be a RESPA violation according to the latest court decision.

If the "discount" being offered exceeds the value of services being offered, doesn't that mean they are offering those services below cost? And I know loan officers who have seen the pricing these in-house lenders charge, and its just not right.

I think this practice needs to be challenged from a competing mortgage or title company based upon a cause of action for anti-competitive and unfair trade practices.

What do others think?

Thursday, October 18, 2007

Realtors, pick your Brokers wisely

In most, if not all states the real estate brokerage license holder is statutorily responsible for supervising their real estate agents. As an agent, be very careful when selecting your broker and see if you can get an answer to the following questions:

Does your manager get bonuses based upon the office capture rate in regards to mortgage and title services? Has your manager given you advice on how to address "objections" if your clients want to select their own title or mortgage company? When its time to negotiate your commission split, does your manager or broker first look at how many files you've sent to the in-house title company? Does your manager require you to bring your clients to your in-house lender before they leave the office? Do you find that there is an unusual absence of marketing materials or presentations from outside title and mortgage firms? Has your broker told you that the only way to keep the desk fees down is to use the in-house services? Are files automatically sent to your in-house title company even if you request another title company? If you use an independent title company does it generate a visit from a manager asking you why? Does your manager talk about doing what's best for the firm even though that may mean higher prices for your clients? Will you get paid faster if you use your in-house title company?

If you answered yes to any of those questions, it is time to find another broker to hold your license. And you might as well talk to a class action attorney on the way out the door as well as your local regulatory authority.

There is widespread national abuse by brokers of their supervisory capacity going on right now. Can you rely upon your broker to give you honest advice about such things as dual agency, controlled business, conflicts of interest, or does your broker use their position of authority to give you self serving advice?

Maybe its time to take a hard look at the broker/agent hierarchy and ask ourselves if that broker's license really serves a purpose anymore.

Sunday, October 14, 2007

How to "spin" controlled business. What would you do?

Think of it from the perspective of the fiduciary who wants to make controlled business sound like a good thing. The question becomes, "How do you spin Controlled Business?"

What would you do to promote an incredibly profitable business model such as controlled business that was considered illegal under criminal and civil law? Here are some ideas:

1. Set up a non-profit organization dedicated to promoting the idea. The message is much more likely to be received well from a non-profit organization.
a. Make sure it has built-in ties to some of the most powerful lobbying organizations on the planet like Realtor Associations, Bar Associations, Land Title Associations, etc...
b. Make sure the name of the organization sounds consumer friendly. In fact, something that sounds similar to a federal law protecting consumers would be great. RESPRO sounds like RESPA and is perfect.
c. Make sure it is well funded - annual dues of thirty thousand dollars each from the larger firms;

2. Have the non-profit organization "spin" the idea in positive fashion.
a. Confuse the concept of controlled business with other concepts that have a positive meaning to consumers - One Stop Shopping would be perfect.
b. In the case of RESPRO and controlled business, change the name of controlled business to a term that may be inaccurate or less complete of a definition, but something that lay people or legislators might be able swallow. For example, "Affiliated Business Arrangements" sounds better than "Controlled." Controlled is a more accurate and complete definition because steering clients in a fiduciary relationship involves a high level of control. However, most legislators and consumers won't pick up on the nuances. "One Stop Shopping" is a term which consumers have associated convenience. Even though this term really describes the benefits to the Realtor, not the consumer, the term could probably be used with success as again most consumers and legislators won't pick up on the nuances.
c. Flood the market with this terminology until it is accepted as commonplace. Success on this issue is key;

3. Conduct highly visible and expensive "surveys" with incomplete and misleading questions designed to provide preconceived results. Conduct follow-up surveys to build upon the results of those previous surveys - again with misleading questions;

4. Conduct highly visible and expensive "studies" utilizing manipulated data. Disclose the fact that the data came from an unreliable source, but don't use words like unreliable. Simply state the source. In fact, make the non-profit group the source of the data;

5. Hold seminars and conferences and invite legislators and regulators. Make sure that they are wined and dined by your best, most wealthy and most successful promoters;

6. Use your power and status as the biggest newspaper and trade journal advertiser to influence the media coverage that is given to negative stories that come out about controlled business;

7. The fact that real estate brokers are charged by the licensing authorities with the "duty" of supervising real estate agents is a perfect opportunity to engage an army of advocates. However, make sure to spin this to the agents as being a good thing for their clients. And don't forget to offer them indirect spiffs in exchange for referring business (better commission splits, reduced desk fees,etc...);

8. Draft trusted property transfer forms that spin controlled business as a good thing;

I know I've forgotten a few things, but I don't have millions of dollars and an army of advocates to do a better job. Anyone else want to add anything?

Tuesday, October 9, 2007

Competiton among One Stop Shopping providers?

Ok, that was a joke. But what isn't so funny is that is exactly the argument that Controlled Business Arrangement (CBA) advocates are making to their clients, regulators and legislators to justify their existence. If there are now 600 title companies where there used to be only a handful, there must be a lot more competition right?

WRONG. CBA's, aka One Stop Shopping, by definition eliminate competition. In fact, the more affiliated title companies you have in a controlled marketplace translates into LESS competition. Every controlled business operation represents a segment of real estate consumers that have been steered into an affiliated business arrangement without the benefit of comparison shopping. And since the steering is done by fiduciaries, that steering is almost always successful.

There is not a lot of incentive to offer lower prices when you have a client who will pay whatever they are "advised" to pay by their real estate fiduciary.

Realtors, loan officer, attorneys, and builders who have One Stop Shopping divide up real estate title insurance consumers among themselves. They use that unique relationship to extract above-market prices from consumers (unless you're willing to cite RESPRO's self serving ABA survey of ABA's with data provided by ABA's to show that ABA's don't cost more). Those clients have trusted their real estate professionals to make the settlement service provider decision on their behalf. Each controlled title company represents the "captured audience" of those "professionals."

And those clients are some of the most vulnerable consumers in the entire U.S. market. They typically put more reliance on their fiduciaries than in any other profession, with the exception of doctors.

Controlled Business Arrangements, One Stop Shopping, Affiliated Business Arrangements or whatever else you want to call them, do one thing that automatically makes them intolerable under any circumstances. They annihilate competition.

Saturday, October 6, 2007

Is Nations Title paying illegal kickbacks in violation of RESPA?

Do you have a Nation's Title Office near you? I encourage you to take a look. Because they are paying $100 to loan officers (and possibly other real estate professionals) if they help them "clear title." I don't know if this is specific to their Minnesota operation or if it is a nationwide practice. A determination of the legality of this arrangement needs to be publicly scrutinized as it certainly impacts both the consumer and competition.

In their own words as they explained to me:

"When Nations Title signs up a new client, in order to meet the business demands of that customer, we may need to hire more staff. To limit hiring needs and overhead for Nation's Title, it is possible for the Mortgage Broker to perform certain tasks in the processing of the order. Most commonly, the Mortgage Broker can obtain payoffs and any other items that are needed to clear the title work (such as satisfactions, proof of paid off liens by getting copies of cashed checks, prior closing information, subordinations, LOI requests, COR requests, etc). Nations Title has determined that this is approximately 1/3 of the closing process. Therefore the Broker would receive 1/3 of the closing fees to make this amount up. The customer is not charged extra for this, as it comes directly from the Nations Title revenue. The remaining 2/3 of the closing process is the doc and HUD prep, and then the signature collection effort."

Here is an e-mail sent to one of my closers from a loan officer explaining why they stopped sending us orders:


Not at all xxx and I have always been very happy with you and your service. We have sent several of our last deals to Nations Title they offered us their service agreement, and they also have been proactive in helping us with ARM leads, as you know business is tough for everyone and as much as I have enjoyed working with you, I have to make the best business decisions for the company. We are not exclusive, but it has been a mutually benefiting relationship and I have to keep my numbers up."

Other facts (at least as I believe them to be) to consider: This service agreement is only available to loan officers or other real estate professionals on their own files. It has been my employees' experience that payoffs take about 5 minutes to order, as most payoff requests are now automated. It is also our experience that loan officers almost always obtain payoffs on their own anyhow in order to accurately determine the financial implications for their clients. In regards to obtaining Satisfactions, LOI's and COR's, (Letters of Indemnity and Certificate of Releases), those requests are made to other title companies and consist of faxing over the title work with a request for an LOI or COR.

Its my opinion that this is nothing more than a kickback disguised as a "service agreement." The only thing that is done routinely on almost every file, is the procurement of a payoff. And that is something that most loan officers already do. They are paying them for doing nothing (my opinion). Heck I'd be happy to provide the same "service" to them for $10 per file (as long as it is exactly the same as what they expect of their loan officers).

Let's translate this $100 fee into real numbers during a busy market. For fun, I'm going to pick a refi craze where loan officers might be doing 20 transactions per month spread out over a year. Well, that works out to $24,000 per year per loan officer. If Nation's Title has 200 big producing loan officers in the Minnesota area, that's 4,8 million dollars being paid out. If they have 2000 nationwide, that's 48 million dollars per year in kickbacks (again, my opinion).

Finally, lets not forget to look at the results of this "service agreement." Loan officers who were perfectly happy with the service of one settlement provider, are now changing the "advice" that they give their clients and are steering them to a more expensive title company. And who is getting penalized? I believe that it is the consumer who is paying more for title insurance as well as the settlement provider who refuses to participate in these schemes.

Competition has once again been extracted from the normal process and replaced with tainted advice of a trusted real estate professional.

Your opinions please! Everyone is welcome to participate. Your comments do make a huge difference as this blog is now being read by industry leaders and regulators on a nationwide scale.

I do not moderate the comments, except for profanity.

Thursday, October 4, 2007

Class Action against Attorney's Title Guaranty Fund

Ok, the headline is made-up. There is no lawsuit. But what if? What might it look like?

Facts: Attorneys Title Guarantee pays attorneys a commission to sell their title insurance product to clients.

1. Do Commercial Bribery* statutes give a private cause of action?

2. If so, is it considered commercial bribery to pay a commission to an attorney to influence the advice that attorney provides to their clients when it comes to selecting a title company or buying title insurance?

I've heard attorneys state that they're just issuing title insurance as a convenience for their clients. It is amazing to me that this one act can be described so differently. However, if it were me, I'd be more interested in how the class action attorneys might describe that act (see Issue #2 above).

If the Commercial Bribery statutes are applicable, it might land some people in jail. And it might provide a private cause of action. I think there is a fair debate that could take place here. I would love to see some comments.

3. Is it considered a breach of fiduciary duty for an attorney to accept a commission for selling title insurance to a client?

First off, I don't understand why attorneys would ever want to insert a conflict of interest like this into their representation of their clients.

I'm guessing every State has laws addressing self-dealing, the duty of accounting, and accepting secret profits. Some States also have burden shifting case law. In those States, the plaintiff only has to prove that their fiduciary had a conflict of interest. Once that happens, the burden of proof shifts to the Defendant to prove that they obtained the client's informed consent (good luck).

The other thing to consider is the potential for damages. There is case law stating that if a fiduciary violates the duty of loyalty (self dealing is a serious breach to the duty of loyalty), the damages are the forfeiture of all fees earned or a percentage thereof. We're not talking just the commissions; we're talking all the legal fees charged to that client.

Is it really acceptable for an attorney to be collecting a commission for selling title insurance to their clients? This scenario is nothing like a contingent fee lawsuit where the interests of the client and the attorney are aligned. We're talking about a commission in exchange for selling a product to a client.

Finally, I think the actual practices may be worse than I've described above. I believe that there are many law firms that haven't provided a full accounting to their clients of the commissions that they collected. If there are firms out there that have been collecting commissions on title insurance and didn't provide a full accounting of those profits, then those profits will likely be construed as secret profits. And if that's the case, don't those firms also now have a duty to disgorge all those profits to their clients and disclose this issue to their clients?

*Excerpts from a typical commercial bribery statute - this one is from Minnesota.
Subd. 2. Acts constituting. Whoever does any of the following, when not consistent with usually accepted business practices, is guilty of commercial bribery and may be sentenced as provided in subdivision 3:
(1) corruptly offers, gives, or agrees to give, directly or indirectly, any benefit, consideration, compensation, or reward to any employee, agent or fiduciary of a person with the intent to influence the person's performance of duties as an employee, agent, or fiduciary in relation to the person's employer's or principal's business; or
(2) being an employee, agent or fiduciary of a person, corruptly requests, receives or agrees to receive, directly or indirectly, from another person any benefit, consideration, compensation, or reward with the understanding or agreement to be influenced in the performance of duties as an employee, agent, or fiduciary in relation to the employer's or principal's business.
Subd. 3. Sentence. Whoever commits commercial bribery may be sentenced as follows:
(1) to imprisonment for not more than five years or to payment of a fine of not more than $10,000, or both, if the value of the benefit, consideration, compensation or reward is greater than $500;....

Monday, October 1, 2007

Attorneys Shouldn't Issue Title Insurance for Clients Either!

The problem with fiduciaries in controlled business relationships isn't limited to just Realtors. It includes attorneys as well. If an attorney represents a client in a residential real estate closing and then also issues the title insurance and performs the closing, that attorney has just created an insurmountable conflict of interest. Most ethics opinions require attorneys not to use their law practice to steer clients into another business. For example, it would be unethical for me to have both a real estate brokerage and a law practice and refer people from one to the other.

Pretty standard stuff and I personally tested this position fresh out of law school about 18 years ago by getting an opinion from the Minnesota Board of Professional Responsibility. At the time I wanted to combine an exclusive buyer brokerage with a law practice. I was convinced that I had found a way to remove all the conflicts and offer a real service to my clients. Before starting I asked the Board for an opinion. They were very clear in their answer - Can't do it. They had some very good reasons too. That's why I'm so shocked that there is an industry out there right now of attorneys issuing title insurance for their clients.

Attorneys, as fiduciaries, may not "sell" their clients anything, they must act with due diligence, avoid conflicts of interest, must not have secret profits, must not engage in self dealing, they have a duty of full accounting and on and on... The duties of a fiduciary are immense. Sometimes I wonder why real estate agents want to fall into this category...

Anyhow, in my opinion, there is absolutely no way an attorney can issue a title insurance policy as part of his or her representation of a client. First off, did the attorney shop and compare title rates for their clients? And if so, how did they do this in an unbiased manner seeing as they have a conflict of interest in owning their own title company? Did the attorney collect a title insurance commission for "selling" a title policy? Both the act of collecting the money and selling something to a client are unethical and violate fiduciary laws. And the fact that part of the compensation is a commission makes the compensation suspect too. And what about negotiating the title insurance coverage on an owner's policy? Exactly how is the attorney to negotiate with him or herself? And what if there is a claim? Who does the attorney represent? What if documents are executed incorrectly - can the attorney sue his own client if they don't cooperate? The list goes on and on....

The same reasons why an attorney can not legally fuse a title company and law practice are the same reasons a Realtor can't. They are fiduciaries and it violates the very nature of their representation. In a fiduciary lawsuit all the plaintiff has to show is that a fiduciary relationship existed and that there was a conflict of interest. Once they make that prima facie case, then the plaintiff is home free because the burden of proof shifts from the plaintiff to the defendant! The burden is now shifted to the defendant to prove that they obtained the informed consent of their client before they continued with that conflict.

Here's the thing and the reason why I've been harping on fiduciary relationships so hard. "Informed consent" is a very subjective term and almost impossible to prove. If you are a plaintiff and can prove that there was a fiduciary relationship and that a conflict existed, you have an almost automatic winner of a case. It boggles my mind that more attorneys are not well versed in fiduciary law. If they would just pick up the Restatement of Agency 2d for even 5 minutes they would know that. For them to look only at RESPA is one of biggest mistakes I've ever seen a lawyer make - and to do it so publicly is even worse.

If you're a fiduciary, then do what you do best - represent your client. Don't get greedy and put obstacles between you and your representation of your client. Avoiding conflicts of interest is one of the primary responsibilities of a fiduciary.

Friday, September 28, 2007

Residential attorneys could end the problems in our industry

The residential real estate attorney industry has all been but wiped out in Minnesota and in many other states. And those who still practice often are not brought into the transaction until it is too late. If you want to wipe out mortgage fraud, kickbacks schemes, and the rest of the problems in the real estate industry, all you have to do is give the consumer an unbiased advocate - a residential real estate attorney.

Currently, when a consumer is looking to buy or sell a house, the first person they contact is a Realtor. If the consumer wants to hire that Realtor, they are presented with and asked to sign a "standard" representation agreement which severely impacts the rights of that consumer. These Buyer Representation Agreements or Listing Contracts are anything but standard. In fact, I presented the Minnesota Bar Association with the idea of a consumer friendly listing contract years ago, which was then drafted by the Bar Association's Residential Real Property Law Committee and is now available to the public. Unfortunately, the form is almost unknown to consumers who are almost exclusively provided one-sided Realtor Association forms.

Here is a link to the form: Minnesota State Bar Association's Listing Contract

The inclusion of an attorney at an early stage in the transaction process is key to avoiding all kinds of problems later on. And although brokerage firms may find their Administrative Fees being stricken, Realtors really shouldn't find this prospect unsavory as it will likely result in a reduction of liability for them. No longer will they feel pressured to provide legal advice to their clients.

In order for this to work however, it is imperative that you remove all potential conflicts of interest that exist with the attorney. The attorney can't be one who regularly represents or receives referrals from real estate professionals. Perhaps a regulatory sponsored website could be created for which attorneys could advertise themselves? And the attorney can't have a conflicting interest in a mortgage, brokerage or title firm. In other words, a highly skilled, conflict free attorney.

If States were to enact laws making it a prerequisite that consumers hire an attorney prior to engaging the services of any other real estate professional, I believe that you would eliminate most of the current problems in our industry. Or even if a Study were to be done showing how effective good legal representation can be to avoiding fraud and widely publicizing that data. If attorneys were involved early in the transaction, you wouldn't need new laws to protect vulnerable real estate consumers from kickback schemes, mortgage fraud and other problems. They would have an advocate who is trained to spot these schemes. And that advocate gets paid whether the transaction closes or not - the consumer would have untainted advice.

For the record, I don't practice law in this area anymore. However, I am deeply aware of the benefits such an advocate can have for the consumer.

Wednesday, September 26, 2007

Controlled business hurts both consumers and small business

Thank you Doug for the great articles. I hope more mortgage brokers can join this discussion. We have lost a great deal of business due to the controlled business by Realtors and Builders. As a result, these buyers paid much higher rate / cost. I believe the controlled business should be stopped. Thank you again!!!!!!!!

Is RESPRO on a misinformation campaign?

RESPRO is the "non-profit" organization who's membership is comprised of corporate giants who support controlled business. It is my understanding that some of their members pay annual dues in excess of $30,000. So it should be no surprise that RESPRO was successful in getting Congress to change the negatively charged term "controlled business" to "affiliated business arrangements" (AfBA's). It should also be no surprise that they had the money to hire an expensive firm (Cap Analysis) to perform a highly detailed and very well thought out study on AfBA's. It is that study which is today's topic.

Here's the link to their study:

Cap Analysis' highly detailed 25 page analysis came to a lot of very important conclusions. For example, they found that Affiliated Business Arrangements don't cost more than independent title companies. RESPRO has now used that scientific study to dupe Congress and more than one State into believing that affiliated business is a good thing.

However, there is one large flaw in the study. The data! On page 12 there is a key sentence that clearly demonstrates that the study is not only flawed but it is hopelessly corrupted. Here it is, "The 2,236 HUD-1's were collected from sixteen RESPRO members operating in nine states." It was from these HUD-1's for which the entire statistical analysis was based.

RESPRO members have an obvious interest in the results of this survey. And they are in a perfect situation to skew the results. For example, it is a well known fact that many AfBA's in my State will match our fees when their clients are savvy enough to shop and compare. Were those HUD-1's used? Of course they were. Or worse, the data was forged. I say that because one of those sixteen states was Minnesota and I know their data is wrong.

I have the price comparisons in my State to prove that controlled business costs more. The source of the data? The AfBA's themselves. We have written price quotes from those same AfBA's showing what their fees really are. That's how data should be obtained.

I asked Sue Johnson, the executive director of RESPRO, to provide the HUD-1's with personal information redacted. She declined. October Research asked her to engage me in a debate on this topic. She also declined. Her silence on this matter speaks volumes.

What type of analysts are willing to put their name on such a study that utilizes obviously tainted data? I don't know, but here are their names: Donald L. Marin PhD and Richard E. Ludwick, Jr. PhD

In conclusion, what this industry needs is a real study done on this marketplace that actually surveys the industry and consumers. Don't ask a consumer if they like One Stop Shopping in real estate. Of course they are going to say yes. That is a misleading question in that One Stop Shopping offers benefits only to the Realtor not to the consumer. Instead, explain to them what a title company does. Ask them if they would like their Realtor to shop and compare title companies on their behalf. Pose the question accurately and you will get an accurate answer.

Monday, September 24, 2007

Illegal RESPA Section 8 kickbacks take many forms

Brokers who reduce rent to Agents at 100% commission shops in exchange for referrals to their title company

At those offices, the agents pay rent to the brokerage firm for such things as office space, reception and other services and the rent does not come cheap - often $1500 per month or more. The agents typically get to keep 100% of their real estate commissions and don't have to split them with their broker, as is customary with other firms. However, many agents have reported to me that brokers at those 100% commission shops are "encouraging" them to use their in-house title company as a way to help reduce costs (and therefore their rent). And, with a wink and a nod, some agents actually pay less than the going rate as a method of "compensation" for being "loyal" to their in-house title company.

Such actions are a clear violation of Section 8 of RESPA and another indication why controlled business just can't work under any circumstances. The "thing of value" is of course the reduction in rent. And the paper trail is an easy one to document and prosecute. All you need to do is show a consistency between rent reductions and referrals. The money trail is clear, the violation is serious and against agents who have the means to pay higher fines.

The really hard part about this example is that the agents that work at these 100% shops and participate in these kickback schemes typically have more certifications than other firms and they are often some of the most experienced real estate agents in the industry. If they can fall prey to these sorts of inducements, then it seems to me that it should be no surprise that the rest of the industry is also broken when it comes to kickbacks.

In Minnesota, I've seen this scheme used to persuade top of the line agents to blindly steer their clients into one of the most expensive title firms in the market. And that firm, at least the last time I checked, wasn't even providing the ALTA Homeowner's Title Policy - only the standard policy. That title firm certainly doesn't have to compete. They can hardly keep up with the business they have. I know many loan officers who receive so much referral business from these agents that they are afraid to tell their clients about other settlement services for fear of upsetting the Realtor. And I've seen Realtors harass loan officers that do offer up less expensive but unaffiliated title companies.

But I don't blame the agents so much as I blame the brokers. For it is the broker's license that was created for the express purpose of supervising their agents. It is the broker who is also responsible for the actions of its agents. Agents should be able to rely upon their broker's for unfettered advice and counsel. In fact, I'm sure that the broker is considered a fiduciary for that purpose.

Unfortunately, it will likely be the agents, not the brokers, who come under fire for receiving these kickbacks. They will be the easiest to prosecute and the least likely to put up a fight.

The only advice that should be coming from brokers? Put your client's interest first, above all others, especially your own and avoid conflicts of interest at all costs. In fact, those words come from the common law of agency. To do otherwise; to put your interests above your clients, is considered to be self-dealing. Self dealing is the worst breach to the duty of loyalty owed by fiduciaries. The typical common law remedy for that breach is forfeiture of all fees earned. The criminal version is theft by swindle.

So a Realtor should never be "loyal" to their affiliated businesses. It violates the duty of loyalty - REALLY. They should always be loyal to their clients and do everything they can to avoid conflicts of interest, even those that give the appearance of impropriety.

Stuff like this makes me wonder if a class action lawsuit on behalf of real estate agents against their broker isn't in the offing. The breach of duty is clear, the only thing would be the damages. Perhaps the disgorgement of the commissions, rent and other things of value that the broker received while violating the terms of the broker licensing laws? There is something there, just need to think about it some more.

Here's Section 8 of RESPA:

Section 8: kickbacks, fee-splitting, unearned fees
Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or any thing of value in exchange for referrals of settlement service business involving a federally related mortgage loan. In addition, RESPA prohibits fee splitting and receiving unearned fees for services not actually performed.