Ga. case illustrates games realty firms play

Nation's Housing

September 18, 2005|By KENNETH HARNEY

A NEW FINANCIAL settlement between the federal government and one of the country's best known real estate brokerages offers homebuyers insights into the under-the-table games that might be played with settlement fees.

Coldwell Banker Residential Real Estate Inc. agreed to pay the federal government $250,000 to settle charges that some of its offices illegally paid higher commissions, provided gifts and other incentives to realty agents who steered purchasers to an affiliated title agency.

The Coldwell Banker offices involved are in metropolitan Atlanta. Coldwell Banker Residential Real Estate Inc. did not admit to any wrongdoing in the settlement but agreed to cease practices the federal government claimed were illegal under a 1974 law that prohibits giving "things of value" in exchange for referrals of settlement business.

Charlotte Sears, president and chief operating officer for Coldwell Banker in Atlanta, said: "We deny that our conduct violated [federal law] and do not believe HUD's allegations accurately portray our conduct." The settlement was signed by James M. Schmidt, senior vice president of NRT Inc., a real estate investment trust that is the country's largest owner of realty brokerages, including a number of Coldwell Banker offices.

According to the Department of Housing and Urban Development, which investigated Coldwell Banker Residential Real Estate's practices for a year, the firm has an "affiliated business" ownership interest in an Atlanta title insurance agency, Regency Title Co. LLC.

Ownership of settlement and mortgage affiliates is commonplace among many of the country's major realty brokerages. Affiliates can be highly profitable -- sometimes generating millions of dollars in additional revenue a year for the brokerage, though not necessarily any direct remuneration for individual sales agents.

When a sales agent encourages -- or steers -- a homebuyer client to an affiliated title company, the brokerage typically gets a piece of the lucrative title insurance premium and other settlement-related fees collected at closing.

An affiliated business arrangement might work like this: ABC Realty and XYZ Title form a joint venture to provide title and settlement services. Both participating companies are supposed to invest capital or pay for employees who perform title insurance and other services. The joint venture partners receive profits or losses based on their ownership shares.

In reality, however, the joint venture may be little more than a shell corporation designed to give the realty brokerage a split of the title agency's fees in exchange for supplying a steady stream of clients to the title agency.

HUD did not claim Coldwell Banker was participating in an illegal shell corporation. But it did attack the brokerage's alleged methods of ensuring a steady stream of homebuyers to the affiliated title company.

Coldwell Banker offered sales agents "trips, Atlanta Braves baseball tickets, and agent-of-the-month ads in local newspapers based on the number and volume of referrals to Regency Title," according to HUD.

Coldwell Banker also allegedly paid "higher sales commissions" to agents who steered their customers to the affiliated title agency, and paid those agents their commissions "immediately at the time of closing," rather than on a more typical delayed basis, said HUD.

In effect, sales agents who steered the greatest number of their clients to the brokerage's title affiliate received extra compensation compared with sales agents who made no such efforts.

The entire issue of broker-owned affiliates often is contentious inside realty firms. Sales agents often get no direct piece of the affiliate's profits; the brokerage firm owners and executives pocket it all.

Sales agents are required to disclose the existence of affiliated service providers to their clients, and the disclosure typically indicates that buyers are free to select any title, insurance, inspection or other service provider they choose.

But most buyers have scant knowledge of competing title or escrow firms. Moreover, the agents are in a powerful position of trust. Their recommendations can subtly direct the buyer's profit-laden settlement services business to one firm or another.

If an affiliated title or mortgage company is willing to send high-referral volume agents to the Bahamas or Cabo San Lucas for free winter vacations, where do you think the agent's client referrals are likely to go? Worse yet, the company that receives the referrals may not be the lowest-cost, fastest or most efficient choice available to the buyer.

Bottom line: Federal law guarantees you the right to choose your settlement-service providers. Don't be steamrollered -- subtly or otherwise -- to firms that might be padding the pockets of your agent.

Kenneth Harney's e-mail address is

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