Colorado real estate probe turns up sham title cos.
February 9, 2006
Officials uncover fake affiliated business arrangements
By Janis Mara
A seven-month probe of affiliated real estate partnerships in Colorado has uncovered what officials describe as a network of sham title agencies set up to pay kickbacks to lenders and other real estate providers.
The probe of relationships between title insurers and other real estate entities is currently focused on about a dozen title insurance agencies owned and operated by Douglas P. Farr, chief executive of Denver-based CPR Title, though officials say others are being probed as well.
In legal documents seeking to close Farr's business and revoke his state insurance license, officials allege that many of his companies were set up to pay kickbacks and rebates to lenders and other real estate service providers in a scheme to fraudulently collect title insurance premiums. Officials say Farr's title agencies left thousands of Colorado homeowners without valid title insurance.
Repeated attempts to reach Farr were unsuccessful.
The title insurance industry came under an intense spotlight in 2005. The Insurance Division in February investigated nine Colorado title insurers for alleged kickback schemes said to result in overcharges to consumers. The probe sparked dozens of investigations nationwide, in Florida, Washington, Hawaii, California, Oklahoma, Minnesota and Washington and other states.
The alleged kickback schemes involved sham affiliated business arrangements, or ABAs, between title insurance companies and builders.
Affiliated business arrangements among real estate service providers are legal under the Real Estate Settlement Procedures Act, known as RESPA, as long as certain guidelines are followed and companies disclose their relationship to consumers. Indeed, for many reputable companies, ABAs are a raison d'etre.
Legitimate title insurance companies involved in affiliated business agreements perform their own title searches, have their own staff, have their own offices and are capitalized in a manner typical to the industry, meaning there is money invested in such things as office equipment, according to Erin Toll, deputy commissioner for Colorado's Insurance Division.
The Division began investigating Farr when it received complaints about how he advertised his business, Toll said.
"Farr promised lenders payback for their 'ownership' in various title agencies," Toll said.
When the Division investigated the complaints, the deputy commissioner said, it saw that many of the businesses had the same address.
The ultimate clue came, Toll said, when investigators walked into one of Farr's offices and found only one employee … painting her nails.
"The investigators asked her, 'Where are the employees and what do you do here?'" Toll said. "She told them, 'There are no other employees. It's just me and all I do is answer the phone and set up closings.'" Asked who was calling to set up closings, the employee pointed across the hallway to the mortgage broker, Toll said.
"They only did closings. A legitimate title insurance agency conducts searches, clears titles, and does everything that goes with title searches," Toll said.
In addition to this alleged improper conduct, the state is also accusing Farr of engaging in fraudulent business practices and failure to properly oversee escrow accounts.
According to the Division of Insurance, Farr and the agencies failed to pay one of the agencies' underwriters, Attorneys Title, about $500,000 in premiums. As a result, the division said, several thousand Colorado consumers did not receive title insurance policies.
As many as 6,400 title insurance policies allegedly issued by various title agencies affiliated with Farr may be in question, Toll confirmed.
Farr was recently arrested and his Denver condominium was seized in an unrelated criminal case, and he is currently out on bail, Toll confirmed.
"It looks like we're going to have about 100 more sham entities that are going to be uncovered from our investigation," Toll said.
Toll said one reason her department began looking into title insurance companies with affiliated business arrangements is because they have grown so fast. ABAs are becoming more popular in the industry – the April 2005 Real Estate Services Providers Council conference focused on such agreements.
In 2001, there were 211 title insurance companies registered with Colorado's Division of Insurance; in 2004, there were about 525.
"Affiliated business arrangements are not inherently bad," said David Rivera, Colorado's insurance commissioner. "However, sham agencies affect the ability of legitimate title companies to compete fairly in the marketplace. It's our goal to take appropriate regulatory actions to level the playing field."
Copyright 2006 Innam News