THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Tuesday, May 28, 1996 TAG: 9605240030
SECTION: FRONT PAGE: A14 EDITION: FINAL
TYPE: ANOTHER VIEW
SOURCE: By HOWARD A. BIRMIEL
LENGTH: 78 lines
A family purchasing a home not only has to choose that home but also a mortgage lender to provide the financing and a lawyer or settlement agent to close the purchase properly and provide title insurance. The wrong choice can be expensive.
Home buyers should make the choice based on price and quality of service. Too often, however, they are steered to a particular lender or settlement company without the opportunity to shop because the person making the referral is receiving a kickback or something else of value for the referral, or because the broker or lender making the referral owns an interest in the lending or settlement company. Sometimes hundreds of dollars are changing hands from the title company to the lender or real-estate agent in exchange for referrals, either directly or under the table.
The 1996 General Assembly, acting on a bill drafted by the Virginia Real Estate Attorneys League and Del. John ``Butch'' Davies of Culpeper, moved to restore freedom to the real-estate-closing market. While existing federal law prohibits such kickbacks, there is no effective enforcement because federal officials are swamped and the interpretations of the law have become a political minefield. Beginning July 1, Virginia state officials will be in a better position to act on complaints and enforce anti-kickback provisions.
The new law:
1. Strengthens the existing anti-kickback provisions in title-insurance laws by adding language borrowed from the federal Real Estate Settlement Practices Act. The payment of any ``thing of value'' pursuant to an agreement to refer business is prohibited, replacing the old law which merely prohibited cash kickbacks.
What are the other possible things of value? Perhaps a title-insurance company is paying for catering for a real-estate agent's open houses, with the expectation that the agent will refer clients once a sale is made. Perhaps the title company is paying for that agent's advertising brochures. Any help with a real-estate agent's expenses are valuable and powerful incentives and will influence referrals.
The law allows for nominal gifts, but if there is a direct link with referrals, both parties involved have broken the law. There doesn't even have to be a formal agreement. An ``understanding'' that the benefits are offered in exchange for referrals is illegal.
2. Creates for the first time an anti-kickback provision for all settlement services. The old Virginia law covered only title insurance. The new law also bans payments made in exchange for referral of other settlement services. For the first time, mortgage lenders, settlement agents, attorneys and appraisers will have to keep their relationships above board or risk prosecution.
The new law does not prohibit cross-ownership situations, such as a real-estate firm owning an affiliated settlement service in a ``controlled business arrangement.'' But the law will prohibit the brokerage from giving incentives to its agents for internal referrals. A lawyer offering free legal services in exchange for closing referrals would also break the law.
3. Bans the early payment of settlement proceeds. Settlement companies in some parts of Virginia have garnered referrals by paying real-estate agents their commissions before the final settlement. Buyers and sellers are best protected when no money is disbursed until all the paperwork is processed. An advance of a commission from the title company's own funds is prohibited as a ``thing of value.''
The State Corporation Commission will enforce the law against kickbacks and referral payments in the title-insurance industry. Anyone who suspects that referrals for other settlement services are being bought should direct their complaint to the local commonwealth's attorney or the appropriate licensing agency. Whether the person is giving or receiving the payment for referrals, the punishment is the same - a misdemeanor conviction and a fine of up to $1,000.
The final bill was supported by attorneys, lenders, real-estate professionals and the title companies. The reputable professionals are tired of the ``buying of business'' they see around them.
Consumers must shop for these services and ask questions about price and service. Finally, if consumers find they are being pressured in one direction or the other, they need to be willing to cry foul. MEMO: Howard Birmiel is an attorney practicing in Fairfax County and a
director of the Virginia Real Estate Attorneys League, which has about
330 members around the state. by CNB