Agents' Costly Referrals Spark Class-Action Suit

By Kenneth R. Harney
Saturday, March 3, 2007

A recent class-action lawsuit focuses attention on a long-festering consumer issue in real estate: Alleged steering of home buyers to affiliated title, settlement and mortgage companies by large real estate brokerage firms, a practice that could cost consumers hundreds of dollars, compared with fees and services offered by nonaffiliated competitors.

Two buyers in Minnesota filed suit Feb. 21 against Coldwell Banker Burnet Realty, one of the largest brokerage firms in the state, charging that it breached its fiduciary duties under state law when it steered the buyers to its own title and settlement affiliate, Burnet Title, despite knowing that the affiliate's fees were significantly higher than those available elsewhere.

A spokeswoman for Coldwell Banker Burnet said the company had no comment on the allegations and does not discuss pending litigation as a matter of corporate policy.

The class action, filed by Kenneth and Dylet Grady in state district court, potentially has national significance because many large real estate brokerage firms have financial relationships with one or more affiliates in the title, settlement and mortgage businesses. Properly structured, these affiliate relationships comply with federal anti-steering and anti-kickback rules, and have withstood numerous legal challenges.

Real estate brokerages increasingly rely on income from their affiliates, and often seek to maximize their "capture rates," which is the percentage of all home-sale transactions that use the affiliates' services. They also argue that even if the affiliates' fees or mortgage rates are not the lowest available, the quality and dependability of their services more than compensate for any price differences.

In the case of a broker-client relationship, fiduciary duty means that a real estate broker is bound to put a client's best interests ahead of the broker's, and must not profit from the relationship unless the client consents. A fiduciary is also supposed to disclose material facts that may affect the client's best interests.

The Gradys make claims in their suit that could be duplicated in other states: When real estate brokers or sales associates knowingly steer clients to higher-cost services that benefit the broker financially, they may violate the fiduciary responsibilities owed to those consumers. The Gradys also allege that Burnet Realty failed to disclose that its affiliated title company "retains at least 75 percent of each insurance premium," or that the title affiliate's fees "are among the highest, if not the highest, in Minnesota."

On a typical $250,000 home purchase, according to the suit, the title affiliate's fees "can be several hundred dollars more" than those of nonaffiliated competitors.

Among other alleged breaches of fiduciary duty, according to the suit, the real estate brokerage did not "disclose that it pressures its sales associates to direct their clients' closing and title insurance business" to the affiliate. Nor did the firm disclose that it offers financial incentives to sales associates who cooperate, including a "quick check" program that pays agents' commissions at closings, rather than at a later date, provided the closing occurs at Burnet Title.

The suit also claims that other incentives include a "partnership compensation plan," that pays for retirement plan contributions, marketing expenses and "bonus pools" that are "tied, in part, to the direction of clients' business" to the title affiliate.

The Gradys' class action, which asks for what lawyers estimate to be millions of dollars in refunds and damage awards to more than 10,000 clients, can be seen as part of a backlash in a number of states and in Congress against title insurance and real estate industry practices. In a congressional hearing last spring, Colorado's then-deputy insurance commissioner, Erin Toll, criticized "the pervasiveness of kickback schemes" involving real estate and title firms in her state.

An independent title insurance agent from Minneapolis, Douglas R. Miller, president and chief executive of Title One, testified that in Minnesota "the title insurance industry and the real estate industry have locked up almost the entire marketplace" through affiliated business relationships. The arrangements take multiple forms, Miller said, but they all add up to the same result: "steering real estate consumers into overpriced ancillary services for secret profits."

Miller told the hearing that his firm does not participate in affiliate relationships with real estate firms or lenders, and charges the lowest insurance premiums in the market. Miller's company still finds it difficult to attract business from home buyers because real estate agents won't send customers his way.

Putting aside the specifics of the Gradys' suit, what should consumers do? Remember that federal law guarantees you the right to shop for the lowest-cost title, closing and other services. Check out the competition to be sure you're getting the best possible deal.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.

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