THE HOME BUILDING AND TITLE INSURANCE industries were in damage control mode this spring after it was widely reported in early March that 16 home builders allegedly received kickbacks in exchange for sending business to First American Title Insurance Co.

The names of the 16 builders (see “Naming Names,” below) were first made public in the Denver Post when Erin Toll, Colorado's deputy commissioner of compliance in the state's Division of Insurance, told the newspaper that First American released the names as part of the state's investigation. Similar probes surrounding illegal title insurance kickbacks are under way in California and Washington state.

At issue is that the title insurance companies allegedly inflated premiums to finance the kickbacks to builders and lenders. According to the California Department of Insurance, under the scheme, home builders formed wholly owned subsidiaries known as captive reinsurance companies to write reinsurance policies.

Reinsurance is insurance purchased by insurance companies when they can't cover all the losses that the policies they write may incur. The problem is that these particular reinsurance companies have yet to pay out any claims, which is why state insurance officials allege the money sent to the reinsurance companies is a flat-out kickback.

Larry Seay, CFO of Meritage Homes, one of those listed, says Meritage voluntarily ceased participating in captive reinsurance transactions until government and industry officials can sort out the issue.

“The builders thought these were perfectly legal and acceptable practices,” says Seay. “These relationships with the title companies are disclosed to home buyers, and we make it clear that the buyers don't have to go to our title company, they can go someplace else.”

Colorado's Toll isn't buying the party line from the home builders.

“It's been eight years since the conception of these arrangements and not a single claim payment has been made,” says Toll, who spoke to the American Land Title Association on March 9.

Toll says she launched the investigation after hearing “whispers in the hallways” about captive reinsurance and after discussing the topic in-depth with colleagues from California and Washington at National Association of Insurance Commissioners meetings. Toll says her hope is that she can settle with the title insurance companies and encourage HUD and the state attorneys general to prosecute the builders and lenders. Toll says she's received calls from at least 25 state governments but that doesn't mean 25 investigations are under way.

At press time, First American was the only title company to sign a settlement, and since state and federal officials had just learned of the alleged illegal schemes, it was too early for the attorneys general or the federal government to develop a case and take action.