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HUD Sues Property ID Corp & 4 Real Estate Brokerages in Kickback Scheme

The U.S. Department of Housing and Urban Development brought a federal lawsuit against Property I.D. Corporation, a large hazard reporting company in California, and four California real estate brokerages for creating sham companies designed to generate illegal kickbacks in violation of the Real Estate Settlement Procedures Act (RESPA). The federal suit claims Property I.D. of Los Angeles made improper payments to the real estate brokers based on the referral of consumers to the hazard reporting company.

The brokers named in the suit are: Realogy Corporation (formerly known as Cendant Corporation); NRT/Coldwell Banker Residential Brokerage Corporation; Mason-McDuffie Real Estate (doing business as Prudential California Realty); and Pickford Realty Ltd (doing business as Prudential California Realty).

The government's lawsuit, filed by the Justice Department in the Central District of California on behalf of HUD Secretary Alphonso Jackson, seeks a permanent injunction of the referral arrangements and recovery of all illegitimate profits generated by the sham companies.

"Our investigation uncovered a network of sham affiliated businesses created for the purpose of paying kickbacks to these brokers," said Gary Cunningham, HUD's Deputy Assistant Secretary for Regulatory Affairs. "RESPA is quite clear on this point - it is illegal to give or to get anything of value in exchange for the referral of settlement service business. This suit demonstrates HUD's strong commitment to enforcing RESPA through federal court proceedings where we believe it's justified."

RESPA was enacted in 1974 to provide consumers advance disclosures of settlement charges and to prohibit illegal kickbacks and unearned fees in the homebuying process. Section 8 of the law prohibits a person from giving or accepting anything of value in exchange for the referral of settlement service business.

California state law requires home sellers or their agents to disclose whether property is located within hazardous areas including those prone to flooding, fires or earthquakes. Consequently, California companies today provide "Natural Hazard Disclosure Statements" to meet this state requirement.

In 2005, HUD launched an investigation of Property I.D. and the referring brokers after receiving information that these parties created and operated sham joint ventures in violation of RESPA. HUD's investigation found that the disclosure report company formed a number of joint ventures with the real estate brokers. These joint ventures did not actually produce hazard disclosure reports and appeared to exist solely for the purpose of funneling payments in exchange for the brokers' referrals of business. The joint ventures are all located at the hazard reporting company's Los Angeles address, had no employees of their own, and shared bank accounts.

The Department further discovered that the referring brokers used a variety of methods to get their agents and franchisees to refer customers to Property I.D. including:

• Providing pre-printed listing contracts with Property I.D. pre-selected as the provider of the hazard disclosure report.
• Giving branch managers a portion of the referral fee in their bonuses.
• Implementing a mandatory policy that advised buyers to purchase Property I.D. hazard disclosure reports even though the buyer has no liability under California law.
• Paying a portion of agent liability insurance when Property I.D. hazard disclosure reports were used.

In return for these referrals, the brokers were paid through quarterly payments, $25 per report, or one-quarter of the total report's cost. The sham affiliated businesses did not provide hazard disclosure reports to non-referred customers and shared in profits based solely on the number of referrals made to Property I.D.

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