Referral kickbacks take a bruising

It's one of American real estate's seamier practices, and it's almost impossible for consumers to detect: kickbacks and sweetheart payoffs among real-estate agents, title and escrow companies, lawyers and lenders for referrals of homebuyers' mortgage or closing services.

The federal government has mounted its most aggressive campaign in decades to stamp out illegal referral-fee schemes. Although it hasn't attracted wide attention, the anti-kickback effort this year has racked up six times the number of out-of-court settlements with alleged violators as it did in 2004.

The latest case, unveiled in mid-November, involved a high-profile New England home-mortgage lender, 1-800-East-West Mortgage. According to the settlement agreement, East-West employees allegedly asked for and received "tens of thousands" of dollars worth of Boston Red Sox and New England Patriots tickets, restaurant gift certificates and concert tickets from attorneys, title companies and appraisers to whom loan officers referred client business.

A joint investigation by the U.S. Department of Housing and Urban Development (HUD) and the Federal Deposit Insurance Corp. (FDIC) found that East-West maintained a "give-to-get" policy that pressured settlement services professionals for "gifts ... that East-West used as employee incentives," HUD said.

"[East-West] expected certain attorneys and appraisers to pay for luxury seating at Red Sox games and concert events at Fenway Park," HUD said. "In addition, East-West induced attorneys and appraisers to pay for semi-private barbecues and charitable galas with Patriot players."

East-West President David R. Bernotas said that while "some providers of services, who had long-term relationships and frequent contact with some East-West employees, purchased seats at athletic events, restaurant gift certificates and the like," referrals of borrower settlement services went "to those who provided high-quality services at the lowest possible cost."

East-West denied any wrongdoing but agreed to pay $150,000 to the Treasury as part of the settlement and pledged not to accept referral-fee compensation.

Earlier names on the government's payoff list for 2005 include units of major real-estate companies, title insurance and lending firms, including Coldwell Banker Residential Real Estate, First American Title Insurance, Chicago Title Insurance, Re/Max Masters and Prudential Locations.

In the Prudential case, agents who referred at least $1 million in new mortgage business to Wells Fargo Home Mortgage Hawaii allegedly were given free trips to Thailand and Las Vegas, and even a free three-year lease of a Mercedes-Benz.

As of Thursday, HUD had done 12 big kickback settlements this year, compared with two in 2004.

Under the Real Estate Settlement Procedures Act, the giving or receiving of anything of value in exchange for a referral of a homebuyer's or borrower's settlement services is banned.

The law dates back to 1974, when Congress conducted hearings and found that consumers across the country were being misled and harmed — steered to what were often higher-cost settlement and mortgage companies — solely because of backdoor payoffs among real-estate, lending, title insurance and other companies.

The payoffs frequently took the form of gifts, cruises to exotic locations, theater tickets and a variety of other trinkets and concessions.

For decades, anti-kickback prohibitions were largely ignored by the industry, in large part because the federal agency that is supposed to enforce the law mounted only minimal efforts.

It lacked the investigative staff, the money and the political will necessary to go after big names in real estate, banking and mortgage finance.

Some real-estate professionals even likened the government to the Wizard of Oz: a big, booming voice but no teeth.

During the past three years, however, the Bush administration has added significant enforcement staff and money and has contracted with retired FBI, Customs, Treasury and white-collar crime investigators to track down real-estate players who are lining each other's pockets illegally.

Brian Montgomery, federal housing commissioner, says the law "couldn't be any more clear" as far as "giving or receiving" referral payments.

"The message to the industry should be equally clear," Montgomery said. "We will not only investigate those who give, but those who receive kickbacks."

Montgomery's office reportedly has large numbers of active investigations to pump up the pressure in 2006 and might create a Web site with tips about referral-fee schemes.

Maybe the word finally will get out: Real-estate referral kickbacks are bad for consumers. They violate federal law, invite big financial penalties and could lead to jail time.

The Wizard of Oz still has a booming voice.

But lately, he's also grown big teeth.

Kenneth R. Harney: kenharney@earthlink.net