Minnesota’s crackdown on gifts is unsettling the title industry

April 30--For Twin Cities real estate agents, the gravy train was easy to catch.

Happy hour at Cowboy Jack's. Dinner at Manny's Steakhouse. Free tickets to a Twins game.

The perks were an essential part of the marketing strategy at Liberty Title, an Anoka company that has been spending heavily to compete for referrals in the obscure world of title insurance, a surprisingly cutthroat business that has drawn the attention of regulators in Minnesota and across the country.

One attendee at Liberty Title's "Roaring Twenties" party in 2014, which drew 350 people and ran up a $2,800 bar bill, posted that it might have been the "greatest party ever."

But the party may be over.

In a crackdown that is provoking an industry uproar, the Minnesota Commerce Department has issued stiff fines to Liberty and other title companies for paying "kickbacks" for business. Another dozen title company investigations are ongoing, according to the department.

Related: Many don't realize they have a choice of title firm

"We want to make sure that the market is fair and that people know they have a right to choose their own title companies," Commerce Commissioner Mike Rothman said.

The investigations have opened a window on an often overlooked part of buying a house. Title companies charge hundreds of dollars to make sure a property is free of liens or other legal problems, and title insurance is required by lenders in most real estate transactions.

But most buyers don't shop around for closing services. Instead, they typically take the recommendation of a real estate agent or loan officer, and those referrals drive the business. As a result, buyers often overpay for coverage, according to consumer advocates.

"We're selling a commodity," said Ronald Walsh, president of Entitle Inc., a local title company. "That's why we have to sell ourselves. We need to get people to like us and trust us, and to tell their friends."

Since 2007, the Minnesota Department of Commerce has documented more than 200 licensing violations involving kickbacks in the title business, generating more than $1 million in fines. Just last month, a Maple Grove real estate agent was fined $5,000 for taking about $2,000 in free meals and other perks from Liberty Title in exchange for steering most of his clients to the company. Liberty was fined $45,000.

Wining and dining can violate federal laws prohibiting kickbacks if regulators can prove such favors resulted in even a modest increase in business. But executives at some of the title companies that have run into trouble say it makes it tough to compete if they can't buy someone lunch once in a while.

In the Twin Cities, the business is dominated by a handful of companies that are related to large real estate firms such as Coldwell Banker and Edina Realty, which reap the benefits when customers opt for one-stop shopping. Altogether, nearly half of local title work goes to companies with ties to another business that can provide much-needed referrals, according to a Star Tribune analysis of 3,200 home sales in 2017.

On the other side of the market are independent companies such as Entitle and Liberty.

Jeff Zweifel, vice president and co-owner of Liberty Title, said the company's spending was critical in turning it into one of the Twin Cities' top title firms. Since 2011, closing volume has tripled, with revenue reaching $8.5 million last year.

"It is very difficult for our salespeople to get in front of people who could recommend our services to their customers, especially agents who work for real estate brokers who own their own title companies and who pressure their agents to use those companies," Zweifel said in a written statement to the Commerce Department.

Burnet Title, the No. 1 company in the market, declined to comment. Edina Realty, the second-ranked company, also declined a request for an interview. In a written statement, Edina Realty said its agents receive "nothing in exchange for recommending Edina Realty Title."

"It appears ironic that some companies apparently take the position that they must violate the law in order to compete," Edina Realty said in the statement.

No title company has been more generous to the local real estate community than Liberty Title.

Between 2013 and 2015, the company spent more than $170,000 to wine and dine local real estate agents and other players in the industry, according to records Liberty Title provided to the Commerce Department. The company hosted more than 100 events per year, ranging from intimate lunches to parties that drew hundreds of real estate professionals.

To avoid further trouble with regulators, Zweifel is chopping his marketing budget by about 75 percent this year. There will be no big parties, no ballgames and no expensive dinners at out-of-state real estate conferences. Free lunches will be greatly reduced but not eliminated.

"We can't stop marketing," Zweifel said.

Liberty isn't the only company to cut back. Several title companies have quit taking real estate professionals on free boat trips in the wake of a 2015 licensing action against TitleSmart, which was fined $45,000 for hosting two dinner cruises on the St. Croix River.

"The guy at Commerce told me he wanted to level the playing field for the little person," TitleSmart owner Cindy Koebele said. "I'm like, 'Are you kidding me?' To really have a level playing field, you shouldn't be able to own a title company if you're a real estate company."

Some industry veterans don't understand why the Commerce Department hasn't been equally tough on the real estate professionals who take freebies. None of the 243 agents and loan officers who went on the TitleSmart cruises were sanctioned, even though the department noted in its action against the company that every one of them wound up referring business to the company. Instead, the agents received warning letters.

In the past decade, just three people have been fined by Minnesota regulators for taking free meals and accepting other perks from title companies, Commerce records show.

Ryan Yardley, a former title company owner who now works as a loan originator in Maple Grove, said title companies wouldn't be paying kickbacks if real estate professionals were not "demanding" them.

"If they want to make it stop, they should fine the Realtors," Yardley said.

Some title agents say the investigations have taken the fun out of a hot market. An executive with Entitle said she has seen competitors snap photos of her agents in what they hope will be compromising positions, such as having lunch with a real estate agent.

"Certain title companies are doing that in order to put their competitors out of business," said Holli Hauschild, vice president of Entitle. "It does feel like a witch hunt."

A handful of other states, including Arizona and California, bar title companies from receiving more than half their business from corporate affiliates. In Minnesota, Edina Realty helped lead a charge to kill legislation in the early 1990s that would have set that limit at 80 percent.

Executives with Edina Realty and other large title companies said they oppose such bans because they would unfairly limit consumer choice. Executives with several independent companies said they favor limits.

"If it is such a great advantage, why don't they start their own real estate company and stop whining about it," said John Collopy, who owns Re/Max Results and Home Title, two large players in the Twin Cities real estate market.

Collopy said his title company usually captures about 60 percent of the closings generated by his real estate agents.

"We don't do any steering," Collopy said. "The consumer is going to ask: Who do you use the most? And so you answer honestly."

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