No truth in advertising ...

In the real estate industry, the practice is known as "white labeling." But let's call it what it really is - a kickback. And it's costing consumers.

Here's how it works:

Some title companies are wholesaling their Natural Hazard Disclosure reports or data to real estate brokerage firms. These brokerage firms then slap their own name on the reports and sell them at an inflated price to unsuspecting consumers.

It's a cozy little relationship that funnels guaranteed business to the title company while also generating a profit for the brokerage firm - all at the expense of the consumer.

This sets up a business relationship that is not only unethical, but in direct violation of California Insurance Code, Section 12404. Don't know that code? It's the one that says it's "unlawful for any title insurer, underwritten title company or controlled escrow company to pay, directly or indirectly, any commission, compensation, or other consideration to any person as an inducement for the placement or referral of title business."

In other words ... it's wrong.

NHD reports are an important part of the home-buying process because they let the buyer know whether a property is located within hazardous areas, including flood areas, zones prone to high fire hazards or seismic areas that could experience earthquakes.

But the consumers who pay for these reports are certainly entitled to know where they're coming from - and if they are, in fact, accurate and complete.

In an Oct. 9, 2008 news story on RESPAnews.com, Attorney Craig Nevin of Nevin, Ramos & Steele termed white labeling "illegal" and "offensive."

HUD (the U. S. Department of Housing and Urban Development) determined that Natural Hazard Disclosure reports are considered a settlement service under RESPA, the Real Estate Settlement Procedure Act. Nevin says white labeling "eliminates the consumer's right to choose a third-party report provider" while also attempting to circumvent RESPA.

If HUD chooses to investigate white labeling and determines that there is no value added to justify the increased cost to consumers, the practice could be violation of RESPA Section 8(b) and a kickback in violation of Section 8(a), according to Nevin.

The ball is in HUD's court. Now we just need to see some action.

Who's minding the store?

We're living in an era of lax oversight.

Don't believe me? Just pick up your newspaper or turn on the TV and you'll hear all about it. The excesses are well documented - from the $50 billion Ponzi scheme of New York financier Bernard Madoff to lavish spending by mega insurer American International Group, which received $150 billion in federal bailout money last fall.

While the oversight was poor and sometimes nonexistent in the financial markets, I find that poor oversight is deeply rooted in the real estate industry as well. The one issue that's come to my attention is the uneven application of how natural hazard disclosure statements figure into the mix. Specifically, are natural hazard disclosures (NHD) regulated by HUD? Are they a settlement service?

California, under Civil Code Section 1103.2 requires that an NHD is provided to a prospective buyer buyer of real property in a timely manner. Natural hazard disclosure statements identify whether a property is located within hazardous areas, including flood areas, zones prone to high fire hazards or seismic areas that could experience earthquakes.

Are escrow companies and officers not responsible for the NHD law compliance? Is NHD a settlement service under RESPA? And if it is, why isn't the Department of Housing and Urban Development (HUD) enforcing the disclosure requirements of the NHD?

I am finding conclusive evidence that NHDs are a settlement service under RESPA.

I'll be looking into this and other issues in upcoming blogs, so stay tuned!