Sham Companies

First American Title was hit by a wrecking ball recently and many small companies affiliated with 1st American imploded.  I'm not going to stand in judgment of each little company and declare that every one of them was a sham or that they were all crooks. 

What has been rattling around in my brain recently is that regulators in the St. Paul area are looking for someone to take the fall for the recent crash in the housing market.  Of course the scapegoats won't be the big guys or the big companies.  The target has become all the little shops in the real estate business:  small lenders deemed as predators; real estate agents labeled as greedy; and the little title companies found to be shams.

I don't pretend to know all the nuances of what happened with the 1st American debacle, but the information meeting set up by the Minnesota chapter of the National Association of REALTORS® to enlighten agents on the issue was enough to make me consider changing careers.  It feels like a witch hunt is being conducted in St. Paul and Minneapolis by the Minnesota Department of Commerce, HUD (Housing and Urban Development), and the FBI to ferret out any, and all, real estate agents who ever conducted a transaction using one of the "sham" title companies under the 1st American umbrella.  As the presenter at the MNAR meeting stated, "The investigations are starting from the premise that there is widespread violation."

The last time I checked, St. Paul real estate agents are a bunch of working stiffs trying to make a living doing the thing they love to do:  help people find and sell houses.  A very, very small minority might be considered crooks, but that is true of every profession including the Department of Commerce, the FBI, and HUD.  A certain percentage of every profession is dishonest and out to make a buck.  It's not specific to real estate.  To assume widespread violation is a slam to a profession which I proudly identify with.

In this meeting, the term "sham" seemed to have a legal meaning.  There are 10 criteria used to determine if an affiliated business is a sham or legitimate.  Some of those 10 criteria include things like a separate facility, separate phones, separate mailing address, separate services completely.  So a small company that chose to capitalize on the market by building sister companies to originate mortgages (mortgage company) and complete closings (title company), but shared a section of the same office is considered a sham.  They might truly be legitimate but by definition if they don't meet all 10 of the criteria they are considered a shell company established to bilk the consumer of their money. 

How did these things become so highly regulated?  When our society originated, didn't the blacksmith live in the same place he had his shop?  And the grocer, baker, and banker also lived behind or above their place of business.  Today different denomination churches (and we all know how they can fight! ☺) share the same facilities.  It makes good economic sense. 

Two of the big companies in our area (Edina and Coldwell Banker) both have title companies.  Their title companies are not in separate buildings.  They are in the same building, but a wall separates them from their sister real estate company.  One can literally walk across the lobby into the affiliated business office.  The physical wall creates a legal wall of protection from being considered sham.  Because a small company needs to economize and share the same fax and the same commercial printer, are they deemed a sham?   If I innocently do business with any one of those "sham" companies, can my livelihood be in jeopardy?

This is one of the things that make me go, "Hmmmm".

      

 

Comments

[Bonnie Erickson]

Aaron, What you are saying is exactly why I said it feels like a witch hunt. The presumption, according to the MAR meeting, was of guilt, not innocence. EVERYONE is under scrutiny, even the best of the best. The unlucky one who happened to do business with a new title company that doesn't meet all 10 of the criteria for being a legitimate company (like not using the same fax machine) can take the fall.

[Aaron Dickinson]

Actually, approximately 11 agents in my office were hit with the Department of Commerce actions regarding First American Title. These agents are some of the best in my office and I don't believe for a minute that they ever hurt their customer's best interests.

There's a lot of nuances in what happened and while so far action has focused on specific company and their practices, I'm certain that everyone is being reviewed right now.