Legal Issues

Through 2006 and 2007, the U.S. Department of Housing and Urban Development reached millions of dollars in settlements with homebuilders and mortgage lenders over allegations that they “engaged in illegal business practices” involving captive title reinsurance and accepted illegal kickbacks from title insurers in the form of payments in exchange for referrals. The arrangements were essentially ways for home builders and mortgage lenders to accept kickbacks for referring a high volume of business to a preferred title insurer. Any payments in exchange for referrals violate RESPA, the Real Estate Settlement Procedures Act. In addition to the settlement payments the companies agreed not to enter into any new captive title arrangements and to cease writing new captive title reinsurance business. Richmond American, Shea, Pulte, KB, Meritage, and Beazer Homes were among the companies involved in the settlements.

In 2005, KB Home paid a record $3.2 million settlement over HUD allegations that
KB’s mortgage unit was responsible for a number of poor underwriting practices such as approving loans to borrowers who were not eligible; approving loans based on overstated or incorrect income; failing to include all of borrowers’ debts; failing to properly verify sources of funds; and, failing to ensure gift letters met HUD requirements. KB subsidiary KB Countrywide has been hit with a number of lawsuits recently, including claims that it schemed with real estate appraisers by falsifying sales data and manipulated appraisals to inflate prices paid for homes as the housing market began to tank. Another KB Countrywide lawsuit includes a former regional vice president and manager claiming wrongful termination after he reported fraudulent lending practices to superiors and refused to approve mortgages for unqualified applicants. Among other things, he alleges “being strongly encouraged to inflate homes’ appraised values by as much as 6 percent” resulting in buyers owing more than their home was worth.