In these reinsurance arrangements, Fitch said, a title insurer cedes a portion of title insurance premiums to a captive reinsurer that is at least partially owned by the settlement producer who is the source of the business.

Fitch said it believes the inquiries are focused on two primary issues--whether there is any true risk transfer related to the reinsurance agreement, or whether the reinsurance premiums paid to captive reinsurers are in excess of the market rate for the risk being assumed.

Under the Real Estate Settlement Procedures Act (RESPA) and most state statutes, Fitch said, it is illegal to pay referral fees to obtain title insurance business.

The rating firm noted that the determination of whether or not a captive title reinsurance program is in compliance with RESPA depends upon several factors, including whether payments made to reinsurers are for reinsurance services actually furnished or for services performed.

Payments, Fitch noted, must also be for bona fide compensation that does not exceed the value of such
services.

The firm mentioned that previous investigations of the title insurance industry that have focused on discounting, controlled business arrangements and agent's commissions have not significantly affected the industry.

However, Fitch said it believes the title insurance industry will face greater pressure to modify compensation and other business practices that may be viewed as creating conflicts of interest.

Fitch also recommended that prudent title insurers proactively review their sales and operating practices with a view towards curtailing those that may prove to be unacceptable in an environment of increased scrutiny and higher transparency standards.

The current title insurer probes will more than likely result in cease-and-desist orders, fines and penalties rather than criminal sanctions, and may be the catalyst to extensive changes to current industry practices--including the elimination of these reinsurance arrangements and increased disclosure of all reinsurance arrangements, Fitch speculated.

Which nine title companies are at the center of the Colorado investigation have not been made public. Fitch said it does not expect any title insurer ratings changes. If the inquiries expand significantly and are concentrated in a small number of companies, individual company ratings may be negatively impacted, Fitch warned.

The Colorado Division of Insurance is looking into suspected kickbacks payments by nine companies that are located outside of that state, the Associated Press reported.

Deputy Insurance Commissioner Erin Toll was quoted as saying she would turn over the names of builders suspected of participating in a kickback scheme to the U.S. Department of Housing and Urban Development for possible discipline.

According to Ms. Toll, payments to obtain title insurance business is illegal with fines up to $10,000 per occurrence.