In the first enforcement action of its kind, HUD settled with two home builders and a national mortgage lender for $1.6 million for their role in an illegal kickback scheme.

Denver-based MDC Holdings, Newport Beach, Calif.-based WL Homes and Maryland's CitiMortgage settled federal allegations that their subsidiaries accepted illegal kickbacks from title insurers.

The payments to subsidiaries were funneled back to the parent companies in exchange for referrals.

The mortgage lender and the home builders, which do business as Richmond Homes and John -Laing Homes, did not admit wrongdoing but have stopped the practice.

In a statement, MDC Holdings said it settled the matter "in a timely manner" to avoid "additional expense" and that its title policies were created "in good faith reliance on HUD's regulations, guidelines and interpretations of the Real Estate Settlement Procedures Act."

But Colorado Deputy Insurance Commissioner Erin Toll thinks that home builders and mortgage lenders played a key role in the illegal arrangements.

"I just can't tell you how excited I am they did this," Toll said. "It's my firm belief that kickback action won't stop until the home builders are involved."

The HUD settlement builds on Toll's work at Colorado's Division of Insurance, the first state agency to crack down on so-called captive title reinsurance agreements.

The arrangements are 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.

"This is ultimately a variation on a theme here," HUD spokesman Brian Sullivan said. "It's the part of the law that expressly prohibits the giving or taking of anything - sports tickets, gold watches, anything - that isn't related to a service that's provided."

Last spring, the state of Colorado reached settlements with Fidelity National Financial and FirstAmerican Title.

Toll met with federal regulators to explain how the arrangements worked in February 2005.

The state is preparing to sue a title insurer, Richmond, Va.-based LandAmerica Financial Group, because it cannot agree with the state on an acceptable settlement payment, Toll said.

Additional HUD settlements could be announced in the coming months because more than 50 firms - including KB Home, Shea Homes, Pulte Homes, Beazer Homes and Meritage Homes - participated in the arrangements. Banks involved include Wells Fargo, Bank of America and Citifinancial.

"We don't talk about our future cases," Sullivan said. "But there's no shortage of material to work with."

Captive title reinsurance arrangements

• How they worked: When you bought a new home or refinanced, a home builder or mortgage lender would steer you to a certain title insurance company. On the side, the home builder or mortgage lender had set up a subsidiary "reinsurance" company. The home builder or mortgage lender had already cut a deal with the title insurer it directed you to. In exchange for volumes of business, that title firm would send part of its fees to the "shell" reinsurance company owned by the home builder or mortgage lender.

• Why it's illegal: The Real Estate Settlement Procedures Act says it's illegal to give or receive remuneration for the referral of a federally guaranteed loan. Most residential real estate transactions are federally guaranteed.

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