Californians who bought natural hazard disclosure reports when they listed their homes with Coldwell Banker, Prudential California Realty, RE/MAX, Century 21 or ERA Real Estate could soon be entitled to full refunds as part of a proposed $39.3 million settlement of a class-action lawsuit.

The settlement agreement, which must still be approved by a federal district judge, stems from a lawsuit alleging that real estate brokers took kickbacks from the company that produced the reports, Property I.D. Corp., in exchange for referring business to the company. The kickbacks were allegedly paid through "sham" affiliated businesses, with brokers receiving about $25 for each report.

Property I.D. and the real estate brokerages that partnered with the company in three jointly owned affiliated businesses deny wrongdoing. But Property I.D. and some of the brokers it partnered with have signed agreements with the Department of Housing and Urban Development stipulating that natural hazard disclosure reports are settlement services governed by the Real Estate Settlement Procedures Act, or RESPA.

RESPA prohibits companies from creating sham businesses for the sole purpose of splitting profits from the sale of settlement services such as title insurance. The three affiliated businesses HUD alleged were established to funnel kickback payments to real estate brokers all had the same Los Angeles address, phone number and bank accounts as Property I.D., and no employees of their own.

HUD launched its own investigation of Property I.D. and its partners in August 2005, several weeks after a class-action suit was filed in U.S. District Court in Los Angeles on behalf of Mark and Rachelle Berger and others who listed their homes for sale through the brokerages. HUD brought its own lawsuit against Property I.D. and its partners in May 2007, after Property I.D. sued HUD in an attempt to bring the nearly two-year investigation to a close.

In its suit, HUD claimed that real estate brokerages steered clients using methods that included listing contracts naming Property I.D. as the default provider of natural hazard disclosure reports. The reports were priced at $99 to $114.

After deducting $50 per report to cover expenses, Property I.D. allegedly split the remaining $50 profit with referring brokers, making payments on a quarterly basis, HUD claimed. Brokers also instructed agents to advise buyers to purchase the reports, even though they were under no obligation to do so under California law.

California requires that sellers provide natural hazard disclosures for properties located in areas prone to flooding, fire, earthquake or landslides. The disclosures must be made on standardized forms and can be prepared by the seller, the seller's agent or a third-party consultant. Although some Property I.D. competitors charge less, the company claims its reports are more thorough.

Property I.D. and the real estate brokerages sued by HUD argued that because natural hazard disclosure statements are not specifically mentioned in RESPA, their marketing and sale was not subject to the law's requirements. Even if RESPA did apply to the disclosure reports, HUD did not have the legal authority to require the "disgorgement" or return of profits generated by the joint ventures, attorneys for the defendants claimed.

In a statement, Realogy spokesman Mark Panus said HUD's lawsuit "was the first public indication that these disclosures, unique to California, are considered settlement services."

While natural hazard disclosures didn't exist when RESPA was written and aren't specifically mentioned in the law, they are clearly settlement services if they are required by states, said Barry Himmelstein, the San Francisco-based attorney who filed the class-action lawsuit. HUD is not obliged to update RESPA to list changing requirements for real estate transactions that vary by state, he said.

"I share HUD's view that (natural hazard disclosure reports have) always been a settlement service subject to RESPA," Himmelstein said. "The argument that (they are not) has always seemed to me to be patently frivolous."

HUD spokesman Brian Sullivan said that with the pending settlement of the class-action lawsuit, HUD has reached an agreement with Property I.D. that does not involve payments, but which acknowledges that the reports are settlement services and bars the company from engaging in practices that violate RESPA. Similar agreements are pending with the brokers that partnered with Property I.D.

Sullivan said the lawsuits have not only put to rest the question of whether natural hazard disclosure reports are subject to RESPA, but establish HUD's authority to seek disgorgement of illegal profits.

In a press release, Property I.D. put a positive spin on its settlement with HUD, calling it "a dramatic example of how the government and the real estate industry are working together to establish new practices for California home buyers and sellers."

Property I.D. claimed the agreement "protects" companies that prepare natural hazard disclosure reports because payment for the reports will now be collected as part of escrow, "requiring a significant change in every escrow company's standard procedures."

Panus said Realogy "voluntarily terminated" its joint ventures with Property I.D. more than two years ago, "for business reasons unrelated to HUD's allegations."

Realogy sued Property I.D. in September 2006, claiming it had not received $600,000 it was owed from its joint ventures. The lawsuit was dismissed in March 2007.

Realogy continues to maintain that the partnerships were legal but agreed to a settlement "to avoid the continuing legal expense and potential business disruption of these lawsuits," Panus said, adding that Realogy will treat natural hazard disclosure reports as settlement services governed by RESPA "on a going-forward basis."

Under the proposed settlement of the class-action lawsuit, Realogy -- parent company of Coldwell Banker, Century 21 and ERA Real Estate -- will pay up to $27 million to reimburse clients who purchased Property I.D. natural hazard disclosure reports between July 31, 1996 and June 30, 2006.

Pickford Real Estate Inc., the owner of Prudential California Realty offices in Southern California that participated in the affiliated business arrangements, will pay up to $4.34 million to reimburse home sellers who bought the reports from July 14, 2000 through Aug. 16, 2005.

Roche Enterprises Inc., the former owner of RE/MAX of California and Hawaii Inc., will pay $498,474 to compensate clients who bought Property I.D. reports from Aug. 23, 2000 through Feb. 28, 2003.

If final approval of the settlement agreement is approved by the judge overseeing the case -- a decision that's not expected until December at the earliest -- Property I.D. would pay up to $7.5 million.

Property I.D. spokesman Bob Gold said the company was prepared to dispute the allegations against the company at trial, but that the insurance company providing $10 million in liability coverage chose to settle.

Panus would not comment on whether Realogy's obligations under the settlement are covered by insurance, but according to court documents, the company had involved three insurance carriers in settlement discussions.

"Obviously the insurance companies pushed to settle, or Property I.D. would have fought this all the way to the end, to a jury trial," Gold said.

Sam Kraemer, general counsel for Pickford Real Estate, declined comment, saying the settlement is still pending before the U.S. District Court for the Central District of California.

On April 28, the court dismissed claims in the class action lawsuit against defendants Mason-McDuffie Real Estate Franchise Corp. -- doing business as Prudential California Realty and Property I.D. of East Bay, LLC -- and Silvercrest Realty Inc. and related businesses in Los Angeles, Riverside, Orange and San Bernardino counties.

The Aug. 4 settlement agreement, along with a proposed mailer to home owners who purchased Property I.D. reports and may be entitled to claim a refund, are included in an 80-page court document filed this week. Judge George King is scheduled to weigh preliminary approval of the agreement on Aug. 25. If there are no objections from those eligible for claims, final approval of the agreement could be granted in December, Himmelstein said.