In the wake of the financial crash of the late 2000s, and then the robo-signing and foreclosure crisis shortly thereafter, mortgage lenders and servicers were highly scrutinized and blamed for poor lending standards and lax servicing practices.
Government entities took action, with Congress passing the Dodd-Frank Act and establishing the Consumer Financial Protection Bureau (CFPB) and state attorneys general and prudential regulators entering into a consent order with the largest mortgage servicers in the country. These actions have changed, and will continue to change, the way the mortgage industry does business. It also puts pressure on the industry to ensure that every aspect of the process is done well, or face serious consequences.
The liability being placed on the mortgage industry is significant and they will be looking to their vendors to help ensure new regulations are being met. What does this mean for the title industry? During the National Settlement Services and Compliance Summit, Marx Sterbcow, managing partner at the Sterbcow Law Group, and Brian Levy, of counsel, Katten & Temple LLP shared their insight.
It starts with the consent order
The consent order issued earlier this year brought with it required changes to servicing standards. Levy noted that servicers are expected to have a single point of contact for each consumer. They can’t have consumers on a dual track, working on a modification while still having the property go through the foreclosure process.
“And probably the biggest area that affects [the title industry] is vendor management,” Levy said. “Servicers need to closely manage their vendors. This is not really a new requirement; there have been regulatory requirements on banks to monitor their vendors, but this was kind of clubby. Now you need some formalized due diligence. This is primarily a result of the problems that they saw with foreclosure counsel.”
Levy noted that the banks that have a consent order are completely redesigning their servicing and loss mitigation processes, personnel are being retrained and new technology is being designed and purchased. He noted that the Office of the Comptroller of the Currency consent orders give some blue prints for how to do this, but that banks are taking a comprehensive look at their efficiency overall.
“So, offering some insights for the vendor side, in competing in this new environment, it’s important that you understand these new expectations on servicers and what they are dealing with. You want to get ahead of their questions and audits by being prepared with some self-reviews,” Levy said.
Coming up: the CFPB Bulletin
“So who cares, we don’t do default servicing?” Sterbcow said. “Well, the CFPB issued Bulletin 2012-03 on April 13. [It outlined] framework for similar third party vendor management rules and regulations which will go into effect on the residential mortgage origination side of the business. So what is important about this is this is the precursor to the settlement service for the origination aspect, which is coming down the pike. So even though it may not apply to you today, it’s going to apply to you very shortly.”
The bulletin clarifies that financial institutions under bureau supervision may be held responsible for the actions of the companies with which they contract. The bureau will take a close look at service providers’ interactions with consumers. It will hold all appropriate companies accountable when legal violations occur. It states the bureau’s expectation that supervised financial institutions have an effective process for managing the risks of service provider relationships. The CFPB recommends that supervised financial institutions take steps to ensure that business arrangements with service providers do not present unwarranted risks to consumers. These steps include:
- Conducting thorough due diligence to verify that the service provider understands and is capable of complying with the law;
- Requesting and reviewing the service provider’s policies, procedures, internal controls and training materials to ensure that the service provider conducts appropriate training and oversight of employees or agents that have consumer contact or compliance responsibilities;
- Including in the contract with the service provider clear expectations about compliance, as well as appropriate and enforceable consequences for violating any compliance-related responsibilities;
- Establishing internal controls and on-going monitoring to determine whether the service provider is complying with the law; and
- Taking prompt action to address fully any problems identified through the monitoring process.
What does this mean for you?
With all of this oversight from the mortgage industry coming, Sterbcow and Levy gave their assessment of what this means practically for the title industry.
One thing Levy suggested was writing down set procedures and assessing the risk of those procedures.
“You may have never done this before, but you need to document your procedures and then follow them,” Levy said. “As a lawyer, I can tell you I don’t have a policy and procedure manual for how I do my work. I don’t think many title companies do that. … If you don’t, now is the time to start doing that because your customers will ask for it. And you’ll want to obtain a risk assessment of your business that you can share with your clients. Risk assessment is the road map for the servicer to follow in its review. You may want to consider an attorney to conduct this assessment.
“Also, your auditing staff, whether they are internal or external, may lack some of the technical skills to assess the legal risks. You may want to consider also getting an SAS 70 that demonstrates your control over data and other information,” Levy continued. “Then you want to benchmark your performance against industry standards. And absolutely when you do this, you want to take action in response to any negative findings.”
Marx noted that under the consent order, servicers will also be responsible for the actions of their vendors’ vendors.
“So if I’m a title company and I’m hiring an abstract company, I need to make sure the abstracting company I’m hiring is compliant because if they are not, the lender is going to take it out on me,” he said.
He then said that servicers want third party providers to give all the documents to the servicer so they remain in custody of all the original documents.
“The third party vendors, and even their vendors, have to have some sort of mechanism to hold onto all of the documents so they are not missing, like we had in the past,” Sterbcow said. “…They want to ensure the accuracy of all documentation involved on behalf of the servicer or the owners of the mortgages. They want to make sure whoever owns that loan, that they can actually identify them down the pike instead of having a system in place where no one knows who owns the loan. They want a single depository so to speak o show some accountability.”
In addition, servicers, and then lenders, are going to be focusing on third party provider qualifications.
“This is probably the most important part of the whole thing,” Sterbcow said. “The servicers are going to be looking at it and the lenders down the line are going to be looking to see how qualified the title company is, or the mortgage company or the mortgage broker or abstractor to see if they actually know what they are doing in order to continue doing business for them. So if you don’t have the qualification, if you are not licensed, the servicer or lender will cut you off.”
Sterbcow said they are also going to be looking at the complaints.
“This is the part that is kind of interesting,” he said. “These auditing teams are going to be looking at the reviews of your operations. So if consumers are going in and you had an employee who had a bad day or just some knuckle head, the consumer that doesn’t like your operation and puts a negative remark on Yahoo!, that can actually impact you down the lien. So it’s important to start monitoring your online presence for reputational purposes, to make sure that you don’t get jammed up later when these auditors come in and you have 10 or 12 negative reviews. They want to make sure that if you are doing the work, that you are giving the consumer a positive experience.”
Sterbcow also mentioned information security, ensuring that the vendors have proper safeguards.
“A prime example is title company escrow accounts,” Sterbcow said. “They are going to want to know what banks are holding your escrow accounts. Do these banks actually have fraud mechanisms in place to make sure that you don’t have these international mafia operations coming in and manipulating the banks to steal your wires, which is becoming more and more prevalent.
“They also want to ensure the adequacy of staffing levels,” Sterbcow said. “So if you are doing 800 closings a month and you have 10 employees, they are going to say that is an insufficient number of employees to monitor that number of closings. So the auditors for most of [the servicers and lenders] will have some established criteria of how many employees you should have working on a set number of files.”
Sterbcow mentioned that lenders and servicers are going to want title agents to have at least two underwriters. He said mortgage industry members are concerned about what happens if a title underwriter goes under.
They will also review the fee structure of their third party providers to ensure the method of compensation provided considers accuracy, completeness and legal compliance.
“They want to make sure that whatever fees are being charged for the bankruptcy law firm, the foreclosure firm or whoever is doing any work on behalf of the servicers is not increasing fees unnecessarily or charging borrowers an inordinate amount of money,” Sterbcow said. “So it has to be a very reasonable fee. What they have effectively done is put some cost controls in.”
Thoughts from the industry
With the significant impact these new requirements could have on the industry, The Legal Description spoke directly to industry members to see what they were seeing in the marketplace, or expected to see in the future.
Randall Bradley, executive vice president, national sales manager at National Closing Solutions, also noted the lenders have a lot on their plates and are reacting quickly, without having the opportunity to consult with their title agents. He said this may have some unintended consequences. He said he has seen this play out already in closing instructions.
“You are seeing a lot of onus put on the closing instructions now in terms of representation of fraud and [ensuring] arms-length transactions,” Bradley said. “And you scratch your head and say, ‘It’s your borrower, your client; we are meeting them for the first time … so how is it I know more about what happens in this transaction than you do?’”
David Gutmann, co-chief executive officer and general counsel of Customized Lender’s Services Inc. agreed.
“I suspect that the first thing we are going to see is more specific closing instructions,” he said. “So I think we have to be more cognizant about making sure we are reviewing those.”
Bradley said the language of these instructions can be a bit unclear, by, for instance, using the pronoun “you.”
“Is ‘you’ the actual individual escrow officer on the transaction? Is it the collective ‘you,’ the company,” Bradley said. “If you are a small agent and you have one office, everyone in the office knows pretty much what is going on in that little town. If you are a direct shop with one of the underwriters, or a large agent like us, who has 75 offices, does anybody in my 75 offices know anything about that transaction I’m closing right now?”
Another thing Gutmann was looking out for was lender-required audits.
“One of the things that does worry me a little bit is the fact that I’ve heard from other people about lenders possibly requiring audits of their vendors,” he said. I’m not sure what they would audit us for, if it would be similar to what an underwriter audits us for. That is kind of hard to prepare for, not knowing what they are looking for.”
Bradley said communication with the lender is critical to addressing any concerns. He noted that this should be done “at a level commiserate with the lender.”
“A small agent in a local community can talk to their community bank and talk to their credit union and can affect change,” he said. “You don’t have that opportunity with the Bank of Americas and the Wells Fargos. So at that level, those conversations have to be driven by your underwriter or your trade associations.”