Over the last few years, the term lender liability has been floated around frequently among members of the title industry. Lenders are under immense scrutiny, while at the same time trying to implement policies and procedures to comply with an ever-changing regulatory landscape. It can be unclear what is expected of title agents who want to continue to receive business from their lender clients.
During a session at the Louisiana Land Title Association’s annual convention, Marx Sterbcow, managing attorney at the Sterbcow Law Group, and Charles Cain, senior vice president and agency manager for the Midwest region at WFG National Title Insurance Co., provided some insight into why lenders are concerned about their liability.
Who is looking
The CFPB has put a focus on the responsibility lenders have to ensure that every aspect of a mortgage transaction is compliant with state and federal consumer financial protection laws. This means making sure that their third-party vendors are also in compliance with these laws and regulations.
“The way they define a third-party relationship is ‘any business arrangement between the bank and another entity, by contract or otherwise,” Sterbcow said, noting that this also goes down the line to fourth- or fifth- party relationships. “If you hire a notary and the notary screws up, even though they are not an employee of your operation, the bank is still liable. If you hire a bad software company and it gets hacked, the lender is still liable. So this really goes downstream and it puts a lot of pressure on you to make sure that not only are you in compliance, but that the people you do business with are in compliance.”
Sterbcow said that the regulators are concerned that lenders have done inadequate due diligence and inadequate risk assessments when it comes to the entities they work with.
“They are also very concerned about underestimating the risks and costs associated with doing business with particular vendors you may do business with,” he said. “[They are concerned about] flawed contracts; they are very concerned about that. So if you have a service-level agreement, a master service agreement, any sort of agreement like that, they want to make sure there is a provision in there that provides oversight over those contracts. Whether you are a title agent that is looking over a notary or whatever it might be, [that want to make sure] you have oversight over what they are doing.”
Not only are lenders concerned about what the CFPB and their prudential regulators are going to look at, but they are very concerned about what their investors think. Specifically, they are very concerned that their investors will require them to buy back loans.
Sterbcow noted that the bureau, along with the OCC and FDIC, is concerned about the ability of holders of mortgage backed securities to contract away their liability. He said that if he were to buy a loan from a bank, sell it to someone else, who sells it to a third person, that third person is responsible for the origination of the loan, even if it was originated 20 years ago. The regulators want to make sure that everybody has skin in the game.
“One of the things that you are seeing driving the vendor management bus right now is that a lot of investors are dictating to the banks what they want for vendor management best practices,” he said. “It’s not really the banks or the mortgage companies; the investors are really in control on a lot of these policies and procedures.”
Cain said investors are being so critical because they are under siege.
“The entire process is being intensely scrutinized by federal regulators and state regulators and they are looking for potentially nine-figure settlements from these servicers who they think have not been doing the right thing,” he said, noting, for instance, that regulators feel that servicers should provide consumers with notice that their homeowner’s insurance policy is going to lapse to give the consumer a chance to cure the problem before the servicer buys a forced-place homeowner’s policy for a higher cost.
“The investors of mortgage-backed securities are going to feel the fire and the lenders and the banks are very worried about loan buy-backs,” Sterbcow reiterated. “Lenders and banks are scared to death of loan buybacks. They are very worried about having a loan blow up because of either a vendor management issue, the new TILA/RESPA disclosure rule or the qualified mortgage rule or others that have been in place.”
In addition, with the changes to TILA and RESPA, lenders are concerned about class-action litigation.
“The new TILA/RESPA rule takes everything out of RESPA and moves it to TILA, which makes it a very attractive class action target,” Sterbcow said.
Sterbcow was quick to remind attendees that it is not title agents that are experiencing this scrutiny.
“It’s not aimed at just title,” he said. “This is going to hit anybody that is even incidentally connected to the process. This is stuff that is coming from all different directions.”
Cain agreed.
“The CFPB, the OCC, the FFIEC, the FDIC, they expect supervised banks and nonbanks they regulate that have vendors to have a process for managing risk,” he said. “It has to be demonstrative. It’s something they are going to have to demonstrate to auditors when the auditors come. [Auditors] will expect consistency as to the monitoring of these organizations. It’s going to be the same whether you are big or small.”
Lender challenges
These heightened areas of scrutiny have proved challenging to lenders. In the past, lenders conducted due diligence of their third-party providers in terms of safety and soundness.
“Safety and soundness was always the standard,” Cain said. “With the implementation of Dodd-Frank, it was stretched beyond that to unlawful and deceptive acts and abusive practices (UDAAP). The troubling part of the UDAAP standard under Dodd-Frank is that the bureau has the authority to decide what is an unlawful, deceptive act or abusive practice. They do have to go through certain rulemaking under the administrative procedures act if they are going to define things, but they can decide something may be a UDAAP practice without a finding that the practice is widespread. They have very broad authority.”
This concerns lenders because many feel as though they are “planning in a fog,” not knowing what is considered an unfair, deceptive act or abusive practice because the definition of what is considered a UDAAP violation is evolving. Cain said under this standard, third-party vendors are held to the knowledge of all the laws administered under the jurisdiction of the bureau, and ultimately the lender would be the principal defendant in this situation.
“There is what I would call a cloud of unknowing over lenders as to what does meet the requirements,” Cain said. “What is going to be sufficient, because so far, the guys over here who can issue subpoenas and take out knives haven’t been real clear about how far do we have to go?”
Cain said that above all, lenders are in search of a safe harbor.
For insights into what areas lenders are concerned about and what agents can do to alleviate those concerns, check back to the Jan. 22 eNews campaign.