As we continue forward in this year, with numerous pieces of legislation and regulation at the federal and state level, what is it we should pay the most attention to? And how should we approach getting involved to impact the changes ahead? During the Industry and Regulatory Outlook webinar, presented by October Research LLC, Rodney Anderson, executive vice president and national agency manager, Alliant National Title Insurance Co., shared some insights.
AOLs
After a brief discussion on the shifts happening in the housing market, Anderson noted an increased focus on home affordability at the federal level. He said this has led to an increased acceptance of attorney opinion letters (AOLs) and alternative title products from the Governmental Servicing Entities (GSEs). The discussion at Fannie Mae and Freddie Mac stemmed from a December 2021 study Fannie Mae published, Barriers to Entry, which looked at closing costs for first-time and low-income homeowners. In 2022, Fannie Mae announced it would begin accepting AOLs for loans it serviced.
“And that is really the genesis for creating the new attorney opinion letters,” Anderson said. “Now I use the phraseology ‘new’ in air quotes because it really isn’t new. AOLs have been around since before title insurance. One of the main reasons for title insurance was the fact that attorney opinion letters were not adequate enough to make sure that purchasers were getting what they paid for, hence the need for title insurance.”
“So when we are looking at these AOLs, and what their genesis is, it starts with Fannie Mae trying to come up with a way to make homeownership more affordable,” he continued. “Is this one of those ways? Well, there is a lot of discussion here because the current AOL product must be directed to the lender and all successors-in-interest, and it has to provide gap coverage, there cannot be survey exceptions, no unpaid taxes, and no redemption rights.”
Anderson noted that an AOL requires a property’s title to be acceptable and the lien must have priority. The challenge with that, he said, was that there is not a nationwide definition of an “acceptable title.” One attorney reached out to him questioning whether AOLs were legal in their state.
He further noted, “It is very interesting that some of the transactions where the attorney opinion letter cannot be used are the transactions that tend to be purchased by first time homebuyers and those seeking affordable housing, most notably manufactured housing. Manufactured housing costs about 50 percent less per square foot than traditional site built homes. They are, by far, the most affordable form of housing, and they are excluded in the current regulation.”
“There is a lot of misinformation out there,” Anderson said. “There are still more questions than there are answers. But I will tell you they are being used.”
He noted a title agent contacted Alliant National with a question, saying the agent had received an order from a national lender that is using an AOL. It was a split closing and the agent wanted to know what to tell the buyer because it was a purchase transaction. Should they tell them about getting an owner’s policy?
“Well, if they are going to pay for the owner’s title policy and pay for an AOL, then you are doing the complete opposite of what it was supposed to do, which was reduce costs,” Anderson said. “And my specific point to them was, in that state you are not permitted to close anything unless you have a bona fide order for title insurance. You are not permitted to close it. So if you don’t have a bona fide order for title insurance, how can you close it?
“So there is still a lot of uncertainty,” he continued. “The AOLs continue to adapt and it’s interesting, the more they adapt, the more they look like title insurance, which should mean they are subject to state regulations of title insurance. There are many states that are heavily regulated on the title insurance side. So at what point does it actually cross the line and become title insurance?”
Anderson further noted that AOLs don’t provide coverage for the owner and that with title insurance most states have simultaneous issue rates when purchasing an owner’s policy and lender’s policy at the same time.
“In addition to not providing coverage to the homeowner, here are some other things it does not do,” he said. “In the current form, it does not protect the lender from the following, and I’m going to read these and if you are a lender you need to be thinking about this, it does not protect the lender against fraud, forgery, duress, undue influence, incapacity or incompetence of the parties due to mental conditions, marital status, the existence of unknown heirs, incorrectly indexed documents, bankruptcy, insolvency, homestead rights, unrecorded easements or unrecorded instruments.“
Anderson said current questions may not be answered until a lender has something go south under an AOL and coverage has to be sorted out.
Cybersecurity
Anderson then turned his focus to business email compromise (BEC) and cybersecurity, noting that insurance companies are losing hundreds of millions of dollars due to BEC. He said there is not a title insurer that hasn’t been hit by it.
He said the losses continue to get higher because the fraudsters adapt. Anderson said one big target of late is mortgage payoffs, giving the recent example of an agent who conducted a transaction for a major lender. The title agency requested a payoff from the lender using an online “token secured” system. The lender sent the payoff statement via fax. Five minutes later, a second fax came across, looking almost identical to the first fax except it came from a different fax number.
“I want you to let that sink in a minute,” Anderson said. “Somebody was either inside the closing agent’s system or there was somebody watching from the banking side. Unfortunately, the closing agent saw two of them there, they looked almost identical, they picked one and threw the other one away and wired $350,000 to a fraudster.”
Real time payments
Anderson also noted the expansion of real time payments (RTPs). While person-to-person RTPs began with Zelle in 2016, it has expanded to payment integration for business-to-business.
“I can set up a business-to-business transfer that may be an ACH, it may not be an ACH,” he said. “And where all of this is headed is what is the definition of good funds. Most states have good funds laws where you have to have good funds in order to close or finish your closing.”
There is an upcoming process called FedNow which is the capability through the Fed for large wire transfers that are peer-to-peer that is coming quickly. Anderson noted legislative bodies are working to make sure they understand the ramifications of this because under federal law, an ACH is not considered good funds because it is not instantaneous or immediate and it can be clawed back.
Engaging regulators and legislators
Anderson ended his presentation by encouraging attendees to engage with state and federal regulators and legislators.
“Your congressmen and senators in Washington, D.C., yes what they do affects what we do every day,” he said. “But what really impacts you more often than not are those things that happen locally and I’m going to talk specifically about the state level. You have some changes that are being looked at, for example, in Oklahoma, that would completely change the regulatory environment of the way title insurance and abstracting is done. New Mexico is another one that is looking at doing some significant changes. In the attorney states, the bar associations are very active legislatively.”
“I don’t care whether you are a senior level executive sitting in the C-suite or you are brand new to the title industry, brand new to the mortgage industry, or new to any real estate related field you need to have a relationship with your elected officials,” Anderson said. “A lot of people make the mistake of thinking they have to be a donor to someone before they can have a relationship with them and I’m telling you that is simply not true.”
He then gave some examples of areas to be aware of, starting with the Financial Crimes Enforcement Network’s (FinCEN) anti-money laundering efforts, including the collection of the beneficial ownership of entities that purchase residential and commercial real estate.
Another one was the SAFE Banking Act, which would make it legal for banks and insurance companies to service entities involved in cannabis. He also mentioned remote notarization legislation and private transfer fees, as well as the CFPB’s scrutiny of junk fees.
“Those are the types of things that you need to be aware of in talking to your state associations,” Anderson said. “Make sure your state associations are coordinating with your federal organizations because there is an old saying in the legislative world that says, ‘If you do not have a seat at the table, you may be on the menu.’ If you are not actively involved, your industry could be the one that gets carved up like a Christmas turkey.”