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Consumer Financial Protection Bureau

Market Demands on Lenders Impacting Settlement Service Providers

September 13, 2012

Uncertain regulatory requirements coupled with recent monetary settlements have forced lenders to be more sensitive to the types of companies they do business with. Consequently, regulators’ increased demand to protect consumers has forced lenders to adjust their relationships with service providers.

Recent bulletins and consent orders from the Federal Reserve, Consumer Financial Protection Bureau (CFPB) and Office of the Comptroller of the Currency (OCC), and requirements for more oversight of foreclosure practices by lenders and servicers coming out of the national mortgage servicing settlement all point to increased focus on service providers and holding lenders responsible.

While lenders have been responsible for their service providers’ actions for years, it’s only been until recently that enforcement orders and corrective actions have demonstrated regulators' intent that the banking organizations are expected to oversee actions of third parties.

ALTA’s Board of Governors recently met in Chicago to address the increased regulatory pressures, and consequently, the rising trend of lenders demanding more information from settlement agents.

“Since the housing bust, lenders have been reassessing their operations, looking for areas that could lead to losses,” said Frank Pellegrini, chief executive officer of Prairie Title and ALTA president elect. “Lenders have put a focus on settlement services because of the potential for significant losses due to escrow theft and the significant regulatory penalties written into federal laws, including TILA and RESPA.”

Consent Orders Driving Lender Decisions

While recent actions by the CFPB has garnered much of the attention, consent orders reached with federal and state authorities is the main driver forcing lenders to rethink relationships with their service providers.

Last year, several federal banking agencies announced formal enforcement actions requiring 10 banking organizations to require lenders to improve oversight of bank and nonbank vendors in the foreclosure area. Among other things, the companies must submit plans acceptable to the Federal Reserve that “establish robust controls and oversight over the activities of third-party vendors that provide to the servicers various residential mortgage loan servicing, loss mitigation, or foreclosure-related support, including local counsel in foreclosure or bankruptcy proceedings.”

Then in February 2012, 49 state attorneys general and the federal government announced a $25 billion joint state-federal settlement with the country’s five largest loan servicers. It also requires servicers to oversee and manage its third-party providers. Servicers subject to the settlement must perform due diligence of third-party providers for their qualifications, expertise, capacity, reputation, consumer complaints, information security, document custody practices and financial viability. The settlement also requires servicers to conduct reviews of third-party providers to ensure any fees and costs charges to consumers are lawful and reasonably incurred.

The $140 million enforcement action CFPB took against Capital One Bank for credit card activities in July amplifies the actions regulators are examining to prevent third-party providers from harming consumers. Capital One hired a third-party call center that used deceptive marketing tactics. Korsmo said this enforcement action is instructive because it shows the CFPB will penalize financial institutions when their third-party vendors’ actions harm consumers.

“We know that the CFPB and other state regulators have targeted so-called residential mortgage ‘service providers’ for heightened scrutiny,” said Francis Riley III, a partner of the law firm Saul Ewing LLP in New Jersey. “However, who is a ‘service provider’ in the CFPB’s mind? There is good reason to believe that the definition now includes, will include or may include—at the regulator’s discretion—title agents with respect to title insurance procurement, but most certainly concerning settlement and closing services.”

CFPB to Hold Financial Institutions Liable for Vendor Violations

A bulletin issued in April by the CFPB fanned the flames even more that lenders need to increase oversight of their service providers. The memo indicates that financial institutions under Bureau supervision may be held responsible for the actions of the companies with which they contract. The Bureau said it will take a close look at service providers’ interactions with consumers and hold all appropriate companies accountable when legal violations occur.

“Consumers are at a real disadvantage because they do not get to choose the service providers they deal with—the financial institution does,” said CFPB Director Richard Cordray. “Consumers must not be hurt by unfair, deceptive, or abusive practices of service providers. Banks and nonbanks must manage these relationships carefully and can be held accountable if they break the law.”

The Bureau’s bulletin, which mirrors past guidance from the other federal banking regulators, urges supervised financial institutions to have an effective process for managing the risks of service provider relationships to “limit the potential for statutory and regulatory violations and related consumer harm.” According to the memo, some examples of oversight by mortgage lenders and servicers 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.
“Based on what we’ve seen, we believe that title agents are likely to face increased scrutiny regarding their business practices, policies and procedures,” Riley said. “It’s imperative for title agents to begin preparing for potential examinations by the CFPB and audits by mortgage lenders and mortgage servicers. Title agents should begin to work with their compliance attorneys to determine exactly what next steps should be taken before they are behind a curve that will be extremely hard to get around.”

Lender Liability Not New

While the CFPB memo has caused new concern, lender liability for the acts of its service providers is nothing new. In 2001, the Office of the Comptroller of the Currency (OCC) issued guidance to national banks on managing the risks that may arise from their business relationships with third parties.

The OCC guidance says a bank’s use of third parties does not diminish its responsibility “to ensure that the third-party activity is conducted in a safe and sound manner and in compliance with applicable laws.” Additionally, Fannie Mae and Freddie Mac in its seller/servicer guidelines indicate the action or inaction of a third party constitutes “the lender’s breach of a selling warranty.”

While lenders face increased regulatory scrutiny, Michelle Korsmo, ALTA’s CEO, said there are no specific requirement or government action that is driving lenders to impose these new requirements. She said the CFPB published the memo to remind banks that they do not transfer liability for compliance with federal consumer financial law to avoid consumer harm when they contract with a service provider to conduct business on their behalf. This reminder was consistent with regulations in place for large national banks, according to Korsmo.

To highlight this, the Federal Deposit Insurance Corp. (FDIC) issued guidance in 2006 raising the awareness of third-party arrangements. The FDIC said that third-parties can help institutions attain strategic objectives, but also present risks.

“Failure to manage these risks can expose a financial institution to regulatory action, financial loss, litigation, and reputational damage,” the FDIC’s guidance said. The FDIC encouraged financial institutions to recognize risks and implement an effective risk management strategy.

Meanwhile, the CFPB has made it clear that banks must ensure that consumers are not harmed, specifically if there is a violation of federal consumer law. Federal consumer law is defined in Dodd-Frank and includes RESPA, TILA and Gramm-Leach-Bliley, among others. From the CFPB’s perspective, lenders can prevent consumers from being harmed by knowing who they do business with.

“One of the problems we face right now is that we don’t know what the final regulations will look like,” Pellegrini said. “But it’s important for title companies and settlement service providers to understand the demands being put on lenders and to be proactive and be aware of how the industry will operate going forward.”

Vetting Companies Popping Up

An outcome of this has been the creation of settlement agent vetting companies. Settlement agents are receiving letters from their lender clients—mainly warehouse lenders—indicating they must be vetted by these third-party companies in order to continue closing loans for them. Warehouse lenders provide a short-term revolving line of credit to a mortgage banking company to fund the closing of mortgages from the closing table to sale in the secondary market.

While the CFPB’s bulletin is one of many demands on lenders, Korsmo said it is important to note that the document does not require any specific practice or vetting program, nor does it set a specific timeframe for lenders to start a vetting program. ALTA encourages members to reach out to lender clients and learn what they need to meet regulatory requirements.

“It’s crucial that you talk to your lenders to understand these demands and how you can work with them to meet their needs,” Korsmo said.

ALTA will continue to examine the increased regulatory demands on lenders. In coming articles, ALTA will examine:
  • How title agencies and settlement service providers are responding to requests from third-party vetting companies
  • Solutions ALTA is working on to help meet lender demands



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