From the Frontlines: Georgia Law Firm Taps CPA Firm to Verify Best Practice Compliance
|February 6, 2014|
By Kim McConkey, CPA
Private enterprise in the United States has a rich history of self-regulation. The best example can be seen in the success of the Motion Picture Association of America (MPAA), which has voluntarily assigned ratings to films since 1968. One of the most important lessons that can be learned from the self-regulatory nature of the MPAA rating system is that it keeps legislation at bay. Film ratings are confusing among viewers as to what they indicate and many people do not even realize film producers have no legal obligation to opt into the system.
The time for self-regulation has now come for the title and real estate settlement industry. A bulletin released in April 2012 reminded mortgage lenders of their responsibility to adopt an effective process for managing the risks of its service provider relationships and should take action that these business arrangements do not present unwarranted risks to consumers. Settlement attorneys and title companies are considered third-party service providers. Therefore, all lenders should have strong motivation to work exclusively with attorneys and title companies that are compliant with federal consumer financial laws and the practices that help protect against fraud.
Companies that adopt the American Land Title Association’s (ALTA) Best Practices now, and begin to document compliance with federal consumer financial protection laws and regulations, can enhance their market share and distinguish themselves from competitors. In today’s post-financial-meltdown, banks and financial institutions are placing greater emphasis on relationships with compliant vendors. It is anticipated mortgage lenders are only going to do business with companies that are in compliance. If a mortgage lender works with a closing attorney or title company that is already compliant, that lender minimizes its risks of non-compliance with the regulatory requirements.
Adhering to the best practices spelled out by ALTA is a great way for closing attorneys and title companies to assure lenders that they do not pose a risk to continued compliance. Much like MPAA ratings, adopting and adhering to ALTA’s Best Practices is completely voluntary. However, attorneys and title companies that do not obtain proof of compliance with these best practices will likely find themselves without any mortgage lenders to do business with, just as very few movie theaters are willing to screen films that have not been rated by the MPAA. That is why McCurdy & Candler LLC, a Georgia-headquartered real estate law firm decided to become compliant with federal consumer financial protection laws.
“We realized very early on that not getting ahead of these regulations would significantly impact our business,” said Michael Dugan, partner with McCurdy & Candler. “The worst case scenario is that a title company or law firm waits and starts losing business because retail mortgage lenders won’t work with them.”
Dugan continued, ”Certification that we comply with ALTA Best Practices and CFPB laws helps minimize any risk to our real estate settlement services clients and it reinforces that we understand the rigorous regulations that impact our clients’ businesses. With so much on the line, it made sense to engage a CPA firm who has professional standards and credibility within the financial services industry.”
Obtaining Accreditation, an Agreed Upon Procedures Compliance Report
The good news for title companies and attorneys is that from a purely operational standpoint, many of them are already in compliance with ALTA’s Best Practices. What’s missing may be formal documentation of compliant practices and procedures. HA&W found that McCurdy & Candler was ahead of many of its peers by already documenting compliance. Consequently, HA&W had an assessment period history to test compliance.
Generally speaking, the majority of actions that must be taken to prove compliance is a matter of documenting the policies and procedures that are already being practiced and to ensure that these policies and procedures are universally followed. At the end of the day, your mortgage lenders need to be able to show the CFPB how they are managing the risk of their third-party service provider relationships. At this point in time, the compliance report ALTA advocates is a great way to accomplish this goal.
A concern facing the industry has been what is considered the definition of proof. Though ALTA provides straightforward guidelines for how to achieve compliance with its Best Practices, the CFPB does not have a standardized method for verifying compliance. Instead, the burden of proof falls under the self-regulatory umbrella of what each lender deems acceptable. Fortunately, ALTA issued a Best Practices Framework to assist in becoming compliant with federal consumer financial protection laws. The framework includes a certification package that can be used by title professionals to warrant and attest to lenders that they have implemented ALTA’s Best Practices. Mortgage lenders are ultimately responsible, and therefore, will seek assurance that its service providers are compliant.
“The biggest question that we encountered was determining the best way to get a report that verifies compliance. There’s a lot of ambiguity out there on the best way to show compliance,” explained Dugan. “It made perfect sense to work with a CPA firm because this process is similar to the requirement of audit work, which they are already experts in. We chose Habif, Arogeti, & Wynne because of the firm’s reputation in our industry and are well known to mortgage bankers. Compliance verification from a CPA firm already trusted by financial institutions means more lenders will accept its agreed upon procedures attestation report.” Proper Preparation Achieves Desired Results - a Compliance Report with no Findings; i.e. a Passing Grade
It’s critical that a company seeking to follow ALTA Best Practices take the time to understand fully the type of report it will receive and confirm that the process to do so is in accordance with ALTA Best Practice Assessment Procedures. This ensures that the report will likely satisfy federal consumer financial protection laws.
The initial planning meeting with McCurdy & Candler was critical to the success of the engagement because it was where the existing level of compliance was determined. HA&W found that McCurdy & Candler had written policies and procedures that aligned with ALTA’s Best Practices and was compliant. In addition, the law firm was able to document that it was following them for a period of time. Before a compliance verification engagement can begin, the companies need to provide two things: ALTA compliant written policies and procedures, and documentation that those policies and procedures have been followed for an agreed upon period of time. ALTA’s Best Practices call for written guidelines that govern business activities and list procedures for the settlement of residential mortgages. Many attorneys and title companies follow these guidelines every day, but have never taken the time to spell them out in a written document.
“Because of our work with real estate mortgages, we already have established procedures for everything called for by ALTA,” Dugan said. “All that was needed was to modify them in a formally written document.”
Once policies and procedures are written, HA&W requires documentation that proves the guidelines have been consistently followed. Often in busy offices, documentation can be among the first things to fall by the wayside. The importance of providing complete and accurate documentation to demonstrate compliance with Best Practices cannot be overstated. Any closing attorney or title company that knows it has not always documented every transaction fully should start doing so immediately and build a database of at least two or three months of properly documented transactions before undergoing compliance verification.
The key to making this process smooth and reducing the potential for “documentation fatigue” by your employees is to have a clear understanding of the most critical documents that must be provided. For example, expect to provide documents such as proof of state licensure, bar association accreditation, security measurements of non-public personal information, and financial documentation that shows agreement between trust ledgers and reconciled escrow bank account balances. McCurdy & Candler made “excellent record keeping” a routine part of its daily practice, so this process went quite smoothly for them, and as a result, the firm was able to have a significantly reduced timeframe for this part of the process. Companies that do not have histories of transaction documentation should begin assessing their records immediately. The amount of time to complete this depends on a company’s size and quality of its record keeping.
After the closing attorney or title company has documented its guidelines and assembled a history of documented transactions, the field work portion of the attestation or compliance engagement can start. This process is quite straightforward and begins with providing copies of written guidelines and procedures as well as specific transaction documentation as requested. The team will review these documents carefully and, if necessary to expedite the process, may request an on-site visit to observe firsthand how the guidelines are followed in an actual office setting. It is in this phase that deficiencies may be discovered and suggestions for mitigating measures are discussed.
Becoming compliant with federal consumer protection law is a necessity. Getting there, though, takes time and patience because many areas of the regulations are murky. The CFPB continues to encourage the industry to develop tools that meet the CFPB’s expectations of protecting consumers in a financial transaction.
“Looking at next year, it’s pretty clear that residential mortgage lenders will be less likely to do business with a closing attorney or title company that does not have an ALTA-type compliance report or equivalent accreditation report,” Dugan said. “Some lenders may want to conduct their own audits, and that’s why having a reputable report is so important. When lenders trust your report, there’s a lot less red tape involved in working with them.”
According to HA&W, here are some activities that companies can start doing today: