Editor's note: This select print feature originally appeared in the February 2016 edition of DS News magazine.
By Lawrence Zielke
Default service law firms rely on title agencies to provide many services as they process files; as such it has become more common for them to have an affiliated REO Title Agency. The law firms have been experiencing an increase in regulatory requirements for several years. Now we see that increase in regulation on the title agency side as well.
Last year brought many changes to the title industry with the inception of the TILA-RESPA Integrated Disclosure (“TRID”) rule and the requirement for Best Practices. Title agencies spent much time in recent years developing and implementing the 7 pillars of the ALTA Best Practice Standards, as well as training on the new TRID guidelines. The Best Practices operate as a tool to assist title agencies in documenting their policies and procedures. Title companies have been subject to regulation at both the state and federal levels for decades. This regulatory activity has been spotty, inconsistent, controversial and occasionally overzealous. This current round of increased federal regulation on title activities is conscious, concerted and committed. It will help manage risk and protect reputation, but compliance requires time, effort and resources.
The Title Industry, along with its lender and realtor colleagues, are adjusting to the new TRID rules that the Consumer Financial Protection Board (“CFPB”) placed into effect on October 3, 2015. The purpose of TRID was to improve the way consumers received information about the mortgage loans at both the application stage and the closing stage. TRID required implementation of two new forms, the Loan Estimate and the Closing Disclosure (“CD”). The Loan Estimate is required to be delivered to the consumer three business days after their loan application. The CD is required to be received by the consumer three business days prior to the closing. The CD combines the HUD-1 Settlement Statement and the Final Truth-in-Lending disclosure and was designed to provide disclosures to consumers in an effort to boost understanding.
The new rules caused a slow October for many title agencies. Lenders continued implementation of the necessary software upgrades required to accommodate the new CD form. The industry seemed to breathe a sigh of relief when the CFPB delayed the effective date of the CD forms approximately two months due to the technical difficulties the lenders were experiencing. The CFPB attributed the delay to a technical regulatory notification issue for the delay, but clearly the industry was not ready in August when they initially planned to launch. TRID regulations have extended loan-closing times by at least seven days, and it is prudent for everyone involved in a non-cash transaction to assume it will now take an additional 10 days to close a transaction.
As with most title agencies, we required our staff to attend classes and webinars on the TRID rules and forms. Our closers work closely with Lenders on a CD worksheet to ensure the costs associated with the closing are accurately inputted by the lenders prior to drafting the final CD form. Title Agents must also be careful about lenders inserting indemnification language in their closing instructions concerning the CD forms. The CFPB clearly delineated that the burden of accuracy falls on the lender, not the title agency. Nevertheless, this has not stopped some lenders from attempting to transfer liability to the title agent. The underwriters have clearly instructed all agents “not to sign or approve closing instructions with indemnification language.”
No matter what industry you are in, the risk of fraud is always present. Fraud is one of the greatest ongoing challenges to title agencies and underwriters. Developments in technology help manage the problem, but also afford new opportunities for fraudulent activity. Our title agency represents two of the national title insurance underwriters. Underwriter-issued “Fraud Alerts” have become more frequent and more alarming. According to Fidelity National Title Group, Wire Fraud is rampant nationally and an epidemic. The result is large losses to some unfortunate and unsuspecting title agencies. As a result, we took steps to ensure we had appropriate fire walls and quality control in place to prevent cyber threats and wire fraud. This included programs which provide a defense against malware and other cyber threats, such as phishing emails with embedded links and other such nefarious activity. It should also be mentioned that standard errors and omissions coverage, including cyber policies, do not protect against such theft. Be sure to talk to your business insurance agent to obtain the necessary recovery protections and/or endorsements to coverage.
Through this process we learned where fraud prevention and the ATLA Best Practices intersect. Title agents must be proactive in utilizing the appropriate escrow procedures set forth in Pillar 2 of the Best Practices. Email, Fax and telephone instructions are not an entirely secure way of communication. Best Practices require that wire and disbursement instructions received via email must be confirmed by telephone at a known or individually confirmed telephone number and not only the telephone number at the bottom of the email. Be on guard for new, revised or altered bank wire instructions. Wire instructions seldom change. Also, be sure to block all outgoing international wires from the escrow account at your bank, if possible, or at the very least implement a system to flag them.
First American recently reported an example of attempted wire fraud in Texas. The buyer was to bring in over $1.5 million in cash to close. Shortly before closing the buyer received an email which appeared to be from the escrow officer. This email listed the file number and property address in the caption. Unlike many fraudulent messages, it was well worded, informing the buyer that because of our “tax policy” involving wires over a million dollars, the buyer would be receiving new wire instructions, informing him it was company policy in such cases to use an “international account,” and if there are any questions to respond to the escrow officer via a Gmail account. Fortunately, this buyer was accustomed to dealing with First American on a regular basis, called the escrow officer directly and the fraud was defeated.
Positive Pay is an automated fraud detection tool offered by the Cash Management Department of most banks. Simply stated Positive Pay matches the account number, check number and dollar amount of each check presented for payment against a list of checks presented, authorized and issued by the title company. It is a tool which can be utilized to block payments of forged checks. Positive Pay must be monitored daily to insure only authorized checks can be drawn against your escrow account. Our title agency has successfully used Positive Pay to defeat a forgery scheme preventing forged checks from draining our accounts.
The above examples are but a few of the proactive measures which may be taken to prevent fraud, forgery and theft of escrow funds. We work closely with our underwriters to implement and enhance fraud prevention. The procedures and policies must not only be documented in your Best Practices, but must also be implemented in the daily operations of your Agency.
Never have the risks been greater than they are today. The good news is that law firms and REO title agencies are better trained, more prepared and ready to take on bigger challenges.