Although some would argue that governmental regulation stifles private enterprise, others see an opportunity. Case in point: the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in 2010 and created the Consumer Financial Protection Bureau (“CFPB”), which describes its mission as making financial markets work for ordinary American consumers. In April 2012, the CFPB issued a bulletin stating that it “expects supervised banks and non-banks to oversee their business relationships with service providers in a manner that ensures compliance with federal consumer financial law . . . .” The bulletin went on to state that the CFPB expected banks and financial institutions to conduct “due diligence” on service providers to ensure that they have adequate policies, procedures and internal controls in place to minimize the risk of fraud or deceptive or abusive practices. In this context, “service providers” includes title and escrow agents.
Thus, an opportunity was born: a third party undertaking this “vetting” process on behalf of financial institutions, for a fee, of course. And in this case, the fee is to be paid by those being vetted, i.e., escrow and title agents. Why? To be, or remain, on the approved list of service providers with whom lenders availing themselves of the vetting service do business. Secure Settlements, Inc. is one company which has offered to provide this “vetting” service on behalf of lenders. The company emphasizes that the April 2012 CFPB bulletin makes the vetting of service providers by lenders a “requirement.” As stated on its website: “Simply put – the need [for vetting] has caught up with the solution [its services].”
Industry representatives including the National Association of Independent Land Title Agents, are questioning whether such third party vetting companies are legal or necessary. One of the complaints leveled is that the vetting service is a “pay to play” system which may violate the anti-kickback provisions of RESPA. Representatives of title agents such as the Escrow Institute of California, have begun efforts to counter the adoption of third party vetting companies, and have questioned their tactics and characterization of what the CFPB bulletin requires.
The American Land Title Association, the trade association for the title industry, is developing a set of “best practices and procedures” for title agents, in the hope that standardizing and publicizing these “best practices” will create a mechanism the industry can use to assure lenders that the requirements of Dodd-Frank and CFPB are being met. By getting out in front and setting its own “best practices” standards, the industry hopes to demonstrate that it has adequate safeguards to protect consumers, and third party vetting is unnecessary.
At the same time, the National Association of Insurance Commissioners is developing a white paper addressing escrow theft in order to help regulators identify and combat such fraud. That white paper may also be helpful in terms of setting risk management standards for the industry, and those dealing with it.
Stay tuned for further developments.