When the American Land Title Association first came out with its best practices statement in June 2013, it seemed like a win-win for the industry and lenders.
But as currently written these guidelines could drive the cost of doing business up to a point where smaller title agencies are driven out of business. The result could be less choice and higher costs for both lenders and consumers.
The best practices were developed as a result of the Consumer Financial Protection Bureau 2012 bulletin which stated lending institutions would be held liable not only for their own actions, but also for the actions of their vendors.
ALTA's best practices statement is a framework developed to assist lenders in satisfying their responsibility to manage third-party vendors. It is the title industry's attempt to help forthright lending institutions have one less thing to worry about as they navigate these heavily regulated waters.
The seven pillars that make up the best practices—including mandates related to licensing, escrow, privacy and security, settlement processes, policy production, insurance coverage and customer care—would both elevate the professionalism of the title industry and allow compliant providers an automatic "in" with lending institutions.
We've reached the Aug. 1 soft deadline for implementing these best practices. However, there are five unintended consequences with the statement:
• Confusion−While the best practices are uniform, interpretations for compliance are not. Title companies are implementing these guidelines in a variety of ways and lending institutions have no standard method from which to vet vendors. ALTA issued assessment procedures for lenders to use last July. However, they are suggestions. There are no set guidelines for how to vet title companies.
As a result, there is confusion on both sides of the fence, and many title companies concerned that they will not be able to compete for business without a set checklist used by all lending institutions.
• The effect on small title companies−A small title company cannot possibly meet the demands set forth in Best Practices. In fact, my firm Hillsboro Title Co. grew just to be able to sustain this industry change. We now have two people working full-time on best practices compliance. The smaller shops simply won't be able to afford to get into compliance and will be forced to close or merge with other companies.
While the larger title companies will have the resources to implement best practices, they will undoubtedly have to add compliance staff and as a result, adding more loan closing offices to offset the cost of the new hires. In addition, with small companies needing to shut their doors, larger companies will face an unparalleled opportunity for growth by acquisition.
• Less competition, less choice−As a result of the consequences explained above, there will be a surge of mergers and acquisitions in the title industry. And, as smaller title companies disappear or become acquired by larger companies, lending institutions and consumers will see their pool of title companies from which to choose shrink drastically.
• Higher costs−Compliance with best practices requires a significant influx of funds; as the cost of doing business increases, these costs will more than likely be passed along to the consumer.
• More lawsuits−With all of the money being spent to regulate, document, and verify, and all of the confusion surrounding the soft Best Practices compliance deadline, there will be an increase in litigation against lenders and title companies to take advantage of the wrinkles yet to be ironed out in discovery documentation.
ALTA's best practices will undoubtedly raise the bar for quality and professionalism in the title industry. However, with good, there is always some bad.
Many title companies will find themselves working "on their business" more than "in their business" and business development initiatives and profits may suffer. While the best practices protect consumers, promote quality service, and provide for ongoing employee education, the regulations are placing hefty burden on title companies across the country. The full effects of this industry game-changer will be interesting to watch.