With regulatory pressures and procedural scrutiny generally on the rise in the last few years, there has been considerable discussion within the lending community about the best way to regulate and certify title insurance agencies. Lenders are understandably motivated to ensure that their funds are secure and accounted for. Moreover, they have become increasingly aware of and concerned by issues related to information security. Additionally, the Consumer Financial Protection Bureau’s mandate requiring lenders to conduct “thorough due diligence” to ensure that service providers comply with Federal consumer finance laws has injected an additional sense of urgency.
Partly in response to that regulatory discussion, and partly in order to establish standard industry practices, the American Land Title Association has released a formalized set of best practices for its members. These best practices are in place to help member title companies highlight policies and procedures the industry relies on to protect lenders and consumers and ensure a compliant real estate closing, the trade group says.While most of these guidelines have been followed by credible title insurance companies and agencies for some time, the fact that they are now codified impacts all professionals who rely upon title companies—lenders in particular.
At least in part, these best practices are designed to provide lenders with critical information about their title vendors. Understanding what these practices are and what they mean for lenders and their title partners is essential for any responsible lender.
While ALTA's formal document goes into more detail about each, they essentially boil down to the following instructions:
- Maintain all government licenses necessary to operate your business;
- Establish accounting procedures and controls that allow for effective daily reconciliation of all escrow trust accounts;
- Maintain privacy and information security policies and controls, which assure the protection of all non-public personal information in your possession;
- Adopt internal procedures that assure that all settlement documents are recorded as required in a timely fashion, and that the correct premiums are charged for the title insurance policies that you issue;
- Adopt procedures that guarantee the prompt issuance of all title insurance policies which you are obligated to provide;
- Obtain sufficient professional liability and employee theft insurance; and
- Maintain written procedures for resolving consumer complaints.
On the surface, the benefits for lenders in terms of additional clarity and certainty seem clear: assurance that the companies you work with are certified and maintain adequate insurance; that they utilize approved accounting procedures; that private information you give them is protected; that documents are recorded as required; and that policies are paid, written and issued correctly and in a timely manner. And, in cases where a lender or borrower does have a complaint, it is obviously gratifying to know that there is a process in place to address those concerns.
On another level, however, the standardization of the certification process is in and of itself a significant step forward. At a time when lenders are struggling with questions of how to certify, monitor and maintain their vendor network, the establishment of these practices will promote consistency and formal standardization that will help eliminate uncertainty and costly inefficiencies.
Complications and Ramifications
As is to be expected with such an ambitious initiative, there are bound to be implementation issues in the near term. It will take significant time and energy on the part of title insurers to drill down into each of these items and make certain that they are effectively implemented. While most reputable companies were already following these guidelines at some level, formalizing their practice in a verifiable manner is a much more significant proposition.
Among the seven items on the list of ALTA best practices, the second and third bullets—regarding accounting procedures and controls, and information security policies and controls—are almost certain to be the most complex and demanding to implement effectively. Reconciling trust accounts daily is a task that must be performed electronically, and that will be a challenge, especially for smaller companies that may not have the resources readily available to perform that process.
Regarding privacy concerns and information security protocols, the procedural issues and logistics are complex enough and the technology to implement them is likely to be even more of a challenge especially for companies that don’t have a full-time IT department. It is no coincidence that these two challenging items are perhaps the most important issues to the lending community and will likely form the centerpiece of any future federal or state regulation.
Lenders should remember that, while conventional wisdom holds that these standards and practices will ultimately be enforced and reinforced via a third-party audit/review system, there is no current auditing mechanism in place. ALTA has developed a self-assessment that companies can use to determine where they are in the implementation process, but lenders would be wise to maintain clear and constructive lines of communication with their title vendors with respect to their implementation status.
In a more general sense, the ongoing rollout of these best practices means that lenders need to start thinking very hard about how they want to structure their vendor network, and what their expectations will be with respect to these new standards. At the very least, lenders should ensure that their title partners are actively working toward these standards.
While any future legislation and/or more formal regulation might not be an exact match with the ALTA best practices, there will certainly be significant overlap. The last thing that any lender wants is to find itself in a situation where they are exposed to additional liability or their vendor network is compromised because of inconsistency or noncompliance. The time to be thinking about this is now: the tough conversations and thoughtful strategic planning of today will build a strong foundation for a future of robust compliance and consistent excellence across the title settlement service spectrum.
William Robinson is president of Attorneys Title Agency, a Farmington Hills, Mich.-based title insurance agency with more than 30 offices throughout Michigan, Ohio and Indiana. Bill is available at firstname.lastname@example.org.