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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2013

Vendor Vetting 101

Mortgage bankers and lenders must comply with service-provider verification

Ever since the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010, many within the settlement-services industry have been waiting for the other shoe to drop. These professionals knew that further changes surely were coming, but no one knew exactly what those changes would be.

Although the practical impact Dodd-Frank would have on daily business operations initially was unclear, a more complete picture is now coming into focus as Dodd-Frank undergoes updates and the Consumer Financial Protection Bureau (CFPB) issues concrete new rules and compliance deadlines. With the CFPB’s publication of Bulletin 2012-03, the question of compliance among lenders’ third-party service providers has moved to the forefront of industry discourse.

In brief, the bulletin explains the CFPB’s expectation for supervised banks and nonbanks to “oversee their business relationships with service providers in a manner that ensures compliance with federal consumer financial law, which is designed to protect the interests of consumers and avoid consumer harm.” The bulletin goes on to say that this emphasis will be reflected closely by its enforcement authority.

The CFPB, which doesn’t have the authority to directly regulate title- insurance agencies, essentially has now taken a back-door route to regulation by shifting accountability upward. In other words, mortgage bankers and lenders now will have to answer for the policies and behavior of their closing agents, title agents, notaries, real estate agents and attorneys, among other vendors. Gone are the days when lenders simply took their servicers at their word, assuming that their servicers met the requirements set out by all federal regulations.

This new requirement has created a novel problem within the mortgage industry. Title agencies and other servicers not only should be compliant, but also should be “vettable” to such a degree that they won’t scare away clients. After all, what good is being compliant if you can’t prove it easily?

For their part, mortgage bankers and lenders must find a way to go about vetting their service providers as effectively as possible. Ensuring compliance can be a costly and time-consuming exercise if it isn’t done efficiently, but a slipshod verification policy can be disastrous. An industry-wide best practice for vetting and verification may appear in the near future, but for now, many companies are scrambling to figure out the right way to adapt to these new requirements.

In the midst of this scramble, companies specifically dedicated to vetting procedures have begun cropping up to provide a solution to lenders that would prefer to outsource the verification process instead of handling it internally. Vetting companies charge settlement agents an annual fee to submit compliance documents that allow them to be included in a database of approved vendors that banks can then access. That way, lenders can rest assured that the partners they choose have met certain qualifications.

Although vetting companies can provide a quick fix for lenders that may prefer to have another organization do the legwork for them, some organizations in the industry object to the practice, claiming that vetting companies are merely profiting from a redundant service. In a recent white paper, the National Association of Independent Land Title Agents argued that vetting companies force title agents to buy into a pay-to-play system whose function is already fulfilled by the industry’s “appointment, licensing and audit procedures.” The association also suggested that vetting companies themselves may be violating Section 8 of the Real Estate Settlement Procedures Act (RESPA), which outlaws kickbacks.

Another question raised by the existence of vetting companies concerns the value of the endorsements that these vetting companies make. There is more to compliance than just documents. The issues of information security and the escrow process are vital to the protection of consumers, and the question of kickbacks are central to RESPA, a piece of legislation that Dodd-Frank enforces with rigor. A list of policies and procedures often cannot adequately address these issues, but a full CFPB audit would quickly uncover negligence or fraud.

Of course, outside vetting companies are not the only solution to this situation. Mortgage bankers and lenders can have their compliance departments or vendor-management departments take steps to ensure the full compliance of their service providers. Title agencies and other service providers, on the other hand, can undergo audits that not only inform them of any weaknesses in their own compliance programs, but also prove their levels of compliance in a verifiable way. Either solution helps meet the CFPB’s requirements.

The American Land Title Association seemingly hopes to sidestep the need for external vetting with its recent publication of “Title Insurance and Settlement Company Best Practices,” a document available online that lists a set of best practices title agents can follow to remain compliant and ensure that their agency protects lenders and consumers alike. These best practices touch licensure, escrow software, security plans, liability insurance and fidelity coverage — among other topics — and many lenders and mortgage bankers may find this document just as helpful as their title-agent counterparts.

Time will tell how rigorously the CFPB will enforce the issues it lays out in Bulletin 2012-03 and what, if any, industry best practices will emerge to answer them. The ultimate goal of the regulations set forth by RESPA and Dodd-Frank is the protection of consumers, so servicers and lenders alike should focus on familiarizing themselves with and then meeting all compliance requirements. Some of the changes service providers will need to undergo may be initially disruptive, but these surely will be worth the difficulty to ensure long-term compliance.

In the meantime, mortgage bankers and lenders should have their compliance or vendor-relations department become intimately familiar with the newest regulations and create a strategic vetting policy that allows them to ensure complete compliance as easily as possible. That way, if and when the CFPB comes knocking on your door, you’ll be able to demonstrate that you’ve indeed performed the required due diligence. Whether you should rely on a third-party vetting company, have your own company perform the verification process or implement some combination of these two options is a matter that every mortgage organization will have to answer for itself. 


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