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   ARTICLE   |   From Scotsman Guide Residential Edition   |   November 2016

Closing Agents and Murphy’s Law

If your lending partners aren’t wary, things could go terribly wrong at the closing table

Closing Agents and Murphy’s Law

Understanding the risks vendors present not only to your business, but to borrowers, has been at the core of the recent focus on vendor management by the Consumer Financial Protection Bureau (CFPB) and other regulatory agencies. The CFPB has made it clear that it will hold lenders accountable for any harm that borrowers encounter as the result of mistakes made by vendors.

Based on the definition of a third-party service provider, closing agents are considered vendors. Not only that, but by most vendor-risk definitions, closing agents pose at least moderate risk because they receive nonpublic personal information (NPI) about borrowers. If anything goes wrong at closing, the repercussions could be felt all the way back to the mortgage originator. And, as Murphy’s Law states, “Anything that can go wrong, will go wrong … sooner or later.”

The CFPB, along with banking and other regulators now require that all lenders have a vendor-management program to ensure that they take their responsibility for monitoring vendors seriously. When it comes to closing agents, neither the closing protection letter (CPL), where that device is allowable by law, or the typical errors and omissions (E&O) insurance policy cover privacy violations. So if something does go wrong, lenders have no recourse back to the closing agent unless they have a confidentiality agreement or some other tool to provide at least some recourse.

Yet, despite these facts and real liabilities, many lenders are not managing closing agents. Surprisingly, a large number still seem to rely on the CPL and, possibly, proof that an E&O insurance policy is in effect to cover their management requirements. Many others have little to no awareness of a particular closing agent’s ability to protect consumers’ private data or even whether the agent maintains a current license or if the agent has had any material regulatory issues with a state or federal authority.

Real risks

When you think about it, closing agents pose real risks for lenders and originators in a couple of ways. First, lenders are wiring mortgage proceeds to these agents, exposing the lender to huge potential losses if there is fraud associated with the wiring instructions. As a result, warehouse banks and prudent lenders should make certain their closing agents have gone through some qualification process before remitting mortgage proceeds. Good wiring controls also create a process to verify any change in established wiring instructions with a named person of authority.

Second, the closing package the lender sends to the closing agent contains the original loan application, which includes sensitive borrower information, such as social security numbers and various bank and credit account numbers. Historically, lenders have not done much due diligence to confirm that closing agents are qualified or able to protect NPI data, yet the CFPB has made it clear that lenders are the responsible party. The risk to originators lies not in losing money, but in losing future business from disgruntled clients, so it make sense for them to work with lenders who have a proven vendor-management policy.

Because of all of these issues, lenders need to make certain they have clear recourse for mishandled NPI and closing errors, and that the closing agents they use operate in a compliant manner, have adequate insurance, properly handle NPI and follow the best practices determined by the American Land Title Association (ALTA).

ALTA’s Best Practices Framework provides a level of policy and process that serves to enable consistent compliance with all applicable laws and regulations. It also supports more timely delivery of the title policy and recorded documents. In addition, closing agents who follow the framework impart fewer compliance risks to lenders.

Lenders have little input on the initial selection of the closing agent,
so they have been reluctant to push back on the borrower’s choice.

Effective closing-agent management programs include an ALTA Best Practice Framework element in the form of a certification and even possibly a requirement for a third-party report. The ALTA Best Practices Framework includes the following seven core pillars:

  • Licensing: Establish and maintain current license(s) as required to conduct the business of title insurance and settlement services;
  • Escrow trust accounting: Adopt and maintain appropriate written procedures and controls for escrow trust accounts, allowing for electronic verification of reconciliation; Protecting NPI: Adopt and maintain a written privacy and information-security program to protect nonpublic personal information as required by local, state and federal law;
  • Protecting NPI: Adopt and maintain a written privacy and information-security program to protect nonpublic personal information as required by local, state and federal law;
  • Settlement processes: Adopt standard real estate settlement procedures and policies that help ensure compliance with federal and state consumer financial laws as applicable to the settlement process;
  • Policy production: Adopt and maintain written procedures related to title-policy production, delivery, reporting and premium remittance;
  • Insurance coverage: Maintain appropriate professional liability insurance and fidelity coverage; and
  • Consumer complaints: Adopt and maintain written procedures for resolving consumer complaints.

Management headaches

Effective closing-agent management programs have more unique elements than the typical vendor-management program, where vendors respond to often lengthy and complex questionnaires. While compliance with ALTA’s Best Practices Framework simplifies risk assessment on one hand, the large number of closing agents coupled with similarly large numbers of loan-production personnel who must be able to view closing-agent information and documentation requires setting up appropriate processes and tools that can support mortgage production.

It’s easy to see why lenders have been slow to implement closing-agent management. Lenders with large footprints and multiple channels of business likely have a thousand or more closing agents. In many cases, and certainly for those involving home-purchase transactions — rather than refinancing, where the lender typically pays the closing costs — lenders have little input on the initial selection of the closing agent, so they have been reluctant to push back on the borrower’s choice.

Now, however, with their necks on the line if there is a breach of NPI by a closing agent, lenders are realizing the importance of understanding the closing agent’s policies and procedures as well as the infrastructure needed to protect themselves in case of closing agent malfeasance. Closing agents now need to be appropriately qualified before closing.

Should an issue occur with a closing agent, it’s important to recognize that the sheer size of the loan transaction may require a lender to invest substantial capital and undergo a lengthy and costly legal process to recover a loss realized by a closing agent’s actions. Even more worrisome, when issues do arise, they frequently involve multiple transactions.

•  •  •

Managing CFPB compliance requires having processes and tools in place to mitigate examination risks and penalties when consumer harm is caused by a vendor. Closing agents are unique vendors with unique risks. This brings to mind a real estate version of Murphy’s Law when it comes to closing agents: “At least one check will be ‘lost in the mail’ every month.”

The important point here is that when something does go wrong, it is generally an expensive matter. Good risk management can effectively reduce the probability of Murphy’s Law hitting on your watch, and it can pay for itself by helping to stave off significant fines and penalties while improving performance. 


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