It did not take long after the Silicon Valley Bank failure for politicians in Washington to rush to the next available microphone and lament the “loosening of bank regulations”. Instinctively the finger pointing began, and in many quarters ended up in the direction of the prior administration’s policy to generally roll back stringent business regulations and allow free market decisions to govern various industries. Chief among the complainants (no pun intended) was Sen Elizabeth Warren, who emerged out of the 2008 crisis as an architect and advocate for the Wall Street Reform Act and the creation of the vaunted Consumer Financial Protection Bureau ( CFPB), which she briefly directed. Just yesterday in DC’s The Hill publication, Sen Warren was reported as blaming the the collapse of Silicon Valley Bank on Republicans in Congress, which in 2018 helped pass a law to ease bank regulations put in place following the 2008 financial crisis. “No one should be mistaken about what unfolded over the past few days in the U.S. banking system: These recent bank failures are the direct result of leaders in Washington weakening the financial rules,” Warren is quoted as saying. According to The Hill piece, Warren, who voted against the 2018 bank deregulation bill, said that the crises would have been avoided if the banks were required to hold more liquid assets because the bill exempted banks with less than $250 billion in assets from rigorous Fed stress tests. Warren and other Democrats say the old rules could have caught the issues at SVB sooner. Given that politicians generally “never let a crisis go to waste,” many now suspect that the banking industry is about to be slammed with heightened regulatory scrutiny, tighter operational rules, more audits and exams, and larger and very public fines, penalties and consent orders. What does this mean for independent mortgage bankers (IMBs)? It means that they have to get back to the compliance mindset they were frightened into adopting between 2008 and 2018, and before the bottoming out of interest rates led everyone to believe that easy money was here to stay and that self-regulation meant hiring more loan officers. Keep those risk management officers and compliance directors close by folks, we are all in for a bumpy ride on the regulatory

We have noticed that in Massachusetts, insurance carriers providing attorney errors and omissions coverage have been quietly adding a new exclusion to their new and renewal policies.  This exclusion is known as the “Disbursement of Funds” exclusion, and it creates enhanced risk for lenders in that state in the event an attorney fails to properly disburse funds.  Any “negligence” in this regard will not be covered as it had been traditionally in the past.

The exclusion reads as follows:

“The following acts are EXCLUDED from coverage under this policy: the disbursement or transfer of funds related to (a) the deposit of a counterfeit check or a check with insufficient funds; (b) the lack of a written verification from the issuing bank that the funds are available and valid, (c) a fraudulent scheme, or (d) the failure of any funds reaching the proper party or the intended recipient, for any reason.”

In a discussion with a Massachusetts agent we learned that some insurers are doing this because (i) the cost of wire fraud is becoming unbearable for them and (ii) they want to push attorneys to pay for cyber liability coverage which would help cover some (but not all) of the risk now being excluded.  Cyber coverage is not mandated for attorneys in Massachusetts.

The problem for lenders is that this new exclusion means that there is NO COVERAGE they can attach for reimbursement for a claim where an attorney disburses funds before a deposited check clears (which occurs far too often) or where an attorney fails to follow the closing instructions and disburses the proceeds to the wrong party or in the wrong amount.  Although these acts/omissions rise to the level of negligence, with this new exclusion there will be no coverage.

At Secure Insight we are encouraging attorneys in Massachusetts whom we monitor to acquire cyber liability coverage and also to certify to the adoption of internal policies and practices avoiding the risks inherent in the excluded matters.

As always, it is critical to keep abreast of all changes in all matters which may affect your mortgage lending business.  At Secure Insight we are watching for you, 24-7, 365 days a year to help prevent losses from title and closing fraud.

Stay vigilant and stay clear of fraud!