SVB Failure Starts Aggressive Regulation Talk in Washington, IMBs Take NoteCoronavirus Creates Potential Recording Delays that May Impact Mortgage Closings

March 17, 2020
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

With the latest news that towns, cities, counties and in some places entire states are shutting down as a precautionary measure to prevent the spread of COVID-19, concern is rising that the inability to record notices of settlement, deeds, mortgages and mortgage satisfactions will upend the closing industry.

In order to successfully conclude the closing of a mortgage transaction several important things must occur. Loan documents must be executed and in some cases notarized. Prior liens must be extinguished and discharged of record. New ownership instruments (deeds and leases) must be properly recorded. In addition, the new mortgage instruments must also be recorded. The timing of recordings is also critical to the proper structure of legal rights in and against a property.

In most places in the United States today these key transfer and lien documents must be submitted manually and then converted to digital files allowing for property history records to be catalogued and then reported publicly. If an office is closed for business due to the health crisis this may mean that these recordings will not take place or may be significantly delayed.

Lender’s rely on these public records, as do title agents and their title insurer partners, to provide an accurate report of the ownership and debt condition of a property in the mortgage evaluation and closing process. Lenders also rely upon title insurance policies to issue within a reasonable time following closing (in some states at the closing table) in order to complete the loan file and prepare it for sale into the secondary market.
Potential chaos in recording also raises the level of risk from closing and title fraud, as the inability of lenders, and title agents to know the current status of a property invites criminals to hide liens, manipulate ownership records, and potentially close more than one loan on the same property through multiple transactions.

Diligence throughout the mortgage process has become customary today, with more lenders than ever adopting comprehensive closing fraud processes backed by effective technology tools to root out potential criminals. As this health crisis extends throughout the United States diligence in financial transactions must increase, especially in the face of rising refinance volume due to low rates and the emerging Spring purchase market.

If you would like to know how Secure Insight can assist you in managing closing table risk, please give us a call for a free demo.

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