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

Many lenders mistakenly believe that as long as they receive a closing protection letter (CPL) from a title agent or closing attorney then they have nothing to fear about a loss that may occur at the closing table.  These lenders may collect an agent’s insurance certificate or declaration page but take no steps to verify insurance is valid, paid and in effect.

There are serious negative consequences with this approach to risk management and loss mitigation.

I have covered the inadequacies of the CPL elsewhere and will not repeat them all today.  To summarize: its not insurance, it does not cover all risk (including cyber, general fraud, wire fraud) and it is aggressively defended when claims are made.  In addition, recovery under a CPL may be restricted if their is a bond or insurance policy available for offset and subrogation which makes verification of those items critical.

Agent’s are not universally required by all states to carry errors and omissions coverage or a fidelity bond so no lender can simply assume that everyone carries them. While no serious professional would operate without having some form of insurance protection, lender’s must inquire because no lender should do business with anyone who fails to carry reasonable coverage.  Quite frankly, no lender should agree to send a wire and loan documents to any professional who does not have insurance coverage sufficient to cover potential losses at a closing.  In today’s wire fraud environment the case for requiring cyber liability coverage (often not covered in traditional E&O) is also highly warranted.

Insurance verification can be a tricky process.  Simply collecting a certificate of insurance or declaration page is not enough.  Policy limits, policy restrictions, previous incident omissions and paid status (i.e. paid in full or financed) are key issues which must be addressed.  Furthermore proper verification cannot take place without an authorization from the agent and confirmation with the insurance office where the policy or bond was issued.

No risk management process is foolproof. No risk assessment tool is 100% accurate. No vendor warranty or guarantee is absolute.  Accordingly lenders must consider how they will manage insurance and bond verification and ensure they have a process in place so that when an event takes place, there will be a reliable source of recovery beyond a restrictive and very limited closing protection letter.

At Secure Insight we obtain digital authorizations from all closing agents allowing insurance and bonds to be verified.  Insurance and bonds are confirmed with the issuing office, payments verified and financed payments tracked.  Our agent risk reports set forth types of coverage, including cyber, and their coverage limits and expiration dates.  We took these steps from day one, way back in 2012, because our process was built in conjunction with risk advisors from Lloyds who understood well the need for comprehensive risk assessment to avoid losses.

In our world where reducing the risk of loss at the closing table is a  paramount concern, we understand that the CPL is not enough to offset and manage a loss event that could cost you hundreds of thousands of dollars and a hit on your reputation.