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

Even the best laid plans and the most stringent controls cannot prevent every fraud loss.  When a loss does occur, where do you turn to mitigate your damages? Insurance and fidelity bonds provide a measure of recovery when losses occur; CPLs are not insurance policies as we have covered before and are not included in this post for that reason.

Interestingly there is no national mandate, rule, law or other directive which requires all settlement agents to obtain and maintain insurance.  A few states have errors and omission insurance requirements and even more have very limited fidelity bond requirements, but that’s it.  Most attorneys in the United States have no obligation to purchase insurance! This means that a lender can never under any circumstances simply assume the company or individual handling its money and documents has an insurance or a bond to covers mistakes or bad acts.

In addition to who is covered, it is important to understand what is covered and for how long.  The bond and insurance worlds are unique unto themselves. Agents for insurers offer various policies and products which are filled with jargon and terminology foreign to most people.  Policy coverage clauses are offset by limitations and outright omissions which, if you are not trained to decipher, may mean when an event occurs you have no legal right to file a claim and receive a recovery.

All errors and omissions and malpractice policies are “claims-based” meaning that a policy must be in effect when a claim is made, and prior coverage later canceled or suspended offers no recourse.  Even more daunting for lenders who try to manage insurance verification is the typical practice of  financing premium payments.  This means that coverage can be bound on an initial deposit, but later withdrawn and canceled when a payment is missed.  Unless a lender is tracking payments, there is no way to know if coverage remains in effect.

Recently insurers have been making significant and material adjustments to insurance policies, carving out previously covered areas or clarifying certain exclusions to omit liability for losses from wire fraud, email hacking and cyber fraud, and even any lender representation that would involve following closing instructions as a fiduciary of the bank and not just a representative of the borrower.  For example, we have seen insurers in Massachusetts carving out from coverage wire fraud incidents in policies covering real estate attorneys.

Another phenomenon that has come to light, because insurers are charging higher premiums for anyone acting as a settlement agent for a lender, are attorneys notifying banks that in any real estate transaction they will not act for the bank, will not follow closing instructions and will restrict all of their responsibilities to the borrower aspects of the closing.  We were obliged to notify a lender just recently that an attorney to whom they were going to wire funds, send the closing package, and bind to written closing instructions, was refusing any duty to act on their behalf at the closing table.

Because the CPL offers little to no relief when a lender is victimized by fraud at a closing, it is imperative that lenders use a tool or develop a process internally that obtains, evaluates, and manages insurance and bond coverage for all settlement agents to whom it delivers a funding wire and closing package.

At Secure Insight we verify insurance and bonds at the source of issuance, track payments and cancellations, and evaluate coverage to uncover unusual carve-outs, limitations and omissions from coverage.  This is only one of the reasons that for nearly 10 years we have successfully managed millions of loan closings without a lender loss.