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

In April 2022, Fannie Mae (FNMA) made industry news by publishing a decision that it would accept attorney opinion letters (AOL) in lieu of and as a suitable replacement for title insurance. Freddie Mac soon followed with a similar decision. The actions by these agencies were allegedly due to dissatisfaction by lenders and consumers with the value and cost of traditional title insurance policies.

The emergence of the AOL service and product has created waves in the title industry which has never had any real competition to its products in the past and has resulted in significant push back and objection by title insurers and their agents. This is understandable given ALTA reported title insurers earned $26.2 Billion in title insurance premiums in 2021.

Consideration of an industry monopoly in title insurance products has been the subject of Congressional hearings, academic analysis and industry platform debates for many decades. Yet to date the AOL has been the first real effort to adopt any alternative to either title insurance or the closing protection letter, which is not insurance but a form of warranty packaged and sold like insurance to consumers. Can the AOL become a widespread alternative and disrupt the industry? The jury is still out, and may it take a long time to deliver that verdict.

An attorney opinion letter is just that, a letter of opinion, following (presumably and hopefully) a thorough review of land records and public records searches, to determine ownership challenges, liens and so forth. Like any legal opinion, it must and does have limitations. In addition unlike a title insurance policy, a form of property and casualty product, which is issued, priced and governed (including a managed claims process) by government regulation, an AOL is a subjective formal opinion that if wrong provides little alternative but to initiate a lawsuit for damages. In addition, the opinion must be backed by an errors and omissions policy which itself will have limitations of coverage and damage limits per occurrence and per insured. Rather than create a simpler method of maintaining title risk it seems to create more layers of complexity which, when it fails can cause lender and consumer heartache and headache.

When it comes to the closing protection letter, the exact opposite is true. The current CPL offered by title insurers and paid for by consumers is not an insurance policy. Like the AOL it is merely an opinion letter in the form of a watered down warranty, and yet consumers pay upwards of $75 for it each time there is a closing. An alternative to the CPL would be welcomed as a true insurance product, separate and distinct from the title insurance policy. Secure Insight has been advocating for years for a better CPL alternative and the opening created by the AOL may just be the opportunity to establish a replacement for the CPL that will not just look like insurance but provide actual insurance protection to lenders, investors, warehouse banks and consumers.

The title industry is changing. With RON, blockchain, and now title insurance alternatives, the landscape is being remolded. Whether the AOL is a real honest to goodness improvement remains to be seen, however the market will supply the answer soon enough. Until then it is wise to become educated and informed as to the differences.