SVB Failure Starts Aggressive Regulation Talk in Washington, IMBs Take NoteTitle Industry Centralization: Is It the Future?

February 21, 2018
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

The recent announcement that First American Title Insurance Company and Lender Processing Services  have reached an agreement to develop and implement a managed title and closing services platform should not surprise anyone.  Title underwriters have for years grappled with the problem of how to manage and reduce the risk they face by allowing independent agents to handle searches, policies and disbursements at residential closings without the type of supervision that would ensure uniform quality and risk management. The inability of underwriters to manage this risk in the last financial crisis led to significant financial losses for them in litigation costs and claims, and resulted in increased fees for the CPL, efforts to find surety coverage for agents, and enhanced supervision.  However the risk remains, and as the market cycle exits the refinance boom stage and enters the more risky purchase business stage, the old fears of significant losses are sure to have re-surfaced.

When SSI was launched in July 2012, the reaction by the small agents and their trade associations was largely negative.  The move towards independent vetting and risk management was seen as intrusive, unnecessary, costly, redundant, and (to some) a total sham.  Having researched and study the risks associated with the closing process, and having met with and studied the title industry, its operations and risk management policies, I saw this reaction as incredibly short sighted.

After more than ten years of studying the issue I was convinced that independent vetting, uniform standards and best practices across the closing profession, would help level the playing field for small agents so that they could compete against large managed offices and regional escrow and closing firms.  Vetting might allow them to demonstrate their commitment to quality service and consumer protection.  Unfortunately some of the trade associations did not agree and instead directed their members not to cooperate with independent vetting firms.  Some even went so far as to file complaints with regulators claiming that vetting firms were “abusive consumer practices” and “scams” designed to “make more money for lenders.”

A year later vetting is here to stay.  The CFPB, HUD, FNMA, OCC, FDIC and others have been very clear that third party vendor management includes closing professionals and therefore lenders most demonstrate a process and procedure to manage closing agent risk.  The large underwriters appear poised to offer banks their own solution: consolidation and centralization.  Ultimately the small agents will suffer and may be pushed out of the industry, not by a vetting firm (only the bad actors lose by vetting) but by the very companies with whom they have agency contracts today.  Why?, because it makes little sense to face significant financial risk in an arrangement where the management of that risk is costly and difficult to control.  Mortgage lenders learned that the hard way trying to work through “net branch” operations, which regulators no longer permit for good reason.

Today title, escrow and settlement agents are faced with a dilemma and how they address it and respond to the challenge may very well shape the future of the settlement profession.  I for one am pulling for the little guy.


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