SVB Failure Starts Aggressive Regulation Talk in Washington, IMBs Take NoteYes, Real Estate Attorneys are Consider Vendors in the Mortgage Industry!

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

For years real estate closing work has been the “bread and butter” of many small law practices.  Representing buyers and sellers in sales and mortgage closing transactions can be a lucrative practice area, and because there are no significant rules and training or practice barriers as for example complex criminal defense or tax work, it has helped many an attorney pay off their law school loans.  That perception may be changing with the wide adoption of new vendor management requirements for third parties.

There is no question that the third party service provider management directives of the CFPB, FDIC, OCC and others cover attorneys who handle mortgage proceeds and closing documents in connection with residential real estate transactions.  There is no exemption for lawyers performing these functions nor does state bar licensing requirements satisfy the regulatory mandates for banks.  Lenders must comply with these vendor management rules or face unacceptable risks.  Accordingly real estate lawyers are being confronted more often with requests by lenders that attorneys submit to vendor management or “vetting” processes to meet regulatory expectations.  These processes may be internal to the bank, or they may be outsourced to third party vendor management firms such as the one we operate.

Why are attorneys covered? Because they have access to a lender’s funds, borrower funds and critical loan documents.  Quite frankly a bad attorney has the means and the method to cause serious financial harm very quickly.  The recent disclosure that a prominent attorney and his law firm in Georgia were alleged to have stolen as much as $30 Million in trust proceeds over several years dramatically highlights this point.

Lawyers who handle real estate closings may have access to a borrower’s complete personal and financial history, usually contained in the closing documents, especially the RESPA Form 1003 mortgage application.  The 1003 sets forth a consumer’s identity information (including SSN), address, workplace history, bank, and asset information.  Other closing documents may detail family relationships, marriage and divorce information, and similar personal data.

Attorneys, more than any other discipline that makes up the closing professional industry are generally the most educated, most trained, and most supervised group. However, even the state bar associations are largely reactionary to attorney malpractice and criminal behavior.  They simply do not have the technology, labor force and resources to engage in the type of ongoing risk evaluation and reporting that the government expects to ensure proper consumer protection.

The news about vendor management is coming slowly to many lawyers.  Real estate attorneys generally are contract and real property law specialists.  They know the ins and outs of the real estate transaction but virtually nothing about the mortgage process, as well as the regulations lenders must follow to ensure a safe transaction for the consumer.  Today however lawyers conducting closings need to know a lot more about the process, including disclosures, closing instructions, signs of mortgage fraud, and vendor management rules.

In the end, the old way of doing business as a real estate closing attorney is changing and changing fast.  There are good reasons for these changes, and attorneys are encouraged to study the applicable regulations and statutes so that they can better understand why they may be asked to become “vetted” before they close their next residential real estate transaction.

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