Lenders Could Make Voluntary ALTA Guidelines a De Facto Standard

Adherence to the American Land Title Association's quality guidelines is voluntary, but it may become a de facto standard if lenders start requiring it as part of their own efforts to meet vendor management compliance obligations.

ALTA's "Title Insurance and Settlement Company Best Practices," contain lists of prescribed steps for conducting title and settlement services operations and cover areas including information security, consumer complaint resolution, escrow account controls and reconciliation procedures and other functions.

"Why is a lender going to allow a noncompliant title agent to close their deals, when you have the opportunity of having somebody who is compliant with the Best Practices close a transaction?" asks Rafael Castellanos, managing partner of New York City-based Expert Title Insurance Agency.

"When you think about it, the lenders are going to require that a title agent be adherent to the Best Practices. That is where I see it going, maybe not immediately, but that is where the future is going to go," he added.

The Consumer Financial Protection Bureau has long emphasized that lenders are responsible for the actions of their third-party vendors, most notably in an April 2012 bulletin outlining its expectations for lenders' due diligence processes.

ALTA provides assessment procedures for lenders to evaluate title agents' adherence to its standards, while third-party risk management firms also offer lenders their own title company review services.

Secure Settlements Inc. is one such provider, offering one title agent vetting service for retail lenders and a second service for wholesalers and warehouse lenders. The use of these services is also gaining the attention of investors concerned about the quality of the loans they purchase.

"A bad settlement agent could cause a potentially defective loan or repurchase demand to take place post-sale," said Andrew Liput, president Parsippany, N.J.-based SSI.

Furthermore, lenders need to be more focused on consumer protection in the mortgage origination process, especially at the closing table. "The vetting of agents and monitoring of them for risk is a key component of consumer protection," Liput added.

ALTA's industry guidelines create "a bar of professionalism and expected conduct," of title agents, but they don't replace a thorough vetting process for individual title agents, Liput said.

"What we do is a compliment to that. We say, 'Great, you are running your business in a professional manner; now we are going to take a look at you and your business from a risk standpoint,'" he explained, adding that SSI performs continuous monitoring of settlement agents as part of its risk management services.

While SSI focuses on monitoring individual title professionals, accounting firm Habif, Arogeti & Wynne provides a compliance monitoring program focused at the title agency level. The Atlanta-based firm performs benchmarking, readiness and assurance reporting services based on the ALTA Best Practices to provide lenders with a certified public accounting firm's assurance of title companies' compliance with the guidelines.

The current status when it comes to meeting the standards is dependent on the size of the firm, said Kim McConkey, HA&W's partner-in-charge of the service, called the ComplianceSuccess Program.

"The larger agencies are either compliant or are very close to getting there. When you get to the mid-sized, I think that those agents in the process of getting compliant," he said.

"The smaller agents are the ones who are really dragging their feet about this and that they have their heads in the sand," McConkey added. "They are hoping that it will just go away. Either ALTA regulates the industry (through these standards) or Washington will come in and regulate the industry."

Lenders aren't just paying lip service to the ALTA guidelines or using it as a pretext to reduce the number of settlement service providers they use, McConkey said. Rather, lenders that are concerned about running afoul of the CFPB may elect to only work with settlement services vendors that not only adhere to the ALTA guidelines, but can prove it, too.

"There is a need for an independent third-party with professional guidelines to do this. CPAs have historically have given financial and nonfinancial information to banks to give them assurance, to mitigate their business risks and this is going to be no different," McConkey said.

Alliant National Title Co., a title insurance underwriter that gets business from independent agents, established its own title agent monitoring program. The Longmont, Colo.-based company even went so far as to undergo a Service Organization Control SSAE 16 Type II examination by a CPA firm, and Alliant claims it is the only title insurance underwriter that can provide lenders with an independent audit of its agent oversight controls.

"We started trying to manage risk systemically in 2008 and 2009," said Alliant CEO Bob Grubb, during the peak of the housing bust and also for claims against title insurers.

After the CFPB bulletin (and similar announcements from the Federal Reserve and Office of the Comptroller of the Currency) came out, Alliant modified its agent monitoring to meet the ALTA standards and accommodate lenders' increased vendor management responsibilities for both settlement service providers and title insurance underwriters.

"If a bank or nonbank lender wants to rely on an audit of our agents, what do they need?" Grubb asked rhetorically, and then pointed to a Fed bulletin that states lenders can rely on a SSAE 16 audit to validate a vendor's internal controls.

But while the SSAE 16 audits are a robust standard well known in the financial services industry, Grubb noted that the entity requesting the audit (which in the case of Alliant was the title underwriter itself) gets to define the scope of the review. So even though lenders don't need to send in their own auditors to review a vendor, they do need to review an SSAE 16 exam for its thoroughness.

For title agents, ensuring compliance with the ALTA guidelines comes at the same time that the title and settlement professionals are preparing to adopt the CFPB's new integrated mortgage disclosures that will be mandatory on August 1, 2015. In addition, agents working in New York are also preparing for new state licensing requirements — though almost every other state in the nation already licenses title agents, notes Expert Title's Castellanos, who also serves as president of the New York Land Title Association.