As a result of the bundling, overvaluation, and selling of mortgages as an equity product that led to the real estate collapse and lending lockdown, the Consumer Financial Protection Bureau (CFPB) released a bulletin in 2012 that reminded lending institutions that they would be held liable not only for their own actions, but also for the actions of their vendors.
In the title industry, this was game-changing and the industry’s governing body—the American Land Title Association (ALTA)—responded by releasing “ALTA’s Best Practices,” a framework developed to assist lenders in satisfying their responsibility to manage third-party vendors. It is the title industry’s attempt to help forthright lending institutions have one less thing to worry about as they navigate these heavily regulated waters. Initially, this seemed like a win-win. After all, the “seven pillars” that constitute the Best Practices— including mandates related to licensing, escrow, privacy and security, settlement processes, policy production, insurance coverage, and customer care— would both elevate the professionalism of the title industry and allow compliant providers an automatic “in” with lending institutions. However, as the soft deadline (August 1, 2014) for implementing these Best Practices looms, there will be five main unintended consequences, as described below.
>> Confusion: While the Best Practices are uniform, interpretations for compliance are not. Title companies are implementing in a variety of ways and lending institutions have no standard guidelines from which to vet vendors. As a result, there is confusion on both sides of the fence, and many title companies concerned that they will not be able to compete for business without a set checklist used by all lending institutions.
>> Small Title Companies Close: A small title company cannot possibly meet the demands set forth in Best Practices. In fact, Hillsboro Title Company grew just to be able to sustain this industry change. We now have two people working full-time on Best Practices compliance. The smaller shops simply won’t be able to afford to get into compliance and will be forced to close or merge with other companies.
>> Big Guys Get Bigger: While the larger title companies will have the resources to implement Best Practices, they will undoubtedly have to add compliance staff and, as a result, additional closing offices to offset the cost of the new hires. In addition, with small companies needing to shut their doors, larger companies will face an unparalleled opportunity for growth by acquisition.
>> Less Competition, Less Choice: As a result of the consequences explained above, there will be a surge of mergers and acquisitions in the title industry. And, as smaller title companies disappear or become acquired by larger companies, lending institutions and consumers will see their pool of title companies from which to choose shrink drastically.
>> Higher Costs: Compliance with Best Practices requires a significant influx of funds; as the cost of doing business increases, these costs will more than likely be passed along to the consumer.
>> More Law Suits: With all of the money being spent to regulate, document, and verify—and all of the confusion surrounding the soft Best Practices compliance deadline, there will be an increase in litigation against lenders and title companies to take advantage of the wrinkles yet to be ironed out in discovery documentation.
ALTA’s Best Practices will undoubtedly raise the bar for quality and professionalism in the title industry. However, with good, there is always some bad. Many title companies will find themselves working “on the business” more than “in the business” and business development initiatives and profits may suffer. While the Best Practices protect consumers, promote quality service, and provide for ongoing employee education, the regulations are placing hefty burden on title companies across the country. The full effects of this industry game-changer will be interesting to watch.
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