The Insured Closing Letter is Obsolete
The Reverse Mortgage Domino Theory
By Andrew Liput A recent panel on fraud issues I attended included a healthy debate about the extent to which a lender can rely on the insured closing letter as a means to offset risk at the closing table. Advocates felt that the American Land Title Association’s (ALTA) Best Practice Initiative backed by the letters should give lenders sufficient assurances that any bad act at the closing table would be deterred or insured. Others felt differently. One audience member asserted that the insured closing letters were woefully inadequate to offset the type of risks that lenders care about most. A careful reading of these letters exposes their limited applicability to a lender’s critical compliance and risk concerns. In an era of heightened consumer protections, data security and risk monitoring what exactly do these letters, which are not an insurance product, offer? Not enough to rely on them unconditionally. Here are some of the key features of the standard insured closing letter issued nationally by various underwriters. The language is similar, if not identical, no matter who is issuing the letter: “We agree to reimburse you for an actual loss incurred when the issuing attorney or closing agent … fails to follow your written closing instructions to the extent that (a) title is impaired or liens not properly recorded, or (b) the agent commits fraud with your funds or misapplies your funds, or (c) commits fraud in handling your documents.” Exclusions to the letter include: l Where the closing instructions vary from the title protection ordered in the title report; and/or l Failure of the agent to deposit the mortgage proceeds into the bank which you designated by name;
JUNE 2014 n National Mortgage Professional Magazine n
NationalMortgageProfessional.com
52 Some issues not covered by these letters include: l Agents who conspire with others to commit fraud; l Agents who steal or misuse a consumer’s personal and financial data obtained at the closing; l Agents who fail to report the fraud of others at the closing table; l Agents who comply with closing instructions, but are complicit in straw buyer, short sale, fraud, foreclosure rescue fraud, and undisclosed intervening flips; l Agents who steal a borrower’s deposit or cash to close; and/or l Agents who permit cash outside the closing. In addition, because these letters are not an insurance product, they are not uniform nationally (several states prohibit them, notably New York), not regulated like insurance, and are invoiced as a title charge not an insurance premium. Finally, because the letters are not insurance, disputes regarding coverage are relegated to the courts, where litigation costs are expensive. There is no insurance commissioner to complain to and no regulatory authority to help mediate disputes and investigate bad claims acts. Quite simply, reliance on the insured closing letter as risk management is misplaced confidence in a document that was never intended to protect lenders from all of the types of risks they face when closing loans, risks that can ultimately result in repurchases and fraud losses. More importantly the insured closing letter, when collected in the mortgage process, does not excuse a lender from conducting the type of due diligence it must perform to meet Consumer Financial Protection Bureau (CFPB), Office of the Comptroller of the Currency (OCC), U.S. Department of Housing & Urban Development (HUD) and Fannie Mae requirements for vendor management and consumer protection. Until a suitable replacement can be implemented nationwide lenders should view these letters for what they are worth: One small part of a larger enterprise risk management obligation to protect consumers and assure loan quality. Andrew Liput is president and CEO of Secure Settlements Inc., a company he founded after nearly 10 years studying the problem of escrow and closing fraud and the uninsured risks associated with mortgage closing professionals. He may be reached by email at aliput@securesettlements.com.
SPONSORED EDITORIAL
By Robert Ottone Back during the Vietnam conflict, many politicians subscribed to what was called “The Domino Theory,” which was, essentially, the notion that should Vietnam fall to Communist rule, so would the rest of Asia. It never happened. There’s concern in the mortgage industry of another kind of “Domino Theory” ... one that would require banks, both large and small, perhaps banks without the necessary means, to hire an individual to handle all reverse mortgage counseling duties face-to-face. That’s what’s apparently happening in Massachusetts, so, it’s not entirely implausible that it could happen across the rest of the nation. Beginning Aug. 1, low-income lenders will be required to make face-toface appointments with clients, reportedly in an effort to better serve those seeking reverse mortgages. While the industry has been fighting this particular regulatory shift for a few years, change is looming. “There are homebound seniors, transportation issues, language issues and a host of restrictions,” said George Downey, founder of Harbor Mortgage Solutions in Braintree, Mass. “The bottom line is it effectively will shut down reverse mortgage lending as we have known it in Massachusetts.” “Lenders may be overreacting. Since the mandate is targeted at vulnerable segments of the reverse mortgage market in Massachusetts, the wisest course for lenders and the industry is to welcome and embrace it,” said Atare E. Agbamu of Think Reverse LLC. “‘Either or’ thinking is not helpful here. What is good for reverse mortgage consumers can be good for lenders and the industry.” Could Massachusetts be the start of something new and frustrating for the reverse mortgage industry? While it seems a bit premature to automatically assume that one state’s mandate will eventually lead to national adoption, there are legitimate concerns. Only time will tell when it comes to this new bit of legislation. Robert Ottone is executive editor with National Mortgage Professional Magazine. He may be reached by phone at (516) 409-5555, ext. 314 or by email at robertpo@nmpmediacorp.com.
new to market continued from page 49
easy and pain-free for lenders,” said Taylor Heal, director of sales and marketing at Brooks Systems. “By offering high-cost loan analysis with QM testing, we help lenders obtain confidence that their loans comply with new requirements and qualify for sale to the GSEs.” Brooks Systems’ Web-based application, BrooksWebCalcs embedded with HCLA (High-Cost Loan Analysis), ensures that loans are 100 percent compliant with all federal, state, and local lending regulations. The product saves lenders time and money by reducing errors and increasing cost controls.
Your turn National Mortgage Professional Magazine invites you to submit any information promoting new “niche” loan programs, new products or any other announcement related to the introduction of a new program, to the attention of: New to Market column Phone #: (516) 409-5555 E-mail: newsroom@nmpmediacorp.com Note: Submissions sent via e-mail are preferred. The deadline for submissions is the 1st of the month prior to the target issue.