Do You Know Who Your Closing Agent is? MBA's Risk Management and Quality Assurance Forum September 9-11, 2012 Omni Dallas Hotel Dallas, TX

Transcription

1 Do You Know Who Your Closing Agent is? MBA's Risk Management and Quality Assurance Forum September 9-11, 2012 Omni Dallas Hotel Dallas, TX

2 INTRODUCTION In the age of Dodd-Frank and the Consumer Financial Protection Bureau, mortgage industry professionals must adopt more robust and independent risk evaluation and management processes or face heightened regulatory scrutiny (with accompanying penalties) as well as unacceptable financial losses from negligence and fraud. In 2005 FNMA recommended that all lenders utilize third party vetting of vendors, including closing agents. In June 2010 FNMA began requiring that lenders confirm the status of closing agents against government exclusionary lists. In April 2012 the CFPB made it mandatory for banks and mortgage lenders to manage third party risk, including risk associated with closing agents. While Appraisal management Companies have risen to provide a uniform approach to appraiser management, the approach to managing closing agent risk is scattered, there is little or no information sharing, and efforts to supervise the diverse pool of professionals who close loans (attorneys, escrow agents, settlement companies, notaries and even realtors) is largely ineffective. In 2011 the FBI estimated that despite training, awareness, and new methods of deterrence, mortgage lenders still lost almost $7 Billion due to fraud and that number is estimated to grow to $13 Billion for Approximately 15% or more than $1 Billion of that occurred at the closing table, and according to FinCEN an increasing number of SARS filings this year are being categorized as title, escrow and closing agent related.

3 IN THE PAST WERE RECOMMENDATIONS The OCC announced in November 2001, that national banks were expected to properly oversee and manage third-party relationships including a risk assessment due diligence written contracts and ongoing oversight of third party activities. Fannie Mae s guidelines to banks on Preventing, Detecting & Reporting Mortgage Fraud, states in part that mortgage lenders must know [their] business partners...and consider using outside sources to selectively choose closing attorneys and settlement agents Fannie Mae Customer Education Group, Report of December 2005 NCUA acknowledges that third-party relationships are essential but inadequately managed and controlled third-party relationships can result in unanticipated costs, legal disputes, and financial loss The agency doesn t want to stifle the innovative use of third-party relationships to meet member needs and strategic objectives, but wants to reemphasize that CUs clearly understand risks they are undertaking and balance and control those risks NCUA Guidance Letter 07-CU-13, December 2007.

4 TODAY THERE IS A NEW REGULATOR The central mission of the Consumer Financial Protection Bureau (CFPB) is to make markets for consumer financial products and services work for Americans whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial.no provider should be able to build, or feel pressure to build, a business model around unfair, deceptive, or abusive practices. CFPB Website

5 AND A NEW REGULATORY MANDATE The Consumer Financial Protection Bureau ( CFPB ) expects supervised banks and nonbanks to oversee their business relationships with service providers in a manner that ensures compliance with Federal consumer financial law, which is designed to protect the interests of consumers and avoid consumer harm Service provider is generally defined in section 1002(26) of the Dodd-Frank Act as any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service. (12 U.S.C (26)... the mere fact that a [bank] enters into a business relationship with a service provider does not absolve the [bank] of responsibility for complying with Federal consumer financial law to avoid consumer harm. A service provider can harm consumers and create potential liabilities for both the service provider and the entity with which it has a business relationship. Depending on the circumstances, legal responsibility may lie with the [bank] as well as with the [service provider]. Source: CFPB Bulletin , Dated April 13, 2012 (Emphasis Added)

6 The Key Message A financial institution can outsource a service, but it cannot cede responsibility for the potential risks to itself and its customers. Banks must have in place a written, enforced policy to evaluate and monitor the performance of all service providers.

7 THE STATISTICS The FBI reported losses from mortgage fraud in 2011 were approximately $11 Billion. Total losses attributed to closing agent fraud amounted to 15%, or more than $1 Billion. A July 2012 study by the Financial Crimes Enforcement Network (evaluating SARS filings between ), identified more than 10,000 instances where financial institutions, particularly banks and money services businesses, filed suspicious activity reports involving title and escrow companies, often in connection with mortgage fraud. In 2011 SARS reports in this area grew by almost 20%. The study, Real Estate Title and Escrow Companies: A BSA Filing Study, documented a range of typologies in which title and escrow companies appear to have been abused by money launderers, as well as a number of cases where the companies, or criminals fraudulently representing themselves as legitimate companies, were suspected of being involved in facilitating illegal activity.

8 THE UGLY DETAILS July 2,2012- Lee County, Al: Former Alabama attorney James Boyd Douglas, Jr., 42, was sentenced to 45 months in prison for his role in a multimillion-dollar mortgage fraud scheme between January 2005 and September During this six year time period, Douglas is accused of embezzling approximately 2.3 million dollars from his clients real estate closings. June 18, New Haven, CT: David Kinney, 52, pled guilty to conspiracy and making false statement charges in November of 2011, and faces up to 10 years in prison for mortgage fraud. According to court documents and statements, during 2006 and 2007 Kinney provided false HUD-1 documents to lenders and delivered disbursement checks before receiving down payment documents on the HUD-1. He has not been sentenced yet. June 15, Pittsburgh, PA: Jason Sheppard, 31, the former president of TruClose Financial Services was sentenced to 55 months in prison and has been ordered to pay roughly 1.5 million dollars in restitution from stealing closing funds in According to court documents, in 2009 Sheppard withdrew money from TruClose s company accounts to pay off gambling debts, credit card debts, and also to support his lifestyle. It has been reported that Sheppard spent about 600,000 dollars in casinos from October 2009 to December 2009, and he also paid off his wife s substantially large credit card bill with these funds. April 27, 2012 Emmetsburg, IA Jean Teresa Hoffert, a real estate broker acting as a closing agent, stole more than $400,000 in loan proceeds received in connection with real estate closings. In her role as a settlement agent, Hoffert failed to pay off prior mortgage loans that were to be paid off as part of several refinance transactions, and in other instances, prior mortgages were paid off late. Hoffert s actions caused over $400,000 in losses to 10 different victims. April 25, 2012 Lake County, FL: Linda Irene Rovetto, pled guilty to charges for misdirecting escrow funds from real estate closings. According to charges, Rovetto diverted more than 3.5 million in mortgage loans, through her company Florida Lakes Title & Closing, LLC to a company managed by a co-defendant. Rovetto faces up to 30 years in prison for her violations.

9 THE MORTGAGE PROCESS TODAY Loan Application Initial Processing Operations Underwriting Process Loan data Verification Closing protection letter verified from title UW Warehouse bank checks agent credentials Funds wired to Agent Branch Level Closing Department

10 THE POST-CLOSING PROCESS TODAY Agent coordinates document signing & disburses money Agent returns closing package to lender Agent Responsibilities Secondary Operations Closing package verified Loan Packaged for Sale Warehouse line repaid upon sale Loan defaults Fraud or theft of funds uncovered Claim made against closing protection letter Litigation commenced Loss Mitigation

11 RISK MANAGEMENT TODAY Closing protection letter issued by abstract agents on behalf of title insurance companies with little or no verification and vetting. No insurance product. CPL is a form of self-insured warranty which is not a profit center for title insurers, is largely unregulated and is not accepted in all states (ex. New York, Iowa, Washington State). Warehouse banks and mortgage lenders employ varying degrees of risk assessment programs, some have none, with no central data base of information, no risk information sharing. Industry circulates exclusionary lists with no cross-checking, no detail, in a hard copy format, sources and objectivity largely unknown. MARI offers a data base of reported fraud incidents but no coordination with lenders, not focused on closing agents, no ongoing monitoring, only historical data.

12 RISK MANAGEMENT TOMORROW? Establish uniform standards and best practices for a diverse industry (attorneys, notaries, realtors, settlement company employees, title agent employees and contractors). Develop and offer meaningful education about real estate closing practices, fraud trends, skill enhancements, to elevate as a profession, not a hodge-podge of independent groups with different licensing requirements, educational backgrounds and skill sets. Eliminate independent vetting processes and silos of agent information and create database for access by all, based upon a gold standard of risk management requirements (i.e. background checks, credit, litigation. Licensing, insurance, etc.) Monitor agent activity to permit red flag notices before a fraud occurs. Verify backgrounds at micro not macro level entity level vetting is good, individual vetting is best. Better insurance options in place of the existing CPL product and process. Recognize that consumers need protection too, and design risk management to cover their concerns, give them information to make better choices (i.e., avoid steering of business to agents) and protect them in the event of loss from fraud or negligence (e.g., no state requires an attorney to carry E&O to have a license!)

13 WHAT BANKS, CONSUMERS & REGULATORS WANT Consumers Protected from Theft of Funds and Fraud Banks Protected from Losses, Repurchases due to Fraud & Negligence Warehouse Lenders Protected from Theft of Funds at Closing Table. The Ultimate Closing Agent Risk Management Goal

14 CFPB Possible Audit & Enforcement Goals Require all lenders to develop written policies to demonstrate they have addressed third party agent risk of loss to consumers, including risk from closing agents. Require all lenders to report closing agent fraud through SARS filings. Prohibit efforts to hide behind the entity; may be held liable for bad acts of agents where the lender could have had policies and procedures in place to identify and address risk. Penalize the failure to take reasonable steps to identify and address risk of loss from closing agent acts and omissions.

15 THE FUTURE Increased due diligence Encourage best practices and expect professionalism Movement towards more uniform standards of evaluating risk Data and information sharing so all benefit Reporting and publicizing bad actors Require more education, specialized testing Make Know Your Closing Agent an Industry Requirement.

16 Thank you! Prepared by Andrew Liput, Esq. President & CEO, Secure Settlements, Inc.