Fraud Panel Examines Solutions to Mitigate Fraud, Escrow Theft
|April 11, 2012
The final general session of ALTA’s 2012 Business Strategies Conference in Louisville on Tuesday discussed findings of a national survey examining the latest trends in mortgage fraud and escrow theft, what best practices companies follow to thwart fraud and what solutions the industry believes are the most viable to implement.
Watch Portions of the General Session
Moderated by Jan Clark of Ernst Information Services, the panel included ALTA President-elect Frank Pellegrini of Prairie Title, Richard Bramhall of Westcor National Title Insurance Co., Penny Reed of Wells Fargo Home Mortgage, Erika Meinhardt of Fidelity National Title Group and Andy Crisenbery of eLynx.
A good portion of the discussion surrounded escrow theft and potential solutions to mitigate the problem.
“We are working hard in the industry to identify those instances where title agents are involved in illegal activity and creating a bad impression of the industry to the public,” Pellegrini said. “It’s something we must examine and not pretend it doesn’t occur. We must call it what it is and most often it is escrow theft. We must make sure the public’s perception of what we do at the closing table is legal, ethical and accurate.”
Meinhardt indicated there’s been a positive downward trend in fraud and forgery claims because controls put in place by lenders, agents and underwriters have helped reduce claims.
“It’s difficult to deal with issues when an agent perpetrates a fraud or escrow theft,” Meinhardt said. “Although a small percentage, it really taints everyone in the process and impacts the integrity of the industry. It’s a key focus for us because it has the potential to be a game changer for our whole industry and the role of agents. The independent agent plays a key role in many respects in our industry and we must preserve that role.”
One question in the survey asked, “What do you think is the best solution to reduce the chance of escrow theft?” More than a third (36 percent) thought a national agent database to identify whether an agent is authorized to issue policies on behalf of an insurer and whether they are in good standing, terminated or cancelled was the best solution. Other top responses were complying with underwriting standards of the appropriate insurer (16%), a new type of insurance policy to cover against fraud, dishonesty and negligence of escrow agents (13%), a standardized endorsement for Closing Protection Letters or Insured Closing Letters (11%), establishing an industry-wide self-regulatory organization (10%) and a national net-funding mechanism for bank-to-bank transactions (5%).
Reed said lenders under considerable regulatory scrutiny and counter-party risk is being examined.
“One of the bigger risks facing lenders is that they wire out millions of dollars per day to people essentially we don’t know,” she said.
One solution would be to not wire money if it’s already known where a large chunk was already going. Reed said that since there are five main servicers, most payoffs are going to these companies.
Bramhall said to think of it as a colossal net-funding mechanism of any mortgage.
“Where a bank does a refi and the payoff goes to that bank, it just net funds the agent what’s left after the payoff,” he said. “This is a variation on same the theme.”
Reed said there are people in the lending industry who think it would be easy to centralize disbursement, but doubted that this could be achieved for a couple of reasons.
“First, real estate is local, but second, when you look around, a good portion of title agents are our customers at the local level,” she said. “They are loan customers and escrow customers. It would be suicidal to make a move that would centralize this and take away business on the business side.”
So how can lenders support the small business model, but protect its consumer on the mortgage side?
“The key is to find a way of having national data so we can be feel safe and not be intrusive on our consumer or business customer,” she said.
While 49 states allow CPLs and 12 states currently mandate a specific fee or charge for closing protection, Meinhardt said a CPL does nothing to prevent escrow theft.
“It merely puts a burden on the underwriter and we’ve been looking at this over the past few years,” she said. “We are pushing to have charges for issuance of a CPL imposed in as many states as possible because it’s a significant liability underwriters assume.”
Meinhardt said the industry has done a better job vetting agents and having higher standards, unfortunately it can be difficult to tell a good agent from one willing to break the law.
As a solution, she encouraged title agents to perform at minimum, three-way bank reconciliations
“They can make an incredible difference in your organization,” Meinhardt said. “Often times these losses start out inadvertently because someone accidentally disbursed a file twice and all of a sudden they are hundreds of thousands in the whole and trying to figure out how to fix that problem. That’s a simple step if that we made than an industry standard that would go a long way.”
Another questions asked whether a national recording system would have any impact on fraudulent recording practices. More than half of those respondents indicated a centralized system would not help. Comments made by those surveyed said a large scale national system would be slower, and there would be more opportunity to try multiple loan scams. Others said there is more control at the local level and that it would only create a new layer of bureaucracy, while not addressing existing issues.
Bramhall agreed it could open the door to more fraud. “If you got good at it, you could take that scam you were doing in Chicago and blow it out nationally,” he said.
Crisenbery said a national recording system would be hard to achieve.
“One of the buzz words is transparency about what’s going on within the transaction all the way through,” Crisenbery said. “For those of you working with land recording systems and jurisdictions, it’s like herding cats. Everybody does everything differently at that level. It’s difficult just to get them to agree to recording standards.