Market Demands on Lenders Impacting Settlement Service Providers
|September 13, 2012|
Uncertain regulatory requirements coupled with recent monetary settlements have forced lenders to be more sensitive to the types of companies they do business with. Consequently, regulators’ increased demand to protect consumers has forced lenders to adjust their relationships with service providers.
Recent bulletins and consent orders from the Federal Reserve, Consumer Financial Protection Bureau (CFPB) and Office of the Comptroller of the Currency (OCC), and requirements for more oversight of foreclosure practices by lenders and servicers coming out of the national mortgage servicing settlement all point to increased focus on service providers and holding lenders responsible.
While lenders have been responsible for their service providers’ actions for years, it’s only been until recently that enforcement orders and corrective actions have demonstrated regulators' intent that the banking organizations are expected to oversee actions of third parties.
ALTA’s Board of Governors recently met in Chicago to address the increased regulatory pressures, and consequently, the rising trend of lenders demanding more information from settlement agents.
“Since the housing bust, lenders have been reassessing their operations, looking for areas that could lead to losses,” said Frank Pellegrini, chief executive officer of Prairie Title and ALTA president elect. “Lenders have put a focus on settlement services because of the potential for significant losses due to escrow theft and the significant regulatory penalties written into federal laws, including TILA and RESPA.”
Consent Orders Driving Lender Decisions
While recent actions by the CFPB has garnered much of the attention, consent orders reached with federal and state authorities is the main driver forcing lenders to rethink relationships with their service providers.
Last year, several federal banking agencies announced formal enforcement actions requiring 10 banking organizations to require lenders to improve oversight of bank and nonbank vendors in the foreclosure area. Among other things, the companies must submit plans acceptable to the Federal Reserve that “establish robust controls and oversight over the activities of third-party vendors that provide to the servicers various residential mortgage loan servicing, loss mitigation, or foreclosure-related support, including local counsel in foreclosure or bankruptcy proceedings.”
Then in February 2012, 49 state attorneys general and the federal government announced a $25 billion joint state-federal settlement with the country’s five largest loan servicers. It also requires servicers to oversee and manage its third-party providers. Servicers subject to the settlement must perform due diligence of third-party providers for their qualifications, expertise, capacity, reputation, consumer complaints, information security, document custody practices and financial viability. The settlement also requires servicers to conduct reviews of third-party providers to ensure any fees and costs charges to consumers are lawful and reasonably incurred.
The $140 million enforcement action CFPB took against Capital One Bank for credit card activities in July amplifies the actions regulators are examining to prevent third-party providers from harming consumers. Capital One hired a third-party call center that used deceptive marketing tactics. Korsmo said this enforcement action is instructive because it shows the CFPB will penalize financial institutions when their third-party vendors’ actions harm consumers.
“We know that the CFPB and other state regulators have targeted so-called residential mortgage ‘service providers’ for heightened scrutiny,” said Francis Riley III, a partner of the law firm Saul Ewing LLP in New Jersey. “However, who is a ‘service provider’ in the CFPB’s mind? There is good reason to believe that the definition now includes, will include or may include—at the regulator’s discretion—title agents with respect to title insurance procurement, but most certainly concerning settlement and closing services.”
CFPB to Hold Financial Institutions Liable for Vendor Violations
A bulletin issued in April by the CFPB fanned the flames even more that lenders need to increase oversight of their service providers. The memo indicates that financial institutions under Bureau supervision may be held responsible for the actions of the companies with which they contract. The Bureau said it will take a close look at service providers’ interactions with consumers and hold all appropriate companies accountable when legal violations occur.
“Consumers are at a real disadvantage because they do not get to choose the service providers they deal with—the financial institution does,” said CFPB Director Richard Cordray. “Consumers must not be hurt by unfair, deceptive, or abusive practices of service providers. Banks and nonbanks must manage these relationships carefully and can be held accountable if they break the law.”
The Bureau’s bulletin, which mirrors past guidance from the other federal banking regulators, urges supervised financial institutions to have an effective process for managing the risks of service provider relationships to “limit the potential for statutory and regulatory violations and related consumer harm.” According to the memo, some examples of oversight by mortgage lenders and servicers include: