Thursday, March 12, 2015

Mortgage Lenders Responsible for Vendors - CFPB via Dodd-Frank direct enforcement

                In Georgia, only an attorney can close a real estate transaction.  The attorney who closes on a residential mortgage purchase loan is frequently selected by the real estate agent representing the seller of the home.  Many borrowers do not fully understand that the closing attorney at most real estate closings (and usually there is only one attorney present) represents the Mortgage Company, not the buyer/borrower or the seller.

                The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, gives the CFPB the ability to supervise a mortgage company’s vendors in the same manner as a bank regulator. The CFPB may also bring a direct enforcement action against a mortgage company’s vendors and, if it finds that the vendor violated federal laws dealing with consumer protection because a mortgage company did not have adequate oversight, the CFPB can:
•     require the mortgage company to improve its vendor management program;
•     bring an enforcement action directly against its vendor; and
•     bring an enforcement action against the mortgage company if it is found to have knowingly or recklessly provided substantial assistance to the vendor in a practice deemed to be an unfair, deceptive or abusive act. 

                On April 13, 2012 the Consumer Financial Services Protection Bureau (CFPB) issued Advisory Bulletin 2012-03 addressing vendor/supplier/service providers to covered companies including state-licensed and regulated finance companies of all types.  Since the Bulletin is based on vendor management rules and processes used in the banking industry, this new layer of federal oversight is a major change in compliance for non-bank consumer finance companies, including mortgage lenders.

                As a result of this new regulatory oversight and vendor management requirements, mortgage lenders are responsible for managing the closing attorneys that represent the lender at closingAt a minimum, every lender should ensure (and document) that:
·       The closing attorney is licensed in the state in which the property is located;
·       The closing attorney has professional liability insurance in place;
·       The closing attorney has adequate expertise to close a residential mortgage loan (which will be more critical when the new integrated disclosure rules take effect on August 1, 2015);
·       The closing attorney is an authorized agent of the title insurance company used by the lender;
·       The closing attorney has an insured escrow account into which funds can be deposited by the lender's bank or source of funds;
·       The borrower is not the closing attorney or any partner in the law firm that is closing on the loan (a frequent violation in Georgia), or that there are any other conflicts of interest; and
·       The closing attorney has systems and processes in place that enable the required closing documents to be produced.

                In addition, the mortgage company should have in place a system through which consumers can register complaints about the closing attorney, and a process for responding to those complaints.

                Under current practice in Georgia, mortgage companies have little control over the selection of the closing attorney, and allow the real estate agent, the seller or the borrower to select the closing attorney.  The attorney selected by one of those parties to the transaction may be unknown to the lender, and the lender will not have conducted any due diligence on the attorney or the attorney's law firm. The failure to do so would be a violation of the mandate under the Dodd-Frank Act and the CFPB's Bulletin to adequately manage a vendor. 

               With the upcoming changes to the process and time in which closing documents will be prepared and delivered to borrowers (the HUD-1 Settlement Statement and Final Truth-in-Lending disclosure will be replaced by a new document called a Closing Disclosure), the interaction between the lender and the closing attorney will be more critical. 
Since the lender will have liability for any errors on the Closing Disclosure, many lenders will take over the responsibility for preparing the Closing Disclosure.  Also, a draft of the Closing Disclosure that will be used at closing must be received by the borrower three business days before closing (no more rush closings). 
If the closing attorney does not have the ability to interact with the lender though compatible software systems, the possibility of failed, delayed, or non-compliant closings is greatly increased. Because of this, it is becoming more and more important that the lender have a well managed relationship with the closing attorneys it uses to close loans. 
The selection of the closing attorney is important to exceptional service and soon will be critical to comply with the pending changes.  Adaptation to changes in our industry is key to longevity in the Georgia Mortgage Industry.  Given the Attorney represents the Mortgage Company, it makes sense they should be selected by their client.


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