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:
• 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 closing. At a minimum, every
lender should ensure (and document) that:
· 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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