I can hardly believe this year is coming to a close. With apologies to Disney, I feel like I am riding ‘Mr. Toad’s Wild Ride.’ According to my colleagues and associates, the real estate market is alive and growing. Sounds to me like a Christmas miracle in Escrowland. Here, here, and cheers!
The major industry news as it relates to escrow is the emergence of “Third-Party Risk Management Companies.” The Consumer Financial Protection Bureau (CFPB) issued Bulletin 2012-03 to provide guidance primarily to lenders, to strictly oversee their business relationships with service providers in a manner that ensures compliance with federal consumer financial laws. At first glance, this sounds like a major benefit to consumers and a daunting task for lenders.
But wait! Entrepreneurial companies/individuals emerged claiming that lenders now have new duties created under Dodd-Frank and the CFPB Bulletin. These entrepreneurs created agreements with wholesale lenders to “assist” with that “requirement” by offering to “vet” escrow and title agencies and their employees. This is only the beginning — would real estate agents and brokers be far behind? Some interpret the bulletin to already include the real estate agents and possibly others.
The definition of “vet” is: to investigate carefully (and pass as satisfactory. For example, ) every member of staff has been vetted by our security department before he or she starts work.
These “independent” and “unregulated” third- party companies would not only investigate, register, and scrutinize the company providing settlement services, but also the individual escrow officers, title officers, assistants, and notaries. This registration would require the submission of personal information, credit reports, and social security numbers.
If this was not intrusive enough, the individual providing this information must PAY the “unregulated third party” for this privilege. The pitch is this: “registration” would satisfy the lender’s obligation to actively manage loan fraud risk. Some lenders were eager to comply and began initiating letters stating that if you wished to continue closing transactions with them, you must register with their selected “vetting” company.
Hmm — let’s see. There are approximately 921 Department of Corporation licensed escrow companies in California. Let’s say each escrow office employs 10 persons fitting the vetting profile. Perhaps a modest, albeit fair, estimate of persons to be “vetted” might be 9,210 (remember this is only escrow personnel). The vetting companies suggest a fee of $299.00 per year, for each person in this capacity. Wait for it — that totals $2,753,790.00! The proposed vetting system sounds more like an on-going “pay to play” system.
In California, a basic requirement to operate as a Department of Corporations’ licensed escrow company is that you must have clearance by the Department of Justice and membership with Escrow Agents Fidelity Corporation (EAFC). EAFC was organized for the purpose of indemnifying the members against losses sustained as a result of fraud, theft, or embezzlement by officers, directors, stockholders, and employees of the escrow agent, according to Chapter 2.5 of Division 6 of the California Financial Code. Each applicant is required to pay EAFC a membership fee of $3,000 and comply with the certificate requirements, finger printing, and bonding.
It is my opinion, and that of many in the industry, that this process does not help anyone except the third-party vetting company; furthermore, it could actually be in violation of current regulations. We, as an industry, through the efforts of many, (including the trail blazing Escrow Institute of California, and with support of the Department of Corporations) have successfully presented our position to the lenders. I am happy to report that the proposed “registration” (which was scheduled to be in place by December 31, 2012) is currently “on hold.”
In the words of Henry Ford, “Most people spend more time and energy going around problems than in trying to solve them.”
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