The Consumer Finance Protection Bureau’s mission is to regulate financial firms so their actions don’t harm consumers. With its very first enforcement action, the CFPB telegraphed that financial institutions would be held liable for the actions of their service providers and suppliers – as though those actions were undertaken by the financial institution itself.
The first enforcement action by the CFPB was a $210 million fine against Capital One Bank, holding it responsible and liable for the actions of a company that it had hired to sell products and services to its credit card customers.
The title insurance industry is a significant service provider to banks and other lending institutions. Nearly every real estate transaction has a lending component. In the case of refinance transactions, the lender often chooses the title agency which does the title search and prepares the commitment.
If banks are held liable for the actions of title and escrow agencies and their underwriters, it won’t be long before banks demand that title companies adhere to procedures and processes that will reduce the banks’ liability in case of an error. Concerns related to security, privacy and fraud prevention will be at the top of the list, but there will be many procedures related to work methods, training, auditing, funds reconciliation, reporting and so on.
Title agencies hoping to gain business from large lending institutions will have to make investments in technology, security, quality control, procedure documentation and employee training. The initial investments alone will be high, and the ongoing maintenance expense to remain in compliance could significantly change the cost structure of all title companies. Many agents in smaller counties will be unable to afford these expenses without increasing their premiums.
In addition to across-the-board premium increases, we expect that small agencies will consolidate into larger regional agencies, so the additional expenses mandated by lenders can be spread over a larger revenue base. The larger, regional agencies are likely to consolidate parts of agency operations into regional hubs, which can be controlled more efficiently.
Finally, some of the larger lenders will begin to evaluate acquiring title underwriters and larger regional agents so the title and escrow service providers are fully integrated into bank operations, follow bank mandated policies and procedures, and are routinely audited by the bank’s internal staff.
The Dodd-Frank Act and the CFPB’s enforcement actions predict a substantial change in the landscape of the title insurance industry. If you have any questions or would like more information, please feel free to contact us.