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Th e M Rep o RT | 13 cover story N obody viewed the post-downturn wave of new financial rules and regulations as third-party service providers getting the third degree. However, the title industry, inextricably linked to mortgage lenders and servicers, has come to realize it is, essentially, on the front line. "One thing I can guarantee is that by the time the implemen- tation period is over, the [title] industry I have learned and prac- ticed in since 1999 will no longer exist as we now know it," said Jaime Kosofsky, managing partner, REO & Local Closing Operations, at Brady & Kosofsky. Despite those who thought in the early days of the Consumer Financial Protection Bureau (CFPB) that the title industry would be exempt from its actions and controls, it all changed with the release of the CFPB's April 2012 bulletin regarding service pro- viders. It explicitly made lending institutions responsible for over- seeing said providers, including title and escrow companies. "In a nutshell, if the lender is responsible for the oversight of the title agent, the title agent needs to make sure they have solid controls in place to protect the consumer and consumer data," said Steve Black, president of Houston-based Accurate Group of Texas LLC. Kosofsky added, "Today, the tables have turned: if the vendor screws up, the lender is liable. If the vendor's third-tier contractor screws up, the lender is liable. While this sounds great [for title companies] to not be at the bottom, it has just made it even harder for a small firm to enter into the industry, because the lend- ers have absolutely no alternative but to hold all vendors to the same standard regardless of their size." The American Land Title Association (ALTA) responded to the CFPB's major announce- ment with its Title Insurance and Settlement Company Best Practices, a set of guidelines for title and escrow companies to adopt "policies and procedures to protect lenders and consumers while ensuring a positive and compliant real estate settlement experience." While the CFPB's new regula- tions enacted at the beginning of 2014 are focused on lenders and servicers, title and settlement pro- viders are not immune to the "un- dertow these regulations have on origination volume," said Diane Evans, ALTA's president-elect. Evans pointed first to the impact of the CFPB's qualified mortgage rule, which requires lenders to meet strict criteria for underwriting, loan features, and upfront costs. "The biggest chal- lenge" involves compliance with the regulation that stipulates the total points, and fees paid to a lender are limited to 3 percent of the loan amount. Fees paid to a title company owned by the lender are included in that cap. "This may cause some number crunching for lenders looking to avoid passing the threshold," Evans added. "Since the CFPB has said that lender-paid charges are not included in the points and fees calculation, lenders could pay for the title charges. Other lend- ers may examine their affiliated business arrangements and reduce affiliations. Others may develop marketing agreements that comply with RESPA (the Real Estate Settlement Procedures Act) for settlement service providers." More direct changes to the title industry will arrive on August 1, 2015, when the Integrated Mortgage Disclosures go into effect. Basically, the Truth in Lending, Good Faith Estimate and HUD forms will be consoli- dated into the new CFPB loan and closing disclosures. "There is still a tremendous amount of uncertainty around this, however. It is evident that the new disclosures are going to require a much tighter relation- ship between the loan originator and the title agent so that com- prehensive, accurate data can be populated into the new disclosure documents," Black said. "The software providers to the title industry and the title industry itself have a tremendous amount of work to do to prepare for the new forms, as they are significant- ly different from existing ones." Francis "Trip" Riley, partner at Saul Ewing in Princeton, New Jersey, said, "Putting aside the title industry's primary focus, RESPA/ TILA integration in the form of the new loan disclosures, the ability to repay (ATR) and the Qualified Mortgage regulations will most impact title operations in that settlement. Agents will have to address the related fees issues to which QM gives rise." The pressure is on lenders and servicers for sure, but it is no doubt being felt by title and settle- ment companies, which to win or maintain business with the financial institutions—and thus ultimately survive in the indus- try—must rise to their mission- critical level. "The myriad of new regu- lations, bulletins, settlement agreements, consent decrees, and other guidance from the various state and federal regulators have been quietly creating winners and losers in the title industry," said Marx David Sterbcow, managing attorney at The Sterbcow Law Group LLC in New Orleans. "There is a quietly emerging regulatory compliance arms race among some in the title industry who realize that implementing the strongest financial, privacy, and security compliance measures known will cause the lenders to embrace their operations." Sterbcow maintains that the GFE/TIL/RESPA rule changes that go into effect in 2015, along with the vendor management protocol, are going to have a "profound impact on the traditional title insurance underwriter-agent busi- ness model." Many of the smaller to midsized title agents across the country will not be able to afford to implement the compliance mea- sures. As a consequence, consoli- dation of smaller operations into larger title companies is already happening. There's also a "renewed focus" by some lenders to establish affiliated title companies for more integrated and streamlined compli- ance efforts. "A buzzword you hear nowa- days is 'compliance lending; and the risk-averse lenders and banks want to make sure whomever they are using will be able to cure any defect in the origination or re- finance of a residential mortgage," Sterbcow said. "Compliance lend- ing has even started causing some lenders to send out monthly report cards to title attorneys, notaries, title agencies, etc., grading them on their performance on the refinance, servicing, foreclosure, and even origination side. This is being done to show regulators when they are audited that they are actively monitoring all their vendors and their vendors' vendors." Captive Audiences S imilar to foreclosure law firms, servicers have been "under the gun" for the last few years regarding vendor management concerns in the title industry. Black cited recent attorney- general inquiries into non-bank mortgage servicers, particularly regarding the impact, if any, to the borrower from the use of captive company service offerings. The greater scrutiny from regula- tors naturally has translated to greater emphasis on compliance. "There appears to be a height- ened feeling in the servicing industry that it's easier to manage vendor relationships with your own title subsidiary," Sterbcow said. "Data, privacy, and finan- cial security are tantamount and some believe keeping everyone in compliance from third to fourth to fifth parties is much more