For a fee, these “vetters” purport to conduct a due diligence investigation into the settlement service providers’ practices and procedures and generate a low-, medium- or high-risk index score that they then make available to lenders and others in the mortgage-lending industry.
These lenders then can withhold business from settlement agents receiving a high-risk score. The vetting companies’ goal is to monitor in an ongoing and uniform manner that settlement service providers comply with all applicable laws and rules and follow the industries’ best practices. In return for that fee, settlement service providers, such as settlement agents, are “promised” preferential access to lenders’ settlement business.
On its face, this business model may seem beneficial in offering more oversight protection for consumers, but there are serious flaws with this unregulated practice.
Promising to deliver settlement business in exchange for paying a fee is illegal under the Real Estate Settlement Procedures Act.
These anti-kickback provisions were enacted to protect consumers from picking up the tab for such referral fees, which are passed along as higher settlement costs. But Andrew Liput, president and chief executive of Secure Settlements, a third-party vetter, says his firm offers a valuable service and does not violate the provision. “Since we are providing vetting services to settlement agents with no guarantee of referral business or even a guarantee of a ‘low-risk’ index score, we are not accepting payments in exchange for referrals,” he said.
But settlement agents are already “vetted” by at least three levels of government oversight and private industry. In many states and the District, selling title insurance requires a license from the insurance commission. To obtain a license, the settlement agent must complete a detailed application, provide financial and personal data and post a fidelity bond. Before a surety company will issue that bond, it conducts a detailed background check, runs a credit report and analyzes the applicant’s business and personal creditworthiness.
Most important, before a settlement agent can become an agent for a title underwriter, he must satisfy that title underwriter’s rigorous screening, education and training protocols. Underwriters audit their agent’s accounts at least annually. These audits are then used to identify and address any deficiencies in the settlement agent’s practices and procedures. “The more that consumers know about the protections that already exist in the title industry, the better,” said Michelle Korsmo, president of the American Land Title Association (ALTA), the title industry’s trade association.
To that end, ALTA last month issued guidelines outlining seven best practices for title-insurance and settlement companies. The goal of the guidelines is to provide the consumer with additional information on the protections that have already been in place for decades.
If these third-party vetters have their way, virtually every independent settlement company employee will pay a fee of approximately $300 per year to maintain his “accreditation.”
Since this vetting service could be quite lucrative, there are likely to be multiple vetting companies used by various lenders, which could mean that independent settlement agents could be forced to go through many vettings, all requiring different responses and all collecting fees along the way.
This lack of any uniformity in the nascent vetting industry will generate enormous costs in the form of multiple vetting fees and time taken to respond to multiple vetting requests. These costs inevitably will be passed to the consumers in the form of higher closing costs and will create confusion over who was “vetted” and by whom.
The Consumer Financial Protection Bureau is staying out of the fray except to reiterate regulators’ long-held position that it “expects supervised banks and non-banks to oversee their business relationships with third-party vendors to ensure compliance with consumer financial protection laws.” Moira Vahey, a bureau spokeswoman, said: “We have not specifically encouraged the use of independent vetting companies or mentioned them in our industry guidance. We have no comment on these companies.”
Bureau representatives met with industry representatives last month to discuss third-party vetting companies. Robert Holman, secretary of the National Association of Independent Land Title Agents, the industry’s trade association, said the bureau should “issue supplemental guidance clarifying that using third-party vetting companies does not provide lenders with ‘safe harbor’ protection from liability for their vendors’ losses.” Holman added that “the bureau should clarify that it will enforce [the anti-kickback provision] against third-party vetting companies insofar as they represent required use or illegal referral arrangements.”
The bureau’s meeting is a step in the right direction. These meetings should result in the development of uniform, national best practices for settlement agents. Resources must be devoted to educate the real estate consumer about those best practices.
Only then will real estate consumers have confidence that the settlement agents they select are independent professionals, well-trained and regulated fairly.
Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord settlement attorney and lender. This column is not legal advice and should not be acted upon without obtaining legal counsel. Jacobs can be reached at firstname.lastname@example.org.