Why were ALTA Best Practices developed?
In this upcoming blog series, I will offer some observations about the title industry’s challenges in adopting proposed company operational standards that were developed by the American Land Title Association, referred to as the ALTA Best Practices Framework 2.0. In this blog, I will provide a “30,000 foot” overview of the laws and regulations exerting pressure on lenders who have reacted by imposing new demands on the title industry.
What led to the need to develop new title industry standards?
While historically banks always have had a high degree of fiduciary and legal obligation to protect the confidentiality of their banking customers’ information, the 1999 passage of the Gramm Leach Bliley Act (GLBA) was a real game changer for the lending industry. Although this Act instituted numerous groundbreaking changes to the insurance, banking, and investment industries, of particular significance to this audience are the provisions that created a host of new obligations imposed upon all “financial institutions.” For our purposes, the cornerstone of this legislation was the obligation to protect customers’ “nonpublic personal information” (NPI) associated with handling financial transactions. After the passage of GLBA, the lending community immediately began to implement policies and procedures designed to protect NPI. Over the last 15 years, lenders have continually improved and refined their processes to comply with these obligations, and currently are doing much better at protecting NPI.
However, as lenders implemented such changes, most in the title industry continued to operate as if they were unaware of the GLBA’s key provision which unequivocally incorporated title and settlement companies within the definition of “financial institutions.” As a result of this misunderstanding, the majority of the title industry failed to implement detailed policies and procedures designed to protect customer NPI. Consequently, for many years after the enactment of GLBA, the NPI of title industry customers has been routinely handled, transmitted, and stored in a manner that violates the statutorily imposed obligations described in the Act.
Over the past 10 years, lenders periodically have been reminded by their respective regulators (The Office of the Comptroller of the Currency [OCC], The Federal Deposit Insurance Corporation [FDIC], and Federal Reserve) to ensure all third-party vendors (i.e. title and settlement agents) are in compliance with obligations to safeguard the lender’s customers’ NPI. In spite of these numerous regulator directives and guidance letters to that point, many lenders have failed to take any steps to ensure that title and settlement agents are protecting NPI. Understandably, without any pressure from lenders to demonstrate their adoption of policies and procedures to protect NPI, the title industry continued to conduct business as usual.
The next big legislative bombshell was the passage of Dodd Frank in 2010. One of the most significant aspects of this legislation was to consolidate all of the enforcement authority previously exercised by more than 10 different governmental agencies into a newly formed, independently funded agency called the Consumer Financial Protection Bureau (CFPB).
Then, April 13, 2012, the CFPB released Bulletin 2012 – 03, which sent a series of shockwaves through the lending industry. Prior to this bulletin, lenders had assumed that if an outsourced third-party vendor had violated its obligations under GLBA, then the lender who hired that vendor would be insulated from any resulting sanctions. However, in this bulletin, the CFPB clearly states that although lenders may delegate some of the functions involved in the overall financial transaction to third parties, they cannot delegate the liability arising from such vendors’ actions or inactions. In other words, lenders retain direct and primary liability for all actions performed by any third-party vendors.
Shortly thereafter, several of the lenders’ regulators re-released guidance which reiterated the importance that lenders exercise due diligence in selecting and supervising all third-party vendors, especially those handling “critical activities,” such as clearing and settlements. Then, as if to drive their point home, shortly after the release of this 2012 bulletin, the CFPB announced a settlement with three national lenders who were fined a total of $495 million for their failure to properly supervise and manage the acts of their third-party vendors! With this pronouncement, lenders immediately were forced to closely scrutinize the policies and procedures title and settlement agents were utilizing when handling their transactions.
At this point, lender compliance officers began to scramble and devise programs designed to document their exercise of due diligence when selecting all third-party vendors, including title and settlement agents. However, although CFPB has clearly defined the obligation of lenders to exercise due diligence in the selection and supervision of third parties, they give absolutely no guidance or examples of what would be deemed satisfactory due diligence. As a result, the title insurance community was exposed to the possibility of dozens of individually developed due-diligence programs, with almost no uniformity from bank to bank. Title agents soon began to receive letters and emails from their lenders which stated that, as a result of the CFPB directives, in order to remain on the lender’s “approved closing rolls,” the title agent would be required to submit a wide variety of documentation, complete multiple-page questionnaires, and execute indemnification agreements, along with a host of other unwelcome requests. In short, the lender response to the CFPB’s actions began to create a real problem for the title insurance industry.
Best practices standards were designed to be a solution to the “problem”
As a result of the lender response to the CFPB directive, title and settlement companies voiced their concerns to ALTA. They complained that completion of multiple, often conflicting, lender request forms was time-consuming and tedious. In addition, many agents complained that the questionnaires asked for proprietary information about each company, personal information on their employees, bank account information, etc., all of which they were hesitant to provide to multiple parties.
In response to those concerns, ALTA began to fashion a solution designed to both satisfy lenders’ concerns and minimize disruption of title and settlement agents’ day-to-day business. The plan was to create a single set of “standards” designed to satisfy the needs of the majority of lenders who title agents serviced. The hope was that if the title agent could develop a single documentation package designed to assure the lender that it was operating in compliance with that set of “standards,” then thereafter that same documentation package could be provided to every lender requesting proof of compliance.
In a further effort to enhance lender confidence that title agents were complying with this new set of uniform standards, ALTA proposed an alternative approach which would require that an independent third party certify agents’ compliance. This necessitated ALTA developing a set of uniform assessment procedures (referred to hereafter as ALTA Assessment Procedures, Version 2.1) that third parties must utilize in assessing title agents’ compliance. This “independent third-party certification” approach would allow lenders to receive a “certification of compliance” from qualified independent third parties, and enjoy a greater level of confidence that they were meeting their due-diligence obligations required by the CFPB. From the title agent’s perspective, sharing of proprietary company and confidential employee information would be limited to a single independent third party selected by the agent, to verify the agent’s compliance with the standards. As such, this approach was promoted to the lending and title industry as one which was mutually beneficial, meeting both the needs of the title and settlement industry and the lenders it serviced.
In upcoming blogs, I will offer observations regarding the degree to which lenders have accepted the approaches developed by ALTA.