In my most recent blogs, “An Initial Look at the Available Best Practices Adoption Data” and “ALTA Best Practices—Who Is Requiring What,” I have analyzed ALTA’s list of lenders who issued letters requiring some level of compliance with Best Practices. This blog takes a closer look at the motivating forces behind these lender letters.
The South gives rise to adherence requirements.
It was earlier noted that the initial group of lenders requiring adherence to Best Practices appeared to arise in a small geographic region in the Southeast, primarily Mississippi and Louisiana. Initially, I assumed that all of the banks may have been subject to the same regulatory body (either the OCC, FDIC, or Federal Reserve Board) and that the impetus for requiring such letters was, perhaps, a result of an internal memo from one of these specific regulators. However, upon reviewing the FDIC records for each lender, and identifying each of their primary regulators, I found that there was no common regulator governing all of these Mississippi lenders.
Federal regulators apply pressure across the board—CFPB is common thread.
Of the 10 lenders who listed Mississippi as their home state, 7 were regulated by the FDIC, 2 were regulated by the OCC, and 1 was regulated by the Federal Reserve Board. It therefore appears that all of the major federal financial institution regulators are putting similar pressures on the financial institutions that they supervise. Of course, all of these identified federal regulators are subject to the directives of the CFPB. On April 13, 2012, the CFPB issued a straightforward, unequivocal directive to all banks and non-banks to step up their efforts to conduct due diligence on third-party vendors. That memo left no doubt in any lender’s mind as to the consequences of failing to exercise appropriate due diligence over all third-party vendors, including title agents.
While the CFPB’s directive was issued in 2012, most regulators have had specific guidance memos in place for many years. Some of these memos are more specific than others, but all carry the same general theme: lenders have an ongoing obligation to supervise third-party vendors and have internal programs in place to document that they are exercising appropriate controls over such third-party vendors.
Drilling down to the regulatory guidance imposed on your lender.
Although your current lender clients may not have issued a letter requiring your proof of adherence to Best Practices, you should be aware that every lender is operating under a regulatory directive to improve supervision and establish plans to monitor third-party vendors. If you would like to read the regulatory guidance that has been imposed upon any particular lender, it is only necessary to ascertain who acts as your lender’s primary regulator. If you are unsure, access the FDIC’s link, and after entering your lender’s name, data will reveal the regulator for the identified lender. You then can use the appropriate link indicated (below) to see the specific guidance under which your lender is operating. If you follow the steps, and carefully read the regulatory guidance, I think you will find convincing evidence that sooner or later, your lender will be forced to issue a letter similar to the ones already on ALTA’s list. It may make better sense to embrace the inevitable, and develop plans to implement processes to comply with Best Practices, rather than to wait for the requirement letter that will almost certainly be issued by your lender in the future.
Links to Regulatory Guidance Letters
FDIC’s Supervisory Insights, “Third-Party Arrangements: Elevating Risk Awareness,” June 2007
OCC – “Third-Party Relationships—Risk Management Guidance,” October 2013
Federal Reserve Board —“Guidance on Managing Outsourcing Risk,” December 2013
In the next blog, I will look closely at what some lenders are actually requiring and the importance of carefully choosing the right level of assurance to demonstrate your compliance with their requests. Making a hasty decision to just send in requested documentation may subject you to legal liability for making material misrepresentations, even though unintentional.