Elton HarveyEvery once in a while, I get a call that starts “did you hear about XXX, stole XXX million from his clients.”

 We commiserate, shake our heads, wring our hands and predict that this is just one more nail in the coffin of real estate practitioners.

Enter the Consumer Financial Protection Bureau (CFPB). Enacted as a response to the mortgage industry meltdown, the CFPB was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The goal of the CFPB is to watch out for American consumers in the consumer financial product and services marketplace.

To that end, the CFPB has promulgated regulations to be used in connection with a home purchase or refinance. These regulations, which are slated to go into effect on Jan. 10, 2014, put new burdens on lenders in connection with their general servicing policies, procedures and requirements. This, coupled with bulletins from the Federal Reserve and Office of the Comptroller of the Currency have lenders noticeably nervous that they may be held liable for the actions of their settlement service providers.  

Traditionally, lenders have exercised oversight over their settlement agents by limiting their closing lists or requiring settlement agents to submit completed HUD statements for review prior to closing. These new regulations have some lenders looking for ways to protect themselves by proactively instituting reforms that will show compliance with these bulletins and regulations.  As a result, some lenders are requiring their settlement agents to be “vetted” by a third-party settlement agent vetting service prior to closing their loans or continuing to close their loans.

What is agent vetting? In its simplest form, it is a credit and identity evaluation process of individual settlement service providers that purports to benefit the closing agent, the lender and the consumer.

In reality it is a subjective review of an individual at a particular point in time. Can it identify a professional who may be in financial difficulty or who has run afoul of the state bar association?  Certainly. Is it the crystal ball that will guarantee a consumer or lender that the settlement agent who has been vetted is competent, thorough and will not steal their money? Absolutely not.  I am a “vetted” settlement services provider who has been practicing real estate law for more than 26 years. For $299, my third-party vetting service took down my personal and professional information, came back to me several times for more information, and declared that I was the same decent human being that I thought I was. They admit, however, that their program is not a measure of my talent or competency, nor can such a program guarantee that, at some point in the future, I would not stray from the correct path.  The coolest thing, however, is that I can put a logo on my business card that I have been “vetted,” for all the world to see.

 

Pros And Cons

Is “vetting” preferable to the existing practice of lenders reviewing their closing list and kicking off the settlement providers that do not adhere to their closing requirements, or the title insurer issuing a Closing Protection Letter (CPL) guaranteeing that their agent will comply with the lenders closing requirements and agreeing to stand behind the transaction in the event of a defalcation. Is it better than the existing peer-review and consumer-review rating systems available from existing legal services vendors?  I think not.

The third-party vendors who promote this yearly evaluation of settlement agents admit that their service does not take the place of licensing authorities, but do claim to be proactive rather than reactive, like Closing Protection Letters (CPLs) and malpractice insurance. Clearly, settlement agents who want to steal funds are not deterred by CPLs, malpractice insurance or basic moral values that we expect of our settlement agents. And, while agent “vetting” does, theoretically, on a yearly basis, review the settlement agent’s financial affairs, I see no evidence that this proactive service will provide a more reliable indicator than the existing agent reviews conducted by title companies, professional discipline committees administered by the judiciary department or state agent licensing bodies.

Do we have a problem? Absolutely. We practice in a profession where we handle large sums of money on a regular basis and, occasionally, and thankfully, not often, one of our number lacks the required moral compass.  

Is agent vetting a panacea? Probably not. Our local bar association is promoting the legal specialization of real estate practitioners as one means to boost professionalism. But if you are a lender or consumer, the old tried and true method of asking a lawyer or realtor friend to name competent service providers in your area may go further than any “vetting” process.  

In the final analysis, you can’t legislate or vet honesty.

Elton V. Harvey III is an attorney with Baillie & Hershman P.C. in West Hartford, Conn.

 

Settlement Agent Vetting: Panacea Or Puffery?

by Banker & Tradesman time to read: 3 min
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