The spotlight on state regulators is brighter than in the past with the Consumer Financial Protection Bureau (CFPB) electing to focus more energy on functions other than enforcement under Mick Mulvaney’s leadership.
Richard Horn, principal attorney at Garris Horn PLLC and former senior attorney at the CFPB and the Federal Deposit Insurance Corp., shared the spotlight at the 2018 National Settlement Services Summit with a pair of state regulators and one of the most influential figures in the title industry for a session examining their approach to the new regulatory environment, as well as insight about how industry participants can effectively engage regulators to ensure their thoughts and concerns are taken into account.
Horn moderated the panel, which featured John Lartz, deputy director for the Illinois Department of Financial and Professional Regulation; Chuck Myers, supervisor in the Real Estate Settlement Agents (RESA) Investigations Unit for the Virginia State Corporation Commission Bureau of Insurance; and Michelle Korsmo, CEO of the American Land Title Association. Korsmo announced July 18 that she will be stepping down from her role with ALTA in September.
The panelists discussed their views regarding various compliance matters and what takeaways they believe can be helpful as state regulators and industry professionals attempt to understand each other and work towards a regulatory atmosphere that works for all parties. The regulators on the panel noted steps they currently take to consider industry operations in their daily operations.
Communication, communication, communication
One example of such considerations the experts explored involved a letter the CFPB issued to underwriters in November 2017 stating that the bureau would treat closing protection letter (CPL) monies as premium, whereas, in the past, there were concerns over whether it would be treated as premium or as fees.
Having heard from settlement and title agents with questions about how those CPL monies should be listed, Myers said his office informed affected parties that they would be given lead time before any enforcement activity began.
“We let them know that we weren’t really going to come into their agency and we would give them at least four months to implement those changes and to work with their underwriters,” Myers said. “Of course, the lender is going to direct them as to how that will be represented on the Closing Disclosure or the HUD [form]. That was one of the key things that we’ve been working on within the last six to nine months.”
Changes for state regulators
Horn asked Lartz and Myers whether their offices were stepping up enforcement efforts in response to leadership changes at the CFPB, as many industry experts have speculated would happen. Myers said his office’s enforcement activity has remained relatively consistent even as laws have been adjusted.
“We’re not generating our enforcement based on whether there’s a change in RESPA,” he said. “In Virginia we’re RESA, so we don’t have the ‘P’ involved in there. We let folks enforce the federal code and we handle the code for Virginia.”
Generally, Myers said his office is focused on enforcing state law. When a RESPA violation is identified, it typically gets referred to the federal level.
At the state level, Myers said there often are new and different issues that crop up from year to year throughout the state, which spurs his office to act. However, they must act in a way that facilitates a fair playing business environment for the industry, which, in a sense, mimics a regulatory process.
“A year ago, a lot of Realtors were pressing agencies to offer free home warranties or they were going to take their business somewhere else,” Myers said. “With enforcement, it would put a little bit of strain on the industry if we went into Agency A and said, ‘You’re doing this; you need to cease today,’ but their competitor down the road is still doing it and there’s another competitor further down the road that is still doing it. It really doesn’t give equality or level the playing field for the industry.”
To avoid potentially unfair supervisory practices, Myers said his office reacts to widespread issues by distributing a general administrative letter to companies explaining the issue and what codes it was violating to put all industry participants on notice at the same time. By doing so, companies have the opportunity to adjust their practices accordingly and Myers staff is able to avoid unfairly faulting well-intentioned companies for compliance missteps they may not aware of and focus on weeding out bad actors.
Lartz said his department has ramped up its enforcement activity, issuing six actions in the past year where as it issued a total of five over the previous 10 years. However, he said that was more to do with the amount of complaints his office had been receiving about insurance-related issues than with leadership changes at the CFPB.
Of the areas of focus in his state Lartz highlighted, TILA-RESPA Integrated Disclosure (TRID) was not one of them. Areas of focus in Illinois include the state’s revised examination process in which underwriters, domestic or not, are examined annually in response to observed market behavior.
“We could look at TRID, but that honestly is not something we’ve really been focused on,” Lartz said. “We’ve got other things going on.”
Korsmo said ALTA is highly focused on improving TRID and correcting the inaccurate disclosure of title premiums on the mortgage disclosures.
“That will always be on [ALTA’s] agenda until it is fixed because I think it still feels like a bait and switch for consumers when you’re in the situation where the consumers are looking at a different number between what they owe and what the title fees are,” Korsmo said, noting that such issues do not occur in every state, but do in many because of discounts and other factors.
Additionally, ALTA President Steve Day testified in June before the House Financial Services Committee about ways to improve the CFPB’s functionality, as well as noting the association’s support for the GUIDE Compliance Act. The legislation calls for the bureau to provide more information and examples to help businesses make better decisions and comply with the law. This type of information would have helped the industry with TRID implementation.
“It’s about more formal rulemaking instead of regulation by enforcement,” Korsmo said. “We need rules that say, ‘This is what this means,’ and I think that’s what we’re looking for – ‘What does this really mean in this situation or this scenario?’ ”
Innovating processes … compliantly
Regarding innovation and how regulators view the implementation of new technology, Korsmo noted that there seems to be more innovation in the title process than in title products.
“So the question is – are we actually innovating or creating things that are actually benefitting the consumers and the end users of the title insurance product and the services that we provide?” she said. “I think that’s an interesting paradigm shift for everybody to think about when we’re looking at what we do.”
Remote online notaries are among one of the types of technology innovations that has become more prevalent in the industry, Korsmo said, with 17 states introducing bills to allow online notaries, five of which passed.
Korsmo added that she thinks it is good to see county recorders and regulators discussing best practices for bringing online notarizations into their respective markets and the multifaceted usefulness of the technology. Whether one state will recognize a notarization performed online if it has different laws governing real estate transactions remains a concern, according to Korsmo.
Similar to what the CFPB has tried to do at the federal level with its Project Catalyst initiative, Korsmo encouraged collaboration between industry professionals and regulators to help foster innovation. Open dialogues can reveal certain regulatory barriers to innovation, and inform regulators what the industry is developing, what they’re already doing and how they’d like to see the industry evolve, she said.
“I always think about Blockchain as a great example where people outside the say, ‘Oh, it’s going to take over the title industry.’ What they don’t realize is there’s lots of activity within the title industry right now on Blockchain,” she said. “It may not all be public land records but there are lots of proof of concepts happening within individual companies where they are trying to find out if this technology can solve that pain point. I think more of the dialogue between the regulator and the industry, the more people can see what’s really going on and serve the market to that effect.”
Lartz said that Bryan Schneider, secretary of the Illinois Department of Financial and Professional Regulation, has shown significant interest in Blockchain, fintechs, eClosings and other technology innovations. He noted that his department is “keeping an eye on it,” although Illinois does not allow full eClosings, requiring its notaries to have a physical presence in the same room with the buyer or seller during closing.
The speed at which digital currencies used on Blockchain become widely accepted in the real estate world largely will depend on how long it takes to resolve certain regulatory concerns associated with them, Myers said. Issues such as email compromise, encryption lockdowns and other issues that continue to be issues for businesses.
“Once we start seeing some of those aspects getting under control, we may start seeing Blockchain and different currencies and whatnot come forth,” Myers said. “It’s coming but, as it evolves, it’s taking a better look to see what part the states and the title laws are going to have with that.”
Thwarting cybercriminals together
When it comes to cybersecurity, Myers said the topic typically comes up most for him in the context of an enforcement action or a complaint.
“Generally, we’ll have a consumer that was doing disbursement and that gets hijacked through a business that’s been compromised and the agency is slow to get their E&O (errors and omissions insurance) carrier aware or make the party whole,” Myers said.
Some federal and state agencies and industry associations are putting together emergency kits for businesses that may get hit with cyberattacks. He noted that the key to mitigating the effects of such an attack is addressing the issue as quickly as possible and his office recognizes a need to work with afflicted parties to figure out the best course of action to determine what went wrong and how to remediate it.
Myers and Lartz said the process of identifying what led to a cybersecurity issue, whether it was someone opening an encrypted email or some other matter, and educating companies about how to protect themselves from attacks is crucial. Lartz noted that such attacks most commonly begin with issues on the broker’s side or the buyer’s attorney, because they are the one funneling the money for the transaction from the borrower.
Out with the old
Lartz said his department currently is working on updating a state-mandated disclosure form which has not been modified in 21 years. He explained that the modifications are necessary to account for all of the additional information that settlement agents must address, such as business relationships that must be disclosed to buyers and sellers.
“There’s some information on the current form on the costs of the transaction and we decided to expand that a bit,” he said. “The dollar figures are broken out into both buyer and seller instead of just one lump number. We also provide some information for the consumers to get a better understanding of why they have to review this disclosure and sign it.”
Lartz said his office decided to get some underwriter involvement in the crafting of the updated forms so they could see some of the issues that come up during the process of revising the forms. Lartz said his office was on its fourth iteration of the updated form as of the conference.
He noted that there are times where underwriters will issue a policy through a settlement agent who is not their registered agent, noting that Illinois does not license agents, it allows underwriters to register them.
Among the goals of creating the updated forms is to ensure that underwriters always use the proper agents and to ensure that consumers are aware that they have a choice regarding the underwriter who handles their transaction.