The Consumer Financial Protection Bureau (CFPB) issued a three-page memorandum (“Memo”) in April 2012, (http://files.consumerfinance.gov/f/201204_cfpb_bulletin_service-providers.pdf) that put banks on notice that they have “legal responsibility” to “oversee their business relationships with service providers…”
The Memo specifically singles out service providers as: “. . . any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service.” For the purpose of this article, we will focus on those service providers that have the most direct impact on your real estate closings: title agents and settlement agents, including attorneys.
The Memo acknowledges the banks’ use of service providers as an appropriate business decision. The CFPB has asked banks to look at their service provider relationships to make sure they are working with trusted, ethical professionals. The CFPB wants banks to use and oversee service providers “in a manner that ensures compliance with Federal consumer financial law, which is designed to protect the interests of consumers and avoid consumer harm. The CFPB’s exercise of its supervisory and enforcement authority will closely reflect this orientation and emphasis.” These statements in the Memo sent a shockwave through the lending industry as banks can now be fined or sued by the CFPB over the illegal activities of their service providers.
The Memo says that banks are expected to:
- Conduct thorough due diligence to verify that the service provider understands and is capable of complying with the law;
- Request and review the service provider’s policies, procedures, internal controls, and training materials to ensure that the service provider conducts appropriate training and oversight of employees or agents that have consumer contact or compliance responsibilities;
- Include in the contract with the service provider clear expectations about compliance, as well as appropriate and enforceable consequences for violating any compliance-related responsibilities;
- Establish internal controls and on-going monitoring to determine whether the service provider is complying with the law; and
- Take prompt action to address fully any problems identified through the monitoring process.
The CFPB gave these broad examples of expectations without any defined way to measure or quantify compliance. Some might say that the CFPB should give examples of due diligence or what should be in the service provider’s policies. In the CFPB’s wisdom, they did not try to define all of these metrics nor did the CFPB presume to tell the lending industry what is enough. In reality, the CFPB merely stated that banks must know your service providers. The CFPB, however, added “legal responsibility may lie with the supervised bank.” Since the Memo lacks detail on compliance with this new mandate, the American Land Title Association (“ALTA”) has stepped forward to provide direction by promulgating industry Best Practices.
The ALTA Best Practices offers the title industry (title agents and settlement agents, including attorneys) guidance to be a trusted and ethical title professional in the new regulatory environment.