Recently an article appeared in the Washington Post by our colleague Harvey Jacobs about the influx of third-party “vetting” firms that seem to have capitalized on a jittery lending community.
For a fee, these so-called “vetters” claim they will conduct a due diligence investigation into the practices and procedures of a settlement service provider. Then they will assign a score to that settlement company as low-, medium- or high-risk.
The fee is picked up by the settlement company. In exchange, agents are promised preferential access to lenders, who use these index scores to determine if a settlement company is reputable or risky.
Speaking as an owner of an established title company, I am in support of these vetting companies spawned by the CFPB’s Bulletin 2012-03. First, as Mr. Jacobs notes, we will simply pass along the costs to the consumer (yes, the consumer will pay more). Second, since we are a well established company, these new requirements will serve to heighten the barrier to marketplace entry for our prospective competitors; hence, limiting the number of competitors such that we would be able to extract an un-challenged premium from our clientele.
Now, speaking as someone advocating for the consumer and a healthier marketplace, I oppose these new requirements. These private vetting companies specifically cite the CFPB Bulletin and the Dodd-Frank Act as predicates to the requirements under their business model.
The $2 billion in title company fraud cited by a “concerned industry insider” in response to Mr. Jacobs’s article occurred under current regulatory schemes which include
- Issuance of closing protection lenders/insured closing letters to lenders
- State licensing codes established in all 50 states
- Criminal background checks and fingerprint record requests
- Successful completion of state-mandated license examinations
- Annual continuing education requirements
- Appointment application requirements from the title agent’s respective title underwriter
- Mandatory errors and omissions coverage
- Fidelity and surety bond coverage requirements
- Annual escrow audits and quality control reviews performed by the agent’s respective title underwriter
- Unfair trade practices and other consumer protection statutes
- State-mandated escrow and quality control audits.
As you can see, the title industry is already one of the most heavily regulated industries and, to consider the title industry’s handling of over $1 trillion in assets per year, the $2 billion in fraud previously cited pales in comparison to other industries.
You will never “regulate out” bad actors in any industry.
These new requirements are a mere act of redundancy. The quality control processes contemplated by these vetting companies are already being performed by state insurance departments and licensed title insurance underwriters.
They serve no useful purpose other than to squeeze more money out of the transaction at the expense of the consumer and at the risk of stifling competition in the marketplace.
A healthy marketplace encourages competition, and competition encourages more transparency and innovation. CFPB should immediately issue further guidance to its bulletin to address the redundancy and unnecessary nature of these budding third-party vetting companies.