Protect your bank from losses due to title agent fraud

One of your bank's customers comes to you hoping to refinance their mortgage on their cabin so they can take advantage of a lower interest rate. Of course, you're happy to help them out, even though the cabin is outside your bank's typical footprint. You work with a local title agent near the cabin to pay off the old mortgage, and the bank wires $150,000 to an escrow account managed by the title company that served as the closing agent. The transaction seems to go through normally.

However, after a few months, your customer comes to you with a past due notice they received from the lender who made the original mortgage on the cabin. You investigate and discover that the title agent's contract with its title insurer had been cancelled before closing. The title commitment, policy, and closing protection letter issued by the agent were fake. Worse, the title agent used the loan money to pay off the agent's credit card debt instead of the prior mortgage loan. Not only is the bank out $150,000, your customer now owes two debts on the same property. Your bank has a junior lien and no title insurance coverage. The closing protection letter, which is designed to protect against a title agent's theft of loan money, is void because it is a fake. The title insurer refuses to pay the bank's claim on the fake policy and CPL, and the whole mess eventually moves into litigation limbo. 

"The first lender will foreclose on its lien, which in turn wipes out the lien of the lender who thought they were doing a refinance loan," said Bush Nielsen, shareholder at Reinhart Boerner Van Deuren, s.c. Circumstances would be very different if the title agent and/or the insurance policy they issued were legitimate. "If there is no policy in effect, the lender cannot recover because of the existing outstanding lien," Nielsen explained. "If a title agent were to steal the money and it was a valid agent issuing a valid policy, the policy would protect the new lender. With no valid policy in effect, the lender doesn't have that protection." 

An Escalating Risk

Situations similar to the one described above have been happening to Wisconsin banks and their customers for years, with an uptick in occurrences since the housing bubble burst a decade ago. Many banks assume that obtaining a Closing Protection Letter (CPL) is sufficient defense against this kind of fraud, but CPLs can be altered or faked. Plus, in Wisconsin, CPLs can only be issued to a buyer of real estate or a lender, not sellers and borrowers who are refinancing. 

The risk of loss due to title agent fraud isn't new, either. Since the 1980s, title agents have also served as closing agents for real estate transactions, often handling millions of dollars each day, which presents tremendous risk, according to Nielsen. "Because you're talking about mostly small companies handling big amounts of money, one terrible problem can cause the entire agency to go defunct," he explained. Also, recently, some companies have started issuing insurance without ever having been licensed or authorized as title agents. The insurance policies they have issued are entirely fake. For real estate purchase transactions, CPLs offer protection, but only in cases where the insurance is valid. "There's no coverage under a CPL issued by a title agent who doesn't have a contract or is fake," said Nielsen. 

The American Land Title Association (ALTA) has created a new utility that addresses this risk, a national registry of contracted agents. The ALTA Registry of Title and Settlement Agents helps lenders accurately identify their title and settlement partners. It is a single, standard source of accurate data, and as a wire fraud countermeasure it also serves as a critical compliance tool for third-party management, according to ALTA Registry Director Paul Martin. "The ALTA Registry allows for pin-point accuracy in agent details," Martin continued. "It's common to mistake one agent for another as so many have similar or identical names. This is why the national ALTA ID number is so valuable. With this ID and access to the ALTA Registry, a lender can be sure that they are working with the right location and the right agent."

How Does It Work? 

The ALTA Registry was created in response to ALTA members requesting assistance with accurately identifying title agents in their pipelines and reconciling them to their own internal third-party oversight databases. "With support from the title insurance underwriters, ALTA decided that the creation of a single database of title and settlement agents as a utility for the industry would not only help lenders, but would demonstrate self-regulation," said Martin. 

Currently, many lenders use a process Martin calls "stare and compare" to verify title agent listings; they rely on matching data from two different spreadsheets, a difficult task when many title agents have similar or even identical names. Additionally, lenders may contact a title company they're familiar with and request a referral for another title company in a different state or region. However, Nielsen cautions against this practice, as well. "It may not be a current relationship," he pointed out. "They also probably don't know how that agent handles their escrow accounts, and since there are no disclosure laws, no one will know about it except for the owner of that company." He recommends looking for members of state or national land title associations and utilizing the ALTA Registry to verify their information. 

By using the ALTA Registry as the system of record for title agents, lenders can be sure they are dealing with the correct entity, every time. Martin described the steps agents must take in order to obtain a listing in the Registry as a "governance process." Here's how it works: an agent requests a listing and provides details about its identity and locations, then selects which title insurance underwriters it has business relationships with. Those underwriters then review the data against their own information. "If the data is accurate, the agent is confirmed and their listing is published in the Registry," said Martin. Listings in the Registry are free for title and settlement agents, and ALTA membership is not a requirement. Banks and other lenders can access the data by purchasing a subscription. 

"ALTA felt that its industry expertise, together with the support of the underwriters, would result in a utility built for the industry, by the industry," said Martin. "Being owned and operated by the ALTA, the Registry has the flexibility for the future needs of lenders." For example, ALTA is currently building a custom interface for a large lending technology partner. "It is our hope that the ALTA Registry becomes the industry standard for identifying title and settlement agents," said Martin. 

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Reinhart Boerner Van Deuren, s.c. is a WBA Associate Member.

Generations Title
In 2014, WBA EBC bought an equity ownership of Generations Title Company, LLC, giving all WBA member banks the opportunity to share in the direction and ownership of a title agency. Generations Title provides commercial and residential title and settlement services throughout Wisconsin. Any participating bank can become a co-owner of Generations Title. Currently, 42 Wisconsin cities host banks who are owners of Generations Title.