The general phrase “lender liability” usually refers to cases where a lender does not live up to its own loan agreement, or where a loan officer promises more than the loan documents provide, or where the lender sells collateral in a commercially unreasonable manner. Lenders can also be liable for mistreating borrowers in connection with a loan closing, for example, by failing to pay-off prior creditors properly, by mischaracterizing the meaning of provisions in the note or mortgage during a closing, or by violating any of the many regulations applicable in residential mortgage transactions under the Real Estate Settlement and Procedures Act (RESPA), Truth-in-Lending Act (TILA & Regulation Z) or Gramm-Leach-Bliley dealing with consumer data privacy. Lenders have long been wary of the risks involved in conducting closings and lenders have routinely hired third parties, lawyers, closing agents and title insurance company agents, to close loans for them.
In 2011, a new federal agency, the Consumer Financial Protection Bureau (CFPB) took over the responsibility for enforcing these acts and policing lenders’ closing practices generally. Recent CFPB bulletins and directives make it clear that not only can a lender be held responsible for the errors of its third-party closers (the FDIC, CFPB’s predecessor, said that, too), but it can now also be held responsible for failing to assure, in advance, the quality of its third party closers. The CFPB believes that assuring closer quality will reduce harm to borrowers, but how is a lender expected to determine closer quality?
New companies, promising to vet potential closers for lenders, raise the specter of how a lender can best vet the vetting companies. On December 13, 2013, the Federal Reserve Board issued guidance on this very issue. In an effort to create a private sector safe haven for lenders choosing closers, the American Land Title Association (ALTA) designed and is now beginning to implement a program of best practices for closers. The program also has tools for helping lenders determine whether closers have implemented those best practices.
Whether ALTA’s best practices will become an acceptable benchmark for the CFPB is an open question, but as lenders seek to meet the government’s requirement that they be proactive in reducing risks to themselves and their borrowers, examining the ALTA best practices program appears to be a logical next step.