Whitepaper: ALTA Best Practices Guide – Everything You Need to Know
The American Land Title Association (ALTA) is a national trade association and advocacy group for title insurance agents, underwriters, and other professionals whose work contributes to safe and successful real property transactions. Its goals include standardizing products and procedures used by these professionals in order to provide lenders and consumers consistently accurate work. To that end, ALTA introduced its Best Practices Framework in 2013, though the industry didn’t begin widespread adoption of the Best Practices until mid-2016.
The pressure to adopt ALTA Best Practices comes from two primary sources. The Consumer Financial Protection Bureau (CFPB) amended Regulation X (the Real Estate Settlement Procedures Act of 1974) in 2014 to include a provision that holds mortgage lenders liable for the accuracy and quality of work delivered by their production partners.
In 2015, TRID went into effect with its shortened deadlines for producing some transaction documentation. Many lenders attempted to shield themselves from the liability of working with third-party producers and opted, instead, to try to produce the work in-house. Those lenders were quickly reminded of the value of the work of the title agents and settlement firms they’d just set aside, though, and mortgage defects in the categories of Legal, Regulatory, and Compliance doubled in the year between Q1 2015 and Q1 2016. Clearly, lenders needed a way to contract vetted service providers to help them achieve TRID compliance.
Explosive Adoption Of ALTA Best Practices
The ALTA Best Practices Framework had been published about three years before this turning point, and while some title agents did implement them based on ALTA’s recommendation, there were no specific guidelines about how the Best Practices should be implemented. After the massive increase in mortgage defects came to light in 2016, the lenders themselves created a new wave of pressure toward adopting the Best Practices and implementing them in more carefully specified ways which the lenders felt would best protect them against legal liability for incorrect work. The Best Practices have been revised twice, most recently with the release of V 2.5 in October 2016, to reflect the concerns and demands of lenders. Implementing ALTA Best Practices is not a legal requirement, but a market-driven one that is becoming non-negotiable. Title agents, underwriters, escrow agents, settlement companies and real estate attorneys who rely on lenders for the growth of their businesses need to demonstrate to those lenders that they represent the smallest possible risk of liability, and they need to demonstrate it in a way those lenders will recognize as valid and valuable.
Seven ALTA Best Practices
- Establish and maintain current License(s) as required to conduct the business of title insurance and settlement services.
- Adopt and maintain appropriate written procedures and controls for Escrow Trust Accounts allowing for electronic verification of reconciliation.
- Adopt and maintain a written privacy and information security program to protect Non-public Personal Information (NPI) as required by local, state and federal law.
- Adopt standard real estate settlement procedures and policies that help ensure compliance with Federal and State Consumer Financial Laws as applicable to the Settlement process.
- Adopt and maintain written procedures related to title policy production, delivery, reporting and premium remittance.
- Maintain appropriate professional liability insurance and fidelity coverage.
- Adopt and maintain written procedures for resolving consumer complaints.
Best Practices Assessment And Certification Packages
It’s important to understand from the beginning that the ALTA Best Practices are a set of standards developed within the mortgage industry; they are not government regulations. The original Best Practices set forth by ALTA have been updated to reflect input from lenders and other industry professionals in order to create an environment in which effective implementation of the Best Practices is recognized as a trustworthy benchmark industry-wide.
One major impediment to full-scale trust in ALTA Best Practices is the lack of a definitive certification process or certifying body. ALTA itself does not offer certification and neither does the CFPB nor state regulators. ALTA does provide resources and a suggested method for self-certification of compliance with Best Practices and a suggested certification package that companies can offer lenders as a demonstration of compliance:
"The Certification Package is a three-part product that can be provided to a company’s customers, including its lender customers, to demonstrate that it is compliant with the Best Practices standards. This product includes:
- Agency Letter from the company to its customer certifying that it is compliant with the Best Practices standards;
- Best Practices Certificate, which may be substituted for a copy of the company’s completed Compliance Management Report, or a copy of the company’s Best Practices Manual;
- The Declarations page of the company’s Errors and Omissions or Professional Liability policies."
For professionals who need to build working relationships with lenders and consumers in the mortgage industry, ALTA Best Practices are no longer optional and it’s critical to understand that the assurance of compliance becomes legally binding and enforceable the moment an agency delivers a certification to a customer.
Beware Of Pitfalls
Although it may seem like a cost-saving way to achieve certification, there are several potential issues with self-certification. The first and most obvious issue with self-certification is that some lenders simply will not accept it. Many lenders require third-party certification (discussed below) in order to establish a working relationship with a service provider.
Another possible pitfall with self-certification is that there are a number of ways a company can accidentally misrepresent itself and incur legal liability and enforcement action. Following the ALTA procedures for self-certification circumvents one type of accidental misrepresentation, because after following all of the evaluations and assessments they suggest, a title agent will have a firm grasp of what they are representing in their self-certification package. What happens, though, when an agent has gone through the process of self- certification, and then a lender asks them to sign a self-certification document of its own? Will that title agent have sufficient knowledge to correctly represent that they comply with the requirements the lender has set forth? Obviously, the tendency would be to sign the form and take the work, but this practice can lead to agents making themselves accountable for things they may have overlooked or not fully understood until it’s too late.
In many cases wherein small businesses have to produce a procedure manual to satisfy certain requirements to win a contract, the manual will be produced to specifications, presented, then promptly shelved. If a title agent or other provider is using a procedure manual as part of a certification package, they are representing to prospective clients that they are using the procedures in that manual, training the staff on following those procedures, and monitoring their correct and consistent use on an ongoing basis.
Self-certifying Best Practices compliance is a legally enforceable affirmation that everyone in the company is following all of the practices and procedures contained in that certification package and that compliance is checked regularly. Recently, the CFPB took its first enforcement action against a company called Dwolla. Dwolla is not involved in mortgage production but in funds transfer, and it’s easy to see how the enforcement action and consequences could be applied to title agents and other professionals involved in mortgage production.
In Dwolla’s case, there was no major security breach of NPI data or funds that incited enforcement action; it was simply that they made claims of security practices that they did not, in fact, uphold. As a result of these misleading claims, the CFPB ordered Dwolla to pay a $100,000 penalty and ordered the company to "stop deceiving consumers about the security of its online payment system and enact comprehensive data security measures and policies, including a program of risk assessments and audits" and "train employees on the company’s data security policies and procedures, and on how to protect consumers' sensitive personal information. Dwolla must also fix any security weaknesses found in its web and mobile applications, and securely store and transmit consumer data."
Since the amendment to Regulation X, the CFPB has been conducting routine audits of residential mortgage lenders in order to ensure that they are achieving end-to-end compliance with the CFPB's risk management standards, and that includes the work provided by the lender’s chosen providers like title agents.
An alternative to self-certification is hiring a third party, often a CPA firm, to assess how effectively an agency’s procedure manual addresses the Best Practices standards and whether the agency is actually implementing those procedures consistently and in a way that achieves full compliance. The obvious downside to this approach is cost, but ultimately, that extra cost may provide a significantly greater value than self-certification. Getting that value depends largely on the reputation of the firm conducting the assessment and verification. Offering lenders and consumers the assessment and certification of an independent third party gives the perception of greater credibility and reassurance of quality and consistency.
Third-party certification can also help mitigate circumstances if any legal issues should arise in the future; if a company hires a third-party assessor to certify their procedures, it’s more credibly argued that any mistakes or oversights were, in fact, accidental, not intentional misrepresentations. It won’t make the legal issues go away, but it may help build a reasonable argument for lesser consequences than an intentional misrepresentation would bring.
The Bottom Line
Compliance with ALTA Best Practices is not a legal requirement, but it’s fast becoming an overwhelming demand in the mortgage production market. For professionals who need to build working relationships with lenders and consumers in the mortgage industry, ALTA Best Practices are no longer optional, and it’s critical to understand that although implementing the Best Practices is not a legal mandate, the assurance of compliance becomes legally binding and enforceable the moment an agency delivers a certification to a customer. With careful planning and implementation, ALTA Best Practices certification is an invaluable tool for business growth. Manage your compliance programs carefully, and reap the rewards.