Not at all. In fact it occurs in less than 10 per million policies issued or 0.001%. Unfortunately, a few bad apples caused significant problems over the past few years and hundreds of millions in escrow losses, which brought down certain players in the industry – such as Southern Title and New Jersey Title.
Every industry has bad apples. While rare, the sharp fall of the real estate industry tempted formerly good people to commit fraud to save their business, which is why the industry experienced a spike during the downturn. This fact shows why simply running a background check or reviewing public record data is not sufficient enough to vet independent agents. It is absolutely critical that the vetting process includes an ongoing monitoring of the business practices, with on-site visits from staff who operate in the marketplace and know the local market players.
The recent downturn did expose weaker procedures from some underwriters stemming from the rapid growth in the agency market with, in some cases, new entrants committing fraud and leaving the underwriter holding the bag. While painful for the underwriter community, these cases revealed the shortcomings in our processes. Stewart has emerged with the industry’s leading process – far surpassing that of any third party “experts” who vet agents.
After significant data analysis and process review, we began the process of thoroughly vetting our network of independent agencies in 2008 with the emphasis on managing for quality and profitability. We have since reduced the number of independent agencies in our network by approximately 40% and our policy loss ratio of our current independent agency network is less than one-third of its level in the comparable 2008 period. Since this historical data is only available to Stewart, we are in the lead position to independently verify the risk and provide the strongest vetting process.
Our vetting includes:
- License verification
- Pre-sign and random credit, background checks (20 year database of failed checks)
- Deloitte audits (pre-sign and periodic*) – approximately 50% of agencies are denied affiliation after a pre-sign audit
- Review of policy loss history and track record in business*
- Review of E&O/Fidelity bond coverage*
- Random on-site visits*
- Physical file inspections*
- Policy inventory audits*
- Compliance training*
- Stewart’s vetting and management program also looks at the claim history of the agency. This is another key indicator of the quality of the agency and it is information third party vetting companies do not have;
- Stewart’s vetting and management program has as a central focus – the providing of training and education to independent agencies; we provide 50 training and educational opportunities to agencies annually
- Assessment of red flags, including:
- Financial issues, domestic issues and addiction issues
- Changes in ownership, absentee ownership or health issues
- New car/boat/toys
- Changes in employees, business associates, family-run business or related entities (mortgage brokerages/realty office)
- Prior issues with other underwriters or cancellation by another underwriter
- Criminal histories of employees/associates
- Repeat customers or series of closing several transactions with same buyer
- High risk lines of business; untimely recording practices; policy prep/reporting issues and/or disorganized file maintenance
- High loss ratio
- Late premium remittances
- Premium remittance is less than expected minimums
- Infrequent audits
- Infrequent agency visits
- Agent is located in a state suffering disproportionately during the economic downturn
- Fraud and Forgery Watch Program ($500)
Absolutely not. The underwriters suffered the greatest loss by far of ineffective agencies. And, as the party with the most to lose in a defalcation, we also have the most skin in the game for vetting of the agent.
Not only do underwriters have the highest vested interest in maintaining a trustworthy and strong agency network, they also are in the best position to monitor that risk.
Numerous banks have backed away from third party vetting given the additional cost and lack of value it adds to the transaction.
While the underwriter isn’t responsible for the escrow operations of its policy-issuing independent agencies in most states, the fact is, when theft occurs it is often attached to issuing a clean title while thus resulting in a title claim and ultimately being paid by the underwriter or covered by the closing protection letter (CPL).
The CPL covers “actual loss of settlement funds incurred by you in connection with the closing” for the lender, its assignee or a warehouse lender. This includes fraud theft, dishonesty or negligence as it relates to the status of title.
In addition, Stewart has teamed with Lloyd’s of London® to create a very unique enhanced fidelity bond we call the Escrow Security Bond (ESB) that protects Stewart and the lenders’ financial interest as well as the consumers’ non-public information (NPI).
- Covers misappropriation, embezzlement or theft of settlement funds by an employee of the title agent
- Covers misappropriation embezzlement or theft of settlement funds by the principal, partner or shareholder of the title agency
- Allows a designated third party the ability to file a claim under the ESB should the principal, partner or shareholder steal settlement funds – i.e., Lloyd’s of London® pays third party directly when the owner of the title agency embezzles settlement funds
- Covers settlement funds should a third party hacker infiltrate the agent’s computer system and divert funds to a fraudulent account inside or outside the USA
- Provides liability coverage in the event non-public information (NPI) is breached:
- Covers the cost associated with a breach of NPI such as notifying the consumer, credit monitoring, fines levied by federal, state and local authorities and similar crisis management expenses
- Covers third party liability claims for negligence as a result of the release of NPI
No, in fact our industry is regulated by 50 states, and now the CFPB.
With well over 100 years of experience, we have found that using attorneys as settlement agents does not reduce the risk. And, in some cases, risk can be increased if the attorney used does not specialize in title and escrow matters due to a lack of expertise and attentiveness concerning the title and escrow process.
We feel that the only party with sufficient financial backing, understanding of possible risks and detailed ongoing communication and assessment is the underwriter. As a preferred underwriter, our job is to assure that Stewart agencies are of the highest quality, which not only minimizes our risk and exposure but also protects the value of our brand and history of trust and integrity.
We aim to overperform in the market and can only do so by having the highest quality network. We believe agents should be thoroughly vetted by an organization with the skills and resources to perform an extensive data and fact-based process. We do not believe a simple background check along with a rubber stamp that an agent can buy meets the industry’s needs. Additionally the current third-party vetting services have no skin in the game, no experience in agency vetting, no history of claims or escrow processes, no feet on the street to perform on-site audits, and no financial backing.
Our industry plays a vital role in reducing risk in the mortgage market. At Stewart, we take that responsibility very seriously and have taken a market leadership role to assure we have the highest quality agency base. Not only is that our job, but it also will yield significant financial benefit to our shareholders.
We are open to new ideas to reduce and eliminate fraud and welcome opportunities to have individual discussion to alleviate fears and enhance your compliance.
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