ALTA’s Best Practices (2013) November 2014

Agenda — November 2014

Overview and objectives

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ALTA’s Best Practices (2013) overview

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Pillar II: Escrow account controls

10

Pillar IV: Settlement procedures

19

Pillar V: Policy production and reporting

26

In Summary

29

Wrap-up and Q&A

31

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ALTA’s Best Practices (2013)

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Overview and objectives

Overview and objectives The goal of this presentation is to provide you with a deeper understanding of: 1. Why is Compliance with ALTA’s Best Practices (2013) Important? 2. Escrow Account Controls (Pillar II), Settlement Procedures (Pillar IV), and Policy Production & Reporting (Pillar V) using the following framework:

Risk: What could go wrong?

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ALTA’s Best Practices (2013)

Requirement: What do I need to do?

Recommendation: What’s the best way to do it?

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Dilbert’s “Best Practices”

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ALTA’s Best Practices (2013)

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Brief History of ALTA’s Best Practices July 2010 – Dodd-Frank Act creates CFPB

2010

2011

June 2012 – ALTA begins developing Standards/Best Practices

2012

April 2012 – CFPB Bulletin 2012-03

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ALTA’s Best Practices (2013)

July 2014 – ALTA’s Readiness Assessment Guides

2013

2014

July 2013 – ALTA’s Best Practices Released

August 2015 – CFPB’s new Closing Disclosure goes into effect

2015

September 2014 – ALTA’s Annual Convention

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Why is Compliance with ALTA’s Best Practices Important? CFPB Expectations CFPB Bulletin (2012-03)1: “Requesting and reviewing the service provider’s policies, procedures, internal controls, and training materials to ensure that the service provider conducts appropriate training and oversight of employees or agents that have consumer contact or compliance responsibilities;” (emphasis added) CFPB Examination Procedures2: “Verify the entity implements and maintains effective risk and supervisory controls to select and manage third-party contractors and service providers” 1http://files.consumerfinance.gov/f/201204_cfpb_bulletin_service-providers.pdf 2 http://files.consumerfinance.gov/f/201210_cfpb_supervision-and-examination-manual-v2.pdf

Lender Expectations March 2014, Wells Fargo3: “…ALTA Best Practices are guidelines for sound business practices that should ideally already be in place for businesses providing title and closing services for its customers..” 3www.alta.org/advocacy/news.cfm?newsID=24097

Underwriter Expectations Stewart’s Trusted Provider Program4: “Lenders and customers can depend on title agencies and attorney agents exhibiting the Stewart Trusted Provider seal to provide them with a quality experience throughout the real estate transaction process ...” 4http://www.stewart.com/press-release/stewart-title-guaranty-company-announces-trusted-provider-program-for-title-agencies-and-attorney-agents

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ALTA’s Best Practices (2013)

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ALTA’s Best Practices (2013) overview

ALTA’s Best Practices (2013) overview The ALTA’s Best Practices Framework was developed to assist lenders in satisfying their responsibility to manage third party vendors. The Best Practices were created to help ALTA members highlight policies and procedures the industry exercises to protect lenders and consumers. The focus of today’s presentation will be on Pillars II, IV, and V.

Pillar I: Licensing

Pillar V: Policy production and reporting

Pillar II: Escrow account controls

Pillar VI: Liability and fidelity coverage

Pillar III: Security and privacy

Pillar IV: Settlement procedures

Pillar VII: Consumer complaint tracking

Each pillar represents an area of risk to your customers — including lenders, consumers, and other third parties. 9

ALTA’s Best Practices (2013)

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ALTA’s Best Practices (2013) Pillar II: Escrow account controls

Pillar II: Escrow account controls Written procedures

Pillar II: Escrow account controls

Requirement • Adopt and maintain appropriate written procedures and controls for Escrow Trust Accounts.

Risk • Without written procedures, standard processes may not be followed.

• Written procedures

• New hires may have difficulty learning and following the correct operational steps.

• Separation of escrow and operating funds

• Without written procedures, there is a lack of accountability for errors and mistakes.

• Preparation of trial balance

Example of best practice • Maintain a written procedures manual for all Escrow Trust Accounts and make this manual a part of your training program. • All sections of ALTA Best Practice (Pillar 2) should be included. • On an annual basis, review the procedures and make appropriate updates.

• Reconciliation • Identification • Authorization • Bank account controls • Employee training and verification 11

ALTA’s Best Practices (2013)

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Pillar II: Escrow account controls Separation of escrow and operating funds

Pillar II: Escrow account controls

• Written procedures • Separation of escrow and operating funds • Preparation of trial balance • Reconciliation • Identification

Requirement

Risk

Example of best practice

• Escrow funds or other funds maintained under a fiduciary duty to another can not be commingled with the operating account or an employee or manager’s personal account.

• Commingling of escrow funds creates an opportunity for misappropriation of funds, either through fraud or accident.

• Maintain a separate account for real estate closings. (Attorney) • Transactions in the escrow account should be related to and able to be tracked to a real estate transaction.

• Remove agency fees and premiums from the escrow when they become payable. • Remit underwriter premiums directly from the escrow account or open a separate account specifically for underwriter premiums.

• Authorization

• Bank account controls • Employee training and verification

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ALTA’s Best Practices (2013)

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Pillar II: Escrow account controls Preparation of trial balance

Pillar II: Escrow account controls

• Written procedures • Separation of escrow and operating funds • Preparation of trial balance • Reconciliation • Identification

Requirement

Risk

Example of best practice

• On at least a monthly basis, all escrow account reconciliations are prepared with Trial Balances listing all open escrow balances (also known as an “Open File Listing”). This report should agree to the reconciled bank balance and book balance and is considered as the third component of the three-way account reconciliation.

• FDIC coverage may be limited if client funds are not identified or if the records are incomplete or inaccurate.

• Trial Balance prepared by the 10th business day following the bank statement date.

• Escrow funds not completely disbursed are not easily identifiable, creating additional risks related to late disbursements.

• The trial balance should identify files by customer and note the last activity date of the file.

• All file balances should be investigated. File balances held in excess of six months should be reviewed to determine if the funds are still required to be retained. • Any shortages should be funded immediately.

• Authorization

• Bank account controls • Employee training and verification

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ALTA’s Best Practices (2013)

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Pillar II: Escrow Account Controls Reconciliation

Pillar II: Escrow account controls

• Written procedures • Separation of escrow and operating funds • Preparation of trial balance • Reconciliation • Identification • Authorization

Requirement • On at least a daily basis, reconciliation of the receipts and disbursements of the Escrow Trust Account is performed. • On at least a monthly basis, a Three-Way Reconciliation is performed reconciling the bank statement, check register, and Trial Balances.

Risk • Unauthorized transactions posted to the account • Unidentified adjustments, deposits-in-transit, errors, and outstanding checks may go unnoticed without proper reconciliation.

Example of best practice • Reconciliations should be prepared independently by someone not associated with the receipt and disbursement function. • Reconciliations should be reviewed and signed off by management or a supervisor. • Immediately follow up and resolve reconciliation exceptions. • Follow up on any outstanding checks, especially for items that could create a lien (insurance, homeowner’s association fees, water/sewage, etc.)

• Bank account controls • Employee training and verification

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ALTA’s Best Practices (2013)

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Pillar II: Escrow Account Controls Identification

Pillar II: Escrow account controls

• Written procedures • Separation of escrow and operating funds • Preparation of trial balance

Requirement • Accounts are identified as “escrow” or “trust” accounts. • Unless directed by the beneficial owner, Escrow Trust Accounts are maintained in Federally Insured Financial Institutions.

Risk

Example of best practice

• Accounts not identified as “escrow” or “trust” may not be eligible for additional Federal Deposit Insurance Corporation (FDIC) insurance coverage.

• Appropriate identification should appear on all accountrelated documentation including bank statements, bank agreements, disbursement checks and deposit tickets. • Maintain adequate documentation for any funds being held in an institution that is not FDIC insured at the request of the beneficial owner.

• Reconciliation • Identification • Authorization

• Bank account controls • Employee training and verification

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ALTA’s Best Practices (2013)

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Pillar II: Escrow Account Controls Authorization

Pillar II: Escrow account controls

• Written procedures • Separation of escrow and operating funds • Preparation of trial balance • Reconciliation • Identification • Authorization

Requirement • Only those employees whose authority has been defined to authorize bank transactions may do so.

Risk • Misappropriation of funds • Transaction errors • Violation of company policy

Example of best practice • Employee authorizations are set by the Company and reviewed annually. • Former employees are immediately removed as listed signatories on all bank accounts.

• Ensure that signatory stamps are secured and made available only to authorized employees. • For inactive/dormant accounts, senior management approval should be required prior to any disbursement of funds.

• Bank account controls • Employee training and verification

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ALTA’s Best Practices (2013)

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Pillar II: Escrow Account Controls Bank account controls

Pillar II: Escrow account controls

• Written procedures • Separation of escrow and operating funds • Preparation of trial balance

Requirement • Utilize Positive Pay or Reverse Positive Pay, Automated Clearing House (ACH) blocks and international wire blocks, if available.

Risk • Increase in the risk of unauthorized disbursements • ACH credit transactions are not considered to be good funds. The originator has the ability to ‘call back’ the funds. • ACH debits can remove funds from the account, unauthorized transactions must be returned within a very short time period.

Example of best practice • Utilize a bank that offers disbursement fraud protection services. • Set up accounts to not authorized ACH transactions. • Set up accounts to not allow for international wire transfers. • Implement positive pay/reverse positive pay for all escrow accounts.

• Reconciliation • Identification • Authorization

• Bank account controls • Employee training and verification

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ALTA’s Best Practices (2013)

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Pillar II: Escrow Account Controls Employee training and verification

Pillar II: Escrow account controls

• Written procedures • Separation of escrow and operating funds • Preparation of trial balance

Requirement

Risk

• Employee background checks are completed during the hiring process.

• Candidates for employment may have a history not suited for work with customer or company funds.

• At least every three years, obtain a five year background check for all employees who have access to customer funds.

• Insufficient or outdated knowledge of company, industry and regulatory requirements.

Example of best practice • Background check requirement upon hire and periodically thereafter. • Set annual requirements for continuing education for employees and provide training materials on a periodic basis.

• Provide for training employees in management of escrow funds and escrow accounting.

• Reconciliation • Identification • Authorization

• Bank account controls • Employee training and verification 18

ALTA’s Best Practices (2013)

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ALTA’s Best Practices (2013) Pillar IV: Settlement procedures

Pillar IV: Settlement procedures Written recording procedures

Pillar IV: Settlement procedures

• Written recording procedures • Timely shipment of documents

Requirement

Risk

Example of best practice

• Determine contractual, regulatory, and statutory obligations to record documents and incorporate these requirements in written procedures.

• The agency may be in breach of contractual and statutory requirements if proper recording procedures are not followed.

• On at least an annual basis, review and confirm legal (statutory) and contractual (underwriter) requirements for recording.

• Without regular review of requirements, a company may inadvertently follow improper procedures.

• Document review and maintain copies of relevant statutory guidelines, as well as underwriter contracts.

• Verify recordings and follow-up on rejections • Written pricing procedures • Quality checks • Issue timely refunds when discovered

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ALTA’s Best Practices (2013)

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Pillar IV: Settlement procedures Timely shipment of documents

Pillar IV: Settlement procedures

• Written recording procedures • Timely shipment of documents • Verify recordings and follow-up on rejections • Written pricing procedures

Requirement • Submit documents for recording within two business days of the later of settlement or receipt of the documents (when not performing settlement.) Track shipments of documents for recording.

Risk • Late recordings can lead to additional liens against the property or loss of priority possibly resulting in claims and litigation.

Example of best practice • Implement procedures to ensure that documents are submitted or sent for recording within 48 hours of settlement. • If documents are shipped or sent by courier, formally document the date that the documents were sent for recording. Maintain a log of all documents submitted for recording. • Evaluate electronic recording services to e-record documents securely and efficiently.

• Quality checks • Issue timely refunds when discovered

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ALTA’s Best Practices (2013)

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Pillar IV: Settlement procedures Verify recordings and follow-up on rejections

Pillar IV: Settlement procedures

• Written recording procedures • Timely shipment of documents • Verify recordings and follow-up on rejections

Requirement

Risk

Example of best practice

• Verify that recordation actually occurred. Ensure timely responses to recording rejections. Address rejected recordings to prevent unnecessary delay.

• A document shipped for recording may be rejected. If the rejected document is not addressed, it may never be recorded properly.

• Establish a formal process to track, and appropriately address rejected recordings. • Verify that all documents shipped for recording are properly recorded and follow up on any outstanding documents. • Respond to rejected recordings within two days of receipt and maintain a record of follow-up actions.

• Written pricing procedures • Quality checks • Issue timely refunds when discovered

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ALTA’s Best Practices (2013)

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Pillar IV: Settlement procedures Written pricing procedures

Pillar IV: Settlement procedures

• Written recording procedures • Timely shipment of documents • Verify recordings and follow-up on rejections • Written pricing procedures

Requirement

Risk

Example of best practice

• Draft and maintain written procedures for charging the correct title insurance premium and other rates. To ensure accuracy, spell out the process for utilizing rate manuals and online calculators. Ensure discounted rates are calculated and charged when appropriate (refinance or reissue rates).

• The customer may be overcharged, resulting in the need to issue a refund.

• Utilize rate manuals and online calculators, as appropriate, to help ensure correct fees are being charged for title insurance policy premiums, statespecific fees and endorsements. Consult with the chosen underwriter in complex scenarios to ensure the proper premium is being charged.

• The customer may be undercharged, where a discount may not be authorized.

• Some states have set rates that must be calculated properly in order to comply with regulatory obligations.

• Review the rate schedule periodically to verify the most current schedule is being used to calculate premiums.

• Quality checks • Issue timely refunds when discovered

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ALTA’s Best Practices (2013)

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Pillar IV: Settlement procedures Quality checks

Pillar IV: Settlement procedures

• Written recording procedures • Timely shipment of documents

Requirement

Risk

Example of best practice

• Randomly quality check files after settlement to ensure congruence with written procedures.

• Erroneous rate calculations and faulty settlement procedures may go undetected without quality checking files. The agency may not discover the problem until a catastrophe occurs.

• On a periodic basis, agency management should randomly select a sample of files for quality assurance review. If multiple closing staff are employed, efforts should be taken to ensure that files from each closer are reviewed.

• Verify recordings and follow-up on rejections

• Transactions should be tested to determine whether non-title insurance rates for services provided agree with the established rates.

• Written pricing procedures

• The quality review process should be documented.

• Quality checks • Issue timely refunds when discovered

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ALTA’s Best Practices (2013)

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Pillar IV: Settlement procedures Issue timely refunds when discovered

Pillar IV: Settlement procedures

• Written recording procedures

Requirement

Risk

Example of best practice

• Provide timely refunds when an overpayment is detected.

• An agency may be in breach of contract or statutory requirements if customers are being overcharged and the overages are not being properly refunded.

• Written procedures and policies should be in place to ensure that any overcharge that is discovered is quickly refunded to the consumer.

• Timely shipment of documents • Verify recordings and follow-up on rejections • Written pricing procedures • Quality checks • Issue timely refunds when discovered

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ALTA’s Best Practices (2013)

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ALTA’s Best Practices (2013) Pillar V: Policy production and reporting

Pillar V: Policy production and reporting Title policy production and reporting

Pillar V: Policy production and reporting

• Title policy production and delivery • Premium reporting and remittance

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ALTA’s Best Practices (2013)

Requirement • Issue and deliver policies to customers within thirty days of the later of Settlement or the date that the terms and conditions of title insurance commitment are satisfied.

Risk

Example of best practice

• An agency may be in breach of contractual, regulatory, or statutory requirements if policies are not issued and delivered to customers in a timely manner.

• Written procedures and policies should be in place to ensure that policies are issued and delivered to customers in a timely manner. • The agency should track and document the date on which policies are issued and delivered.

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Pillar V: Policy production and reporting Premium reporting and remittance

Pillar V: Policy production and reporting

• Title policy production and delivery • Premium reporting and remittance

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ALTA’s Best Practices (2013)

Requirement

Risk

Example of best practice

• Report title insurance policies and remit premiums to the underwriter by the last day of the month following the month in which the insured transaction was settled.

• An agency may be in breach of contractual, regulatory, or statutory requirements if policies are not reported and/or premiums are not remitted in a timely manner.

• Report policies (including a copy of the policy) to underwriter by the last day of the month following the month in which the insured transaction was settled. Document the date that the policies were sent to the underwriter. • Remit premiums to underwriter by the last day of the month following the month in which the insured transaction was settled. Document the date that the premiums were sent to the underwriter.

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In Summary

In Summary… o Compliance with ALTA’s Best Practices is important o Complete self-assessments using Stewart & ALTA provided selfassessment guides o Create a plan to complete implementation

o Once ready, determine an appropriate service provider to conduct your Compliance Attestation o Don’t underestimate the effort! Deloitte Contacts

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Madhu Gopinath

John Wolf

Senior Manager Deloitte & Touche LLP +1 312 486 1237 [email protected]

Manager Deloitte & Touche LLP +1 303 298 6617 [email protected]

ALTA’s Best Practices (2013)

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Wrap-up and Q&A

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