Passing the buck: How title companies are handling the increased cost of compliance
By Paul Roberts, Director, Aprio’s ComplianceSuccess Program
Historically, the cost of compliance has always been an assumed cost of doing business for title companies. With the level of regulatory scrutiny the industry is under today, the cost is higher than it has ever been. So how are title agents responding to the increased cost? Are they transferring the cost of compliance to consumers? If so, how are they disclosing that cost, and by what methods are they calculating the cost to the consumer?
Aprio, LLP conducted a survey, Passing Along the Cost of Compliance, asking settlement and title agencies those exact questions. Of the 121 respondents, 40.5 percent said they were, in fact, passing along the cost of compliance to consumers. In addition, of the respondents that indicated they were not currently passing along the cost of compliance, 44.4 percent indicated they intended to do so in the near future.
When it comes to disclosing this cost on the Good Faith Estimate (GFE) and HUD-1 (referred to as the Loan Estimate [LE] and Closing Disclosure [CD] effective October 3, 2015), there is no clear consensus on how to disclose that cost, much less to calculate it. For those surveyed that are currently charging consumers, respondents were nearly evenly split, with 44.7 percent charging a flat fee and 47.4 percent opting to increase existing fees.
Responses to how that cost was disclosed on the settlement statement varied widely, with some identifying it as a compliance fee. Others opted to include it in under Title Services fee, Attorney fees, or Settlement/Escrow/Closing fees. Respondents planning to charge consumers in the future were similarly divided, with 45.2 percent opting for the flat fee and 41.9 percent planning an increase in the overall cost of service. However, many of those respondents were unsure as to how they would disclose that cost.
Interestingly, a very small percentage of respondents in both camps chose or plan to pass this cost along as a percentage of costs. Possible reasoning is that it can be very difficult to nail down a fixed cost of compliance to be applied equally to each deal closed. A number of variables contribute to determining the true cost of compliance on a per-transaction basis, such as monthly closing volume or the unique circumstances of a particular closing. Thus, this method requires the initial fee reported to the consumer to be an estimate.
“The regulation by which title insurance rates can be charged to the consumer vary among states as being promulgated, state filed or negotiable with the consumer,” according to Marx Sterbcow, Managing Attorney of the New Orleans-based law firm Sterbcow Law Group, LLC. “Additionally, some states are considered to be ‘all inclusive’, meaning the promulgated rate also includes the title search, examination and/or closing fees necessary to settle the title insurance transaction.”
Sterbcow explains further, “Given the potential pitfalls of passing along this cost, not to mention the lack of industry guidance on how to do so, we recommend you seek the advice of a professional (i.e., an attorney that specializes in mortgage/real estate compliance) in the state [in which] you do business. Regulators, the Consumer Financial Protection Bureau (CFPB) in particular, are especially sensitive to the fees consumers are charged and how those charges are determined.”
Do bear in mind that a perfectly legal, defensible position that does not take into account the consumer’s best interest is going to be scrutinized and possibly penalized by the CFPB. Therefore, a wise company may opt to err on the side of caution, which, in this case, is the consumer.
The title industry is anticipating further compliance changes post-TRID (TILA-RESPA Integrated Disclosure), which are only going to drive the cost of compliance higher. Therefore, it is critical for title agents to determine as soon as possible what their procedures for passing along this cost are going to be moving forward. There is too much at stake to make this decision in a vacuum. They can either pay attorney fees now and get it right, or pay them later when regulators come knocking.
A number of variables contribute to determining the true cost of compliance on a per-transaction basis, such as monthly closing volume or the unique circumstances of a particular closing.