On June 7th, the OCC added bulletin 29 to third-party relationships to clarify the way lenders should interact with third party vendors, to us, that means how lenders deal title and closing providers.
.
As a part of the lengthy bulletin, it stated the lender is responsible for ongoing monitoring.
Ongoing Monitoring
Ongoing monitoring for the duration of the third-party relationship is an essential component of the bank’s risk management process. More comprehensive monitoring is necessary when the third-party relationship involves critical activities. Senior management should periodically assess existing third-party relationships to determine whether the nature of the activity performed now constitutes a critical activity.
After entering into a contract with a third party, bank management should dedicate sufficient staff with the necessary expertise, authority, and accountability to oversee and monitor the third party commensurate with the level of risk and complexity of the relationship. Regular on site visits may be useful to understand fully the third party’s operations and ongoing ability to meet contract requirements. Management should ensure that bank employees that directly manage third-party relationships monitor the third party’s activities and performance. A bank should pay particular attention to the quality and sustainability of the third party’s controls, and its ability to meet service-level agreements, performance metrics and other contractual terms, and to comply with legal and regulatory requirements.
The OCC expects the bank’s ongoing monitoring of third-party relationships to cover the due diligence activities discussed earlier. Because both the level and types of risks may change over the lifetime of third-party relationships, a bank should ensure that its ongoing monitoring adapts accordingly. This monitoring may result in changes to the frequency and types of required reports from the third party, including service-level agreement performance reports, audit reports, and control testing results. In addition to ongoing review of third-party reports, some key areas of consideration for ongoing monitoring may include assessing changes to the third party’s
• business strategy (including acquisitions, divestitures, joint ventures) and reputation (including litigation) that may pose conflicting interests and impact its ability to meet contractual obligations and service-level agreements.
• compliance with legal and regulatory requirements.
• financial condition.
• insurance coverage.
• key personnel and ability to retain essential knowledge in support of the activities.
• ability to effectively manage risk by identifying and addressing issues before they are cited in audit reports.
• process for adjusting policies, procedures, and controls in response to changing threats and new vulnerabilities and material breaches or other serious incidents.
• information technology used or the management of information systems.
• ability to respond to and recover from service disruptions or degradations and meet business resilience expectations.
• reliance on, exposure to, or performance of subcontractors; location of subcontractors; and the ongoing monitoring and control testing of subcontractors.
• agreements with other entities that may pose a conflict of interest or introduce reputation, operational, or other risks to the bank.
• ability to maintain the confidentiality and integrity of the bank’s information and systems.
• volume, nature, and trends of consumer complaints, in particular those that indicate compliance or risk management problems.
• ability to appropriately remediate customer complaints.
Bank employees who directly manage third-party relationships should escalate to senior management significant issues or concerns arising from ongoing monitoring, such as an increase in risk, material weaknesses and repeat audit findings, deterioration in financial condition, security breaches, data loss, service or system interruptions, or compliance lapses. Additionally, management should ensure that the bank’s controls to manage risks from third-party relationships are tested regularly, particularly where critical activities are involved. Based on the results of the ongoing monitoring and internal control testing, management should respond to issues when identified including escalating significant issues to the board.
RedVision/Accenture have put out a study on the changing costs for Title Insurers due to what it aptly calls “Multiple Disruptive Forces” including such things as regulatory changes, digital operations, industry convergence, and a subdued economic outlook. The benchmark study focuses on the true costs of title insurance origination and finds that the true cost is about 30% higher than their study participants estimated.
From my perspective, it’s a thoughtful analysis. I think the ultimate thought would be to have all the information simply digitally dumped into an automated system that would spit out a title commitment. But, as we all know, as the chain of title is put together, there are many stops involved and many places to collect data, all with different systems:Treasurers, Auditors, Assessors, County Recorders, Cities, plats/surveys, etc.etc. And while I know there are inefficiencies in manually obtaining data, and I recognize that much of the information can be downloaded, I believe we are light-years away from a one-stop automated process.
In order to have a “good” title product, someone has to actually LOOK at the data as it will not simply download into the appropriate category. There are too many variables. A good search needs to verify the physical signatures on that deed, look for recitals in documents, review divorce decrees, etc. Yes, streamlining is very important, but so is the knowledge of those persons who examine the instruments. On the other hand, if the industry wishes to become completely automated, it could choose to do so and become like a casualty underwriter – don’t check past history, just prepare and reserve for much higher claims.
This is a commentary by Thomas Pryde in his Blog, reprinted with his permission.
If independent abstractors are going to take the necessary steps to be seen as valued specialists, as opposed to mindless searchers, it isn’t enough to rail against the over-inflated promises of technology. There needs to be a clear understanding of what technology can do. Perfection in the document chain is not a promise that technology will soon deliver, but there are some direct advantages that technology can provide.
Like it or not, the industry is increasingly being driven by technological forces. This happens because our clients understandably want to pay less, get results faster, and ensure greater accuracy. Technology can improve results in all three of these areas, but over-prioritizing the first two values can (and frequently does) undermine the last.
For example, it used to be enough to offer unparalleled accuracy, but speed and price have become paramount to many of our clients. As long as they don’t have to sacrifice too much in quality, faster and cheaper will win the day. For clients who value price and speed above quality, off-shore operations can offer labor rates that will undercut any US based search operations.
Technology has facilitated this possibility, but offshore operations pose a significant risk: quality inevitably suffers when there is a lack of sufficient local knowledge. To further complicate the matter, doing business with US based companies does not eliminate this risk. “US based” operations can employ an offshore search team.
It is important to point out that the technology that makes cheaper and faster possible cannot actually improve the reliability of the person performing the search, and in the end, search quality is heavily dependent on the skill of the abstractor. With that said, there are some direct advantages to be gained by using technology to automate or facilitate three main processes:
Theoretically a full implementation of these technologies could leave the customer and the abstractor doing business with one another directly. Ideally it would, but the reality remains that in between the origination of the order and the person actually doing the search there are a variety of businesses, processes, and other factors that all add cost and time to the order. Used effectively, technology can at least minimize the impact of these factors.
By understanding the forces of technology that are changing our marketplace and taking advantage of the available technology, independent abstractors can compete in this increasingly technological world. That is why the company I lead exists, but ultimately technology can only be part of the solution. The market needs to see that errors resulting from inexperienced searchers, either in the US or offshore, ultimately hurt the customer (and the consumer in the end).
Independent abstract specialists can and must make the case that their local expertise provides a significantly more reliable result. That is the difference between being an abstract specialist or a mindless searcher. Technology can help you be more efficient, it can help you be faster, and it can even help eliminate some kinds of errors, but only a pair of well trained eyes can provide consistently reliable results.
Latest Comments