ALTA develops wire fraud rapid response plan

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Dirt lawyers:  post this in your office!

alta-color-regIn this era where cybersecurity is our greatest challenge, American Land Title Association has benefited all of us in the real estate industry by developing a rapid response plan for wire fraud incidents. Two links are here, one to the plan itself and another to a response worksheet.

Many of our offices have been challenged with these incidents, and we have learned that time is of the essence. We are, in fact, hearing more and more stories where the diverted money (or some of it) actually gets returned when action is taken quickly. Every second counts! Use these resources to guide you and your staff in reacting immediately.

This plan guides offices in contacting banks, parties to the transaction and law enforcement officials at various levels. Websites for notices are included.

I recommend that you save these resources in a place where everyone in your office can access them. And I recommend that you make hard copies and post them in a central location in your office.

Be safe out there!

And thank you, American Land Title Association!

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Another settlement agent sued for failing to protect buyer in email diversion

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My first blog of 2018 discussed a novel lawsuit (at least novel to me) brought in York County against a residential closing law firm. A home purchaser had lost $50,000 in closing funds that were diverted by a third-party criminal posing as the transaction’s real estate agent. Did you hear that? The real estate agent was hacked. The law firm was not hacked and was only involved in the loss because it was the settlement agent. 

The law firm’s paralegal and the purchaser had discussed the funds necessary to close by telephone, but no mention was made in that conversation of the wiring instructions. The complaint stated causes of action in negligence and legal malpractice and listed the following breaches of duty:

  • Requiring the purchaser to wire funds without counseling the purchaser about methods by which the secure delivery of wired funds could be compromised;
  • Failing to counsel the purchaser about the risks and insecurity of email communications, particularly of private, sensitive and financial closing information; and
  • Failing to be alerted by the circumstances of the purchaser’s telephone call to the firm’s paralegal.

email fish hook

American Land Title Association’s ALTA News, dated March 9, reports on a similar lawsuit filed in Wisconsin. The original news story was written by Brian Huber and reported by gmtoday on March 8. 

In the Wisconsin lawsuit, the email of the settlement agent, Merit Title, was apparently compromised. According to the complaint, a Merit Title employee used an unsecured system to email the closing statement and wiring instructions to the purchaser. The following month, the purchaser received an email purportedly from Merit Title, but with a missing “T” in the domain name (merititle instead of merittitle). The second email provided wiring instructions that were similar in format, structure and design to the ones sent by Merit, according to the complaint. The purchaser lost $82,000 in the scam.

The lawsuit claims Merit “had knowledge or should have had knowledge of a cybercriminal epidemic whereby hackers target title companies to learn about real estate transactions occurring and the hackers then send fraudulent wire instructions to the buyers prior to the closing.” Merit Title should have known of preventive steps to protect the buyers, the complaint stated.

My guess is that we are about to see numerous suits like this, seeking payment from the deepest pockets involved in real estate transactions. As I asked in the earlier blog, would the processes established by your law firm for the protection of your clients defend against this type of fraud?  If not, get busy and make changes.

ALTA has a list of resources that can be used to provide the appropriate safeguards, and your title insurance company should be able to assist you in implementing the appropriate resources in your office. Most of the protective procedures involve making sure your own systems are secure. But these lawsuits seems to indicate that consumers must also be advised of the dangers of dealing with others involved in closings who do not use secure systems. You don’t want to be left holding the bag for a comprised email system of a real estate agent!

Thirty-year fixed-rate mortgages

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Are they still the most logical choice for all buyers?

Is the mortgage industry due for a facelift?

facelift

I recently saw an interesting article from MReport via American Land Title’s Newsletter dated February 26, entitled, “A Mortgage Best Fit; Lenders are bypassing the 30-year fixed-rate mortgage in favor of loans that are tailored to specific borrower niches”. I recommend that all dirt lawyers read this article to understand that the mortgages you may be closing in the future may not be the same as the mortgages you closed in the past. You can read the article in its entirety here.

My husband and I built a house and closed a mortgage loan in 2011, and, although we told the lender and real estate agent we intended to pay the loan off quickly, both insisted on the old-fashioned 30-year fixed rate mortgage with a twenty-percent down payment. The lender didn’t even offer alternatives. In 2011, the housing market was just returning from the financial debacle that began in 2007, so everyone was being extremely careful. (I remember being questioned about why our income tax picture had changed in the years leading up to 2011 and having to write a letter explaining that children grow up and leave home.) I’m not sure we would be approached in the same way today, based on this article.

First-time buyers often choose 30-year mortgages because no one explains other options and because it’s the product their parents understand and recommend. The traditional mortgage is generally the safest option because of its reliable, consistent monthly payment. Interest rates have been low for many years now, and this fact also supports the wide-spread use of the traditional mortgage. Why risk a variable rate when the fixed rate is low?

This article suggests, however, that millennials and other first-time buyers may now be more inclined to select shorter-term and adjustable-rate options. Someone who is just entering into the housing market may envision living in their starter home for only a few years and may prefer an adjustable rate mortgage to take advantage of the low interest rate up front. This article suggests that millennials may be saddled with student debt and may be a more transient group, so they don’t want to commit to anything that lasts thirty years. Few envision themselves working for a single company for any length of time. They believe they must change jobs to increase their incomes. This article also suggests that millennials may not be loyal to a geographic area.

In addition to variable rate mortgages, this article suggests the concept of the equity-sharing mortgage, where an investor shares in the appreciation in the home value in exchange for down payment assistance or lower payments. These new-fangled products may enable low- and moderate- income borrowers to enter the housing market.

Some lenders are recognizing that these trends mean that the entire underwriting process needs to be reexamined to accommodate the millennial market. And they also recognize that veterans may have difficulty getting the service and products they need to buy homes because VA loans are a little more expensive for lenders to close. More education for veterans and training for loan officers may be needed to accommodate the veteran population. Online and mobile-friendly mortgages are also likely to change the face of the mortgage industry in the future.

CFPB Announces TRID Clarity in the Works

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Cordray signals notice of new rule expected late July

cfpb-logoIn an April 28 letter addressed to several industry trade groups and their members, Director Richard Cordray of the Consumer Financial Protection Bureau, said his agency has begun drafting a notice intended to provide “greater certainty and clarity” in the Know Before you Owe Rule.

The letter stated the CFPB is working hard to understand industry concerns and recognized there are places in the regulation text and commentary where adjustments would be useful.

In a press release, also dated April 28, American Land Title Association said its primary goal for the proposed adjustments is to insure consumers receive clear information about their title insurance costs on the Closing Disclosure. As we have all experienced, TRID requires a very odd negative number as the cost for owner’s title insurance in most situations. ALTA has been arguing against this strange result for many months.

The Director’s letter stated that the Bureau has begun drafting a Notice of Proposed Rulemaking (NPRM) that should be available for comments in late July. It also suggested that one or two meetings will be arranged with industry participants before the NPRM is issued. In the meantime, the letter encouraged continued feedback.

The text of the letter can be accessed here.

Good News From ALTA

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CFPB said lenders can’t “unilaterally” shift TRID liability

lane shiftIn news that will be well received by South Carolina residential closing attorneys, ALTA reported on April 8 that CFPB Director Richard Cordray stated that lenders may not unilaterally shift liability for errors on TRID mortgage disclosures to third parties.

The report indicates that U.S. Senator Robert Corker of Tennessee had written a letter to Director Cordray asking whether creditors, acting alone, may shift liability to settlement agents for Closing Disclosure errors. Director Cordray responded in writing, “While creditors may enter into indemnification agreements and other risk-sharing arrangements with third parties, creditors cannot unilaterally shift their liability to third parties and, under the Truth in Lending Act, alone remain liable for errors on the Know Before You Owe mortgage disclosures.”

ALTA’s report further states that Director Cordray wrote that lenders and settlement agents are free to decide how to divide the responsibility and risk when implementing the new requirements through contracts.

stay tunedWe have heard from closing attorneys across South Carolina that lenders are taking varying approaches in their attempts to shift or share TRID liability with closing attorneys. We caution closing attorneys to read letters and closing instructions carefully and to negotiate or strike objectionable provisions. Pay particular attention to provisions that would violate attorney ethical obligations. Don’t agree, for example, that client confidences will be revealed to creditors.

Who You Gonna Call?

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Even five months into TRID implementation, there is still confusion about
who is allowed to receive the CD and Closing Statement

paperwork confusionWe’re all crystal clear that the borrower must be provided with the new CFPB compliant Closing Disclosure. We’re clear that there are very specific rules about when that document must be delivered to facilitate the scheduled closing. We know that most of the large national lenders are preparing and delivering the Closing Disclosure themselves while many of the local and regional lenders are still relying on closing attorneys to prepare and deliver this document.

What remains uncertain in some areas is how to deliver the necessary closing numbers to real estate agents, sellers and, when it comes to seller numbers, to lenders.

Real Estate Agents: There is no doubt that real estate agents need the numbers. They typically provide valuable guidance to their buyer clients on the accuracy of the numbers in advance of and during closings. They are also required to retain copies of closing statements in their files. But the Closing Disclosure now contains much more information than the HUD-1 Settlement Statement, and it is a common belief that delivery by a lender or closing agent to a real estate agent violates the buyer’s right to protection of personal information.

What is the solution?  There are two lines of thought. Some believe the buyer should sign a waiver allowing the lender and settlement agent to provide the Closing Disclosure to the buyer’s real estate agent. Several lenders, however, have stated that they will not act on waivers of this type.

The other line of thought is that the real estate agents (both the buyer’s agent and the seller’s agent) can be provided with a closing statement without violating anyone’s privacy. All of the closing software programs have closing statements available for this purpose. American Land Title Association has created forms for this reason, and most lawyers also have versions they have previously used for commercial and residential cash transactions.

Real estate lawyers in South Carolina need to prepare separate closing statements regardless of this dilemma. Our Supreme Court has made it clear that all the numbers in a closing must be properly disclosed to the parties. It took many of us months to wrap our brains around the fact that a Closing Disclosure does not contain all the numbers. It is not a closing statement and it is not a replacement for the HUD-1. It is also not a document from which we can disburse. We need a settlement statement that balances to a disbursement analysis to assure that our numbers are correct.

Sellers: The seller should be provided with the seller’s Closing Disclosure, which is prepared by the settlement agent and not the lender. But, again, this document does not reveal all of the numbers relevant to the closing, so the seller should also be provided with a settlement statement.

Lenders (as to Seller’s numbers): We have heard that lenders are having difficulty obtaining seller information from closing attorneys, but under TRID, settlement agents are obligated to provide the seller’s information to the lender. Lenders need this information to test the accuracy of the buyer’s information, for audit purposes and to be able to provide proper information to investors.hang in there

Five months out, we are all still working our way through TRID, and we will continue to work our way through the various issues as they arise. South Carolina lawyers can rely on friendly real estate lawyers on the Bar’s Real Estate Practices Section ListServ, which can be found here. And title insurance companies continue to obtain and disseminate information as issues arise. We’ll get through it!

Feds Play Shell Game in Manhattan And Miami

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Title companies obligated to ID true owners behind shell entities.

Will this obligation migrate closer to home?

money launderingSecretly purchasing expensive residential real estate is evidently a popular way for criminals to launder dirty money. Setting up shell entities allows these criminals to hide their identities. When the real estate is later sold, the money has been miraculously cleaned.

The Federal government is seeking to stop this practice.

The Financial Crimes Enforcement Network (FinCEN) of the United States Department of the Treasury issued orders on January 13 that will require the four largest title insurance companies to identify the natural persons or “beneficial owners” behind the legal entities that purchase some expensive residential properties.

This is a temporary measure (effective March 1 to August 27) and is limited to at this point to the Borough of Manhattan in New York City, and Dade County, Florida, where Miami is located. In those two locations, the designated title insurance companies must disclose to the government the names of buyers who pay cash for properties over $1 million in Miami and over $3 million in Manhattan. FinCEN will require that the natural persons behind legal entities be reported if their ownership in the property is at least 25 percent.

FinCEN’s official mission is to safeguard the financial system of the United States from illicit use, to combat money laundering, and to promote national security through the collection, analysis and dissemination of financial intelligence.

FinancialCrimesEnforcementNetwork-Seal.svgThese orders are a continuation of FinCEN’s focus on anti-money laundering protections for the real estate sector. Previously, the focus was only on transactions involving lending. The new orders expand that focus to include the complex gap of cash purchases.

FinCEN’s Director, Jennifer Shasky Calvery, was quoted in the agency’s press release: “We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money.”

American Land Title Association officials met with FinCEN to confirm the details of the orders. Michelle Korsmo, Executive Direction of ALTA, indicated that ALTA is supportive of the effort but is concerned that the program must be implemented in order to determine whether it will work. She said it will be difficult for a title insurance company to figure out a transaction involving a major drug kingpin who buys a mansion through a string of shell corporations all over the world.

This phase of the new program is being called temporary and exploratory, meaning that it may or may not work, and if it does work, it may or may not be expanded to other locations. (Query:  why won’t a money launderer who seeks to purchase residential real estate during the initial phase of this program, simply change locations to Chicago, Houston, San Francisco or Los Angeles?)

We have no way of knowing whether or when this program might be expanded to South Carolina, but it is entirely likely that expensive properties along our coast are being used in similar money laundering schemes. Will South Carolina closing attorneys enjoy ferreting out this sort of information for the Government? We will keep a close watch on what occurs in New York and Florida during the first 180 days of this program.