While the long-standing trend has been to migrate to a centralized title model, we recently met with an industry friend that had just left a regional lender that had yet to convert. He estimated the lender is using 120+ title companies. We had a few immediate questions. 1) How in the world do you effectively manage them? 2) In today’s environment, how can you not know EXACTLY how many you are using, much less exactly WHOM?
As we discussed their current state, the conversation was equally as fascinating as it was troubling. For starters, title vendors are chosen by individual loan officers, without any published criteria. Simply stated, that is dangerous, as there is just too much opportunity for ‘quid pro quo’ scenarios. Title is lucrative, so loan officer kickbacks can be too. Make no mistake – it happens. Further, having limited vendor management and audit resources does not allow for adequate third-party oversight and governance, as demanded by regulators. With title, settlement and closing being the largest fraud target within the originations process, it’s a disastrous proposition.
Instead of continuing to punch holes in the fragmented model, let’s switch gears and highlight the primary benefits of a centralized title model, whereby you use a single vendor, or a select few in a champion-challenger model.
Benefits of Centralization:
Having a limited number of vendors of any kind makes navigating the regulatory and compliance gauntlet more manageable. All auditors, internal or external, expect lenders to perform adequate vendor due diligence – a defined process to evaluate and select vendor partners based upon a minimum set of standards, resulting in a well-documented audit trail. You want to have record of how and why you made the vendor selections.
Lenders must also classify the level of risk each vendor poses and provide proactive monitoring and oversight of their vendors. The higher the vendor’s risk classification, like title companies, the more systemic oversight needed. Manage those select few tightly!
Ideally, every vendor, regardless of service provided, should be given periodic performance scorecards with formal reviews of results, along with forward-looking action plans and follow-up on deficiencies cited.
With such a manageable scope, a few vendors versus 120+, deliberate performance management should almost instantly result in better efficiency and quality. Communication, training and consistency of execution is less complicated. This is substantially made possible by fewer and more advanced system integrations, use of APIs and such. A centralized model should simplify things for everyone at all levels of the process.
Lenders know that the title, settlement and closing process leaves the most significant lasting impression in the minds of the borrowers. The centralized model, without question, helps lenders better control that all-important experience. With far fewer cooks in the kitchen, the likelihood of adhering to the prize-winning recipe is far greater – versus 120+ off the menu alternatives.
Many will argue that a centralized model also provides a tremendous cost save to the lender’s bottom line. In reality, that is generally only true if the lender had been fully executing against all compliance and oversight responsibilities – proactively managing EVERY single title vendor via scorecards, issue identification and resolution, onsite and remote audits, etc. It is not likely a lender has the staff or budget to accomplish that feat with 120+ title vendors. So, is there really a cost save? Instead, there is very likely some future cost avoidance by way of regulator fines due to lacking oversight, fraud incidents and similar.
A huge benefit of the centralized model is the lender now has much more definitive claims leverage. Lenders have well-defined contracts, terms and conditions which include title claims. Oh, and they also have contact names, addresses and phone numbers in filing claims. Imagine the nightmare of attempting to file claims against title companies chosen by individual loan officers.
The benefits herein are hard to argue against. There is a point of diminishing returns in having more vendors than necessary. Control and compliance are often the first dimensions to fall under immense pressure. It is not a matter of ‘IF’ they will fail, it’s a matter of when – and how troublesome for the lender. Throwing more people at it is not the solution – throw more prudence and pruning instead.