Settlement agents and attorneys have been doing business the same way for decades, but the business world is very different now — especially for settlement agents. And the worst kept secret is how vulnerable the average settlement agent’s escrow account is to fraud, embezzle-ment, cyber-attacks and unintentional mistakes.
How Did We Get Here?
The title insurance/settlement industry came under lender, legislator and regulator scrutiny because of the perceived lack of effective controls within the industry, as evidenced by the pervasive escrow theft taking place, which resulted in a loss of confidence in the industry’s ability to police itself. The demise of two regional underwriters in 2011 — the result of escrow theft by their agents — was the catalyst for a comprehensive review by the National Association of Insurance Commissioners (NAIC) and other regulators.
Specifically, regulatory bulletins CFPB 2012-03 and OCC 2013-29 contained guidance that placed the responsibility for the qualification, monitoring and oversight of third-party vendors with lenders, previously the sole domain of title insurance underwriters. Now, underwriters and title agencies need to quickly demonstrate that they have established proper and reliable controls to protect settlement funds.
All the while, title agents have handled their escrow funds the same way they’ve always handled them. That way of doing business does not work anymore. As the NAIC noted in its 2013 Escrow Security White Paper, banks are awake to the fact that escrow theft carries ramifications of reputational damage, loss of revenue, resulting claims and, maybe most importantly, a regulatory response and all of the costs associated with remediation.
But it’s not just the headline-grabbing boogeymen out to get you. There are everyday errors and intentional shortfalls made “just this once” that happen far more regularly that put your company’s reputation at risk. What was once OK is now unacceptable.
As a means for establishing effective financial controls for their agents, underwriters are turning to RynohLive in order to mitigate embezzlement and other losses of settlement funds; while at the same time reducing the cost of insurance bonds that are required as additional protection against claims arising from the improper handling and disbursement of agent-held funds.
Without immediate action and sometimes fundamental changes, the entire industry structure may be at risk. If you, the title agent, do not update your internal processes and controls, and adapt your business now, lenders and regulators will more than likely decide to eliminate your company as a third party service provider.
These decisions are already being made.
Your bank, underwriter and the consumers at the closing table are all looking at you and your escrow account. Can you look them all in the eye and say that their money, their financial security, and their reputations are all secure?
The Good News
The above is certainly painful for some to read, but it’s a necessary preamble as to the state of the title insurance industry, and it highlights the main area of risk: your escrow account.
Here is the good news: Much of your risk is almost completely eliminated. By following these simple escrow accounting best practices, and using today’s technology to your advantage; your business and your customers’ funds will be safer instantly.
RynohLive presents 6 Steps to Total Escrow Security.
Daily Three-way Reconciliation of All Escrow Trust Accounts — NOT Monthly
Three-way reconciliations always have been held as THE accounting best practice, and they still are. The difference in 2014 is the timing. NAIC lists the three-way reconciliation as one of the major basic best practices within its Escrow Fraud White Paper. The American Land Title Association (ALTA) stepped up the industry standards within its Best Practices by calling for a monthly three-way reconciliation. That is a step in the right direction, at least when compared to the previously undefined expectation throughout the industry.
But while monthly three-way reconciliation may be an improvement from where the industry has been, it still leaves you susceptible to fraud, embezzlement and crippling accounting errors. A Phoenix-Hecht study noted that “frequent reconcilement is often your last line of defense to prevent fraud.” A monthly standard will only put up that last line of defense 12 times out of 365 days in a year.
In golf terms, a monthly reconciliation is being 120 yards away from the green and a quarterly or annual reconciliation is being 180 yards away from the green. The extra yardage helps, but you still have a ways to get to the hole. Within that 30-day window, fraud, negative file balances, pending deposits, unsent wires, unprocessed mortgage payoffs, remain very real possibilities, and costly.
Time Can’t Be An Excuse
In 1980, an excuse that “this process is too cumbersome” was real. In 2014, it is not. There is too much technology and integration possible today. Settlement agents have no excuse for handling funds with a 1980s sensibility.
What Can Happen In 30 Days?
The fraudulent: A Virginia Beach title agency caught suspicious activity in its escrow account. The agency was poised to be victimized by the ZeuS Bot and Zero Access Rootkit Malware that had infiltrated its network. The Bot was programmed to infiltrate via the settlement software (specifically targeting title agents). It created fictitious settlement files, moved funds into these fictitious files and posted checks to disburse the funds held in the agency’s escrow account. Luckily, a daily reconciliation report noted these fraudulent disbursements, allowing the title agent to save the $2,000,000 held in the account, avoid insolvency and the bad press. … What would have happened in 30 days?
The everyday: The clock hit 6 p.m. and “X” Title Agency went home for the night. Meanwhile, a bank branch (in another state) transposed two input entry numbers. This accidentally withdrew $87,000 from “X” Title’s account. The next day, this error was caught by a morning report from “X” Title’s escrow accounting software. This was a giant annoyance for “X” Title and the bank, but ultimately it was resolved quickly. … What would have happened in 30 days?
With the stakes so high today, and with the software so accessible, daily reconciliations are simple, so why take a risk with other people’s money? Title underwriters and lenders started asking this question, very seriously, in 2012. They don’t want a 120 yard chip shot to the flag. They want a “tap-in.” And so should you.
The above problems were easily iden-tified and solved by RynohReport. This daily report is automatically delivered to you each morning with your first “cup of coffee.” Rynoh’s Morning Re-port apprises you of the status of your escrow account and tracks those criti-cal disbursements that represent your greatest financial and reputational li-ability. These alerts serve as red flags to head off or eliminate: check fraud; ACH and wire fraud; bank errors; dis-bursing errors; and deter embezzle-ment. In addition, the Reconciliation Wizard identifies those items prevent-ing three-way reconciliation and pro-vides corrective guidance.
A three-way reconciliation is a method for discovering shortages (intentional or otherwise), charges that must be reimbursed or any type of errors or omissions that must be corrected in relation to an escrow trust account. This requires the escrow trial balance, the book balance and the reconciled bank balance to be compared. If all three parts do not agree, the difference shall be investigated and corrected.
Electronic Verification Of Reconciliation
OK, so you are doing a three-way reconciliation every day. Now what?
ALTA’s Best Practices are industry standards that cover a title agent’s crucial function within the closing and settlement process. Following ALTA’s Best Practices is a good start on the path toward total escrow security, but that’s all it is — a start. Back to our golf analogy, for lenders, the Best Practices for escrow accounting are tap-ins — gimmies — that agents need to have in place.
ALTA’s Best Practice Pillar No. 2 is the call to “adopt and maintain appropriate written procedures and controls for escrow trust accounts allowing for electronic verification of reconciliation.”
But what does electronic verification mean? Does this mean that an email from you to your underwriter with a PDF attachment of your reconciliation meets the requirement? NO: True electronic verification goes well beyond an email.
Electronic Verification Systems (EVS) compare items through electronic means to ensure the validity of the item or document being submitted for review or analysis. For reconciliation purposes: Does the underlying data held by the bank and accounting system support the reconciliation results? An electronic copy of a reconciliation statement is simply another form of paper that cannot be analyzed for accuracy, which subverts the true purpose of evolving to electronic verification.
EVS allows you and your underwriter to deal with facts in the form of unquestionable, verified data.
This concept is hardly new and hardly a secret. In 2009, the New York State Insurance Department, in a bulletin that noted an increased focus on title insurance defalcation, listed this as a main deterrent: “Get an automated solution to monitor your escrow accounts through three-way and daily reconciliation of escrow accounts.” How far back was 2009? The first iPad was released in 2010.
EVS for your escrow accounts means automation. That’s what the regulators are looking for; that’s what banks and underwriters are looking for; and that’s what consumers’ funds demand in order to be safe from malfeasance.
Because these are gimmies, you should not have to spend much time manually accomplishing these tasks. There is turnkey software out there that easily automates these processes. RynohLive, for example, automates these tasks and has a COMPLETE history of your bank account at the ready.
RynohRecon retrieves the transactions that have cleared the bank and reconciles them against your accounting software every business day, identifying anomalies such as mistakes, potential fraud or audit concerns.
Ninety percent of all national and regional underwriters have endorsed RynohLive. In fact, among its recommended escrow accounting practices, Alliant National Title Insurance Co. lists a daily three-way reconciliation and positive pay. The regional underwriter also recommends RynohLive for this.
Don’t take ALTA’s word for it, don’t even take our word for it. Here is what the New York State Mortgage and Title Unit concluded were the best seven steps settlement agents could take to deter defalcations:
- Don’t insure behind a naked transaction.
- Submit accurate information on the HUD-1 form. Agents need to ensure the HUD-1 form is accurate, truthful and in compliance with the lender’s closing instructions.
- In purchase transactions, submit only the seller’s proceeds. In refinance transactions, transmit only the borrower’s loan proceeds.
- Send the payoff letter on the date of disbursement via certified mail or courier.
- Get an automated solution to monitor your escrow accounts through three-way and daily reconciliation of escrow accounts.
Use Positive Pay — Immediately
Positive pay is the putter in your escrow accounting golf bag — it is a basic tool for playing the game. Unlike your putter, positive pay is a can’t-miss solution. The NAIC agrees, noting in its recent Title Escrow Theft and Title Insurance Fraud white paper that positive pay is critical for escrow security. And it’s far from a new solution. Even in 2006, before the financial world collapsed, a Phoenix-Hecht white paper extolled positive pay’s virtues for essentially ending check fraud.
“Utilizing a positive pay service will become increasingly more important as the banking industry moves to settle check payments by clearing check images and image replacement documents rather than the original paper checks,” the 2006 paper stated.
Positive pay is an automated check fraud detection tool offered by most banks. How it works is simple:
One of your checks arrives at ABC Bank.
ABC Bank processes the check and matches it against a list of authorized, written checks issued by your company.
In this process, ABC Bank compares: 1) check number, 2) check dollar amount, and 3) check date. If the bank offers payee match, it will also verify the check payee.
If everything matches — the bank has verified that this check is identical to the critical information you have provided on your daily list of approved checks — then the check is processed for payment.
But if there is a discrepancy…
sponse to this email notification, there is a decision time limit as you must advise the bank as how to process that check (Pay or Do-Not Pay). The check(s) requir-ing a decision may be: fraudulent; errone-ously processed (posted) by the bank; a voided check presented for payment; or a miss-numbered check. If you do not notify the bank as to how to process the check, “your decision,” the bank will apply your “default decision.” The default decision, (“Pay” or Do-Not Pay”), is how you wish the bank to process the check should you fail to notify them before the decision cut-off time. The recommended default deci-sion is “Do-Not Pay.” A default decision of “Pay” immediately creates liability for you if the check in question was fraudu-lent. Your default decision instructed the bank to “pay” the check. We believe that it is easier to apologize to a client for a good check that was returned because of a “processing error at the bank,” than it is to have to face the financial loss from a fraudulent check.
What if my bank doesn’t offer positive pay?
Then it might be time to get a new bank. The issue is too important to ignore.
RynohLive however provides a standalone non-payee match positive pay solution (RynohPay) that is a part of the basic RynohLive service. RynohPay provides the same protection as non-payee match positive pay. If your bank provides positive pay, we highly recommend that you utilize that service, especially if the bank provides payee match. Positive Pay is an ALTA Escrow Best Practice.
Positive pay on its own is crucial, but there are some obvious operational hurdles for your title agency to clear to regularly provide the check list to the bank and to communicate effectively and quickly in the event of an issue. To help streamline this process, RynohPay provides fully automatic and synchronized positive pay transmissions to your bank (either for payee or non-payee matching).
KNOW YOUR BANK:
Your banker and Bank are essential elements of a successful settlement operation. It must be a strategic decision based upon bank capability, core services, and financial stability; and not merely about the promise of business. But if your bank does not pass the litmus test, this relationship has to be left behind before your company is.
Other than positive pay with payee match, here are some factors to consider in your bank selection:
- Financial Stability of the Bank (http://www.bankrate.com/rates/ safe-sound/bank-ratings-search.aspx)
- What are the security requirements for on-line banking?
- Size might matter — larger banks tend to have better IT security.
- Do they have a separate department dedicated to title and settlement?
Track Your Disbursements Daily
Positive Pay is your putter, and without it you will be lost, but this isn’t putt-putt. You need to utilize a variety of clubs in your bag to perfect your escrow accounting game.
Large sums of money are coming in and going out of your escrow account daily, which means you need to track the status of your disbursements daily. NOT doing this puts you and potentially your customers’ at risk. Tax checks, deed recording checks, payoffs, home insurance premiums, are but a few that if not paid in a timely manner create both a financial and reputational risk plus potential penalties or fines for your agency.
Important note: For as much as “good funds” are talked about within the title industry, this is not a recognized banking concept. If you are making sure to distribute “good funds,” you are not living up to highest banking standards and leaving yourself open to risks. Collected funds are the only safe standard and should be the only funds you disburse.
RynohTrax verifies all receipts and disbursements; provides notification for critical items not posted for either payment or credit; and validates funds flowing into and out of each file. RynohTrax will even alert you if funds have been deposited into the wrong account. The critical payments specified by your company can be tracked by payee, purpose or amount with an alertment issued after a specified timeframe.
Funds deposited and irrevocably credited to a settlement agent’s account used to fund the disbursement of settlement proceeds.
A lender returned an insufficient payoff without notifying us. The return wire showed up in our Morning Report the next day. We immediately identified the problem, and re-wired the correct amount.
If we were reconciling monthly, I wouldn’t have known about this for almost 30 days.
RynohLive not only saved us nearly $1,800, but prevented our borrower from getting a 30 day late notice on his credit.
Vice President, Cottonwood Title Insurance Agency, Inc., Salt Lake City
For all but the smallest title agencies, certain processes can be established such as required, separation of duties for book-keeping, reporting and check-writing, file documentation requirements, internal audits, background checks for newly-hired employees, mandatory use of trust accounts to separate escrow and premium funds from operational accounts, restrictions on investment of trust account funds into accounts that are guaranteed, required lock-up of certain documents and notary stamps, and clear communication of expectations surrounding ethical practices and ensuring employees of whistleblower protections.
NAIC Escrow Theft
Establish Strong Cyber Fraud Protection
Even after you’ve implemented all of these checks and balances, caught every accidental error, locked up the escrow funds and thrown away the key, there is still a possibility for theft. Escrow security technology is progressing at a rapid pace just so it can keep up with cyber fraudsters. In this game, the fraudsters are always a stroke ahead. You need an eagle — a score above and beyond — to beat them.
Cyber fraud doesn’t appear like it does in the movies, either, where you click on an email, your screen turns red, locks up, and instantly you recognize that you are in trouble. Many of these malware “bots” just sit there in the background, gathering password and keystroke information, waiting for the right time to silently access your accounts and wire funds.
Here is a list of some possible attacks:
Malware, Trojans, Viruses and Bots. Malicious software engineered to initiate financial crimes.
Key loggers. Invisible software that tracks key strokes.
Spear-Phishing. Emails that try to exploit human vulnerability and get someone to click an insidious link.
Did you know that your business bank accounts do not have any statutory protections? If they get wired to Russia illegally, the bank is under no obligation to make you whole.
Here are some basics for sound cyber fraud protection, to stop those bots from taking root:
Create strong, constantly changing passwords that are at least 10 characters long and include a combination of capital letters, lowercase letters, numbers and special characters. Use separate passwords for each online account.
Protect your company’s network: Review your network topology, which means ensuring security devices are configured correctly.
Utilize a combination of a quality antivirus program, a firewall and top-level email spam protection.
Verify that any data you transmit is sent over a Secure Sockets Layer (SSL) and that any hosted web software you use has a secured URL beginning with “https.”
Institute employee best practices, such as limiting Internet browsing and disable thumb drives.
Remove old user accounts and rename default administrative account names.
An isolated, secure, stand-alone computer not connected to your network that handles all of your online banking — and NOTHING else.
Ensure that Adobe, Adobe Flash, Java Script and other programs are not installed on this computer.
Use either Google Chrome or Mozilla Foxfire as your web browser, and do not include any add-ons to the browser installation.
Dual authorization of disbursements. One person originates the wire, but the funds can only be released and approved by another person.
Clear the browser cache before starting an online banking session in order to eliminate copies of Web pages that have been stored on the hard drive.
An important word for your business is encryption. Your computers and banking environment need to be encrypted. There are products on the market that offer additional encrypted layers of protection, such as Marble Security.
RynohLive offers the most comprehensive Virtual Private Network (VPN) in which to conduct all of your online banking activity when teamed with Marble Security. Marble’s easy-to-use service assesses the risks associated with mobile, personal devices, PCs, apps and networks, and enforces security policies that allow access to a secure virtual private network. Marble Control, managed by RynohLive, allows IT administrators to manage security deployment from devices over the Internet. RynohLive clients can set policies, run risk reporting, and access a rich dashboard to track devices, users, applications and reports.
We have caught errors where the closer may not have entered the deposit in Proform, so there is nothing to match, or the deposit may have been entered in Proform but the deposit was actually not made, such as earnest money that needed to be transferred from another account. A payoff check may not have been sent/ delivered and an alert lets me know it has not been cashed. What I really like about Rynoh is if there is a discrepancy, it tells me the process to go through to correct it. It only takes me a few minutes each morning to review the reports, and the end of the month, reconciliation is a breeze compared to what we were doing. It saves a lot of time. I really appreciate being able to make any corrections within a day or two instead of trying to re-invent the wheel 30 to 40 days later.
Hometown Title, Eureka, Ill.
Create Automated Reports To Send To Your Underwriters
Your title errors are covered by your title underwriter or your E&O policy. But your escrow account? That is yours. Some states have started to shift on this, however. Some background:
The Demotech Defalcation Study noted that a few states have “statutorily imposed strict liability for title underwriters for the fraudulent acts of their agents. By transferring the risk of loss directly to the insurer, underwriter strict liability puts the onus on the insurer to appoint agents of high character and financial responsibility, and to implement oversights of agents’ practices.”
According to the Demotech Defalcation Study, even without strict liability, many regional and national underwriters have “instituted policies and procedures to oversee their agents and prevent theft, fraud and other questionable practices by their agents… In addition, new technology is enabling underwriters to utilize accounting software to identify potential instances of defalcation.”
From the NAIC Escrow Theft white paper: “Title underwriters increasingly must expend a great deal of resources to detect, prevent and combat problems associated with these types of losses. Conducting audits, investing in software and monitoring transactions are just a few examples of the costs to title underwriters associated with escrow and title premium theft. Title underwriters can exercise more ‘hands-on’ control, policies and procedures for reduction of these problems with direct operations.”
And if you refer back to ALTA’s Best Practices, you’ll notice a portion saying, “Results of the reconciliation are reviewed by management and are accessible electronically by the Company’s contracted underwriter(s).”
Essentially, the standard is moving to transparency. Title insurance underwriters are now requiring management reports from their title agents — and they want it electronically.
With escrow accounts receiving an intense focus from regulators on lenders and from lenders on title insurance underwriters, this trend is not likely to reverse. Sure, in a perfect world, title agents remain the sole eyes on the their escrow accounts. But if it was a perfect world, no one would be stealing escrow funds. Concessions and improvements must be made.
That’s why this final step is so important. Direct, automated underwriter reporting may become mandatory before you know it.
NAIC mentioned integrated software solutions that offer “real-time interaction between title insurers and title insurance agents.” Picture a golfer and his caddy, both reading the lines of a green together to look for any potential problems. The match win (and their stake of the money) are both on the line.
“These solutions that integrate such title and escrow activities as policy orders, policy and endorsement issu-ance, search functions, accounting and administration of escrow and settlement funds can help reduce ad-ministrative costs for title insurance agents, improve record retention, re-duce inadvertent mishandling of funds and provide a less expensive method for insurers to audit and oversee activ-ities of title insurance agents. These commercially available programs can provide much needed controls for title underwriters and title agencies.” (This is RynohLive).
Agents using RynohLive can be monitored, audited and verified 24×7 by their underwriters. With the RynohReport, agents can compile customized alerts into an automated, emailed Morning Report. These alerts serve as red flags to head off and eliminate check fraud, prevent disbursing losses and deter embezzlement and other fraud.
With RynohSecure, underwriters, lenders, regulators and auditors can establish alert criteria independent of agents and direct operations. It provides access to the agent’s RynohLive system to review escrow account activity from the agent’s operations.
If you take nothing else out of these steps, take this: Escrow security is just as much about finding/fixing the everyday errors as it is about protecting your agency from cyber-attack, fraud, and embezzlement of settlement funds.
RynohLive has protected more than $500 billion and more than 1.5 million real estate transactions. Title insurance agents, and their underwriters saved more than $7.5 million in fraud and error losses in 2013 alone. Specifically, eight agencies are still in business today only because they had RynohLive to help prevent: check fraud, illegal ACH’s and wires; cyber-fraud; embezzlement; or bank and disbursing errors.
In a 2014 survey of clients, virtually 100% reported that RynohLive had saved them time, money and prevented errors or fraud. Many reported that RynohLive had saved them over $100,000 in escrow losses due to check fraud, ACH fraud, wire fraud, or employee or bank error.
- On average agents using RynohLive saved more than $5,000.
- ~70% said RynohLive identified employee errors or disbursement errors
- >50% caught bank errors
- >50% identified returned wires.
- >75% prevented check fraud
- All agreed that RynohLive saved them time and worry.
Remember, these are basics for the title industry today and technology makes it easy. Follow the six steps outlined in this whitepaper, implement a winning combination of software and services, and you shouldn’t worry either.
In the days before we had RynohLive, there were a few unpleasant and costly payoff faux pas. A lender called once, telling us the borrower on a refinance was getting collection calls from their old lender. OUCH. The worst thing is forgetting to wire a payoff, then realizing it was an FHA loan … and the payoff has just gone up by the amount of one month’s interest! Now, we are assured every day that all payoff wires have been sent on closed files – and if not, we’re able to get them done in a timely manner, avoiding further interest accrual. We have been alerted to initiate payoffs SEVERAL times. Thank you, Rynoh!
Thurman, White & Anderson, Lexington, Ky.