Your residential mortgage lending business is still standing. Congratulations for making it through the storm. However, to continue to survive and be profitable, you are no doubt considering alternative sources of revenue to ensure that your business remains strong against the volatile economy and the ever-changing demands of your investors or warehouse lines. * One alternative revenue source that complements mortgage lending is title insurance. The benefits of owning whole or part of a title agency that provides title and settlement services equate to increased revenue and greater control. * But not every mortgage lender makes for a viable and profitable title agency. This article presents the benefits of affiliated ownership, the initial due diligence needed to determine the likelihood of success as well as the obstacles that often derail such enterprises.
Obviously, increased revenue is the primary reason to consider owning a title agency. In this current market, where increasing reserves and working capital are paramount to both regulators and investors, increasing your revenue may prove essential to your survival.
A close second to increased revenue is the benefit of greater control. Actual collaboration between the lender and its title agency results in customized services that are unique to the lender's way of doing business. The resulting consistency and reliability not only make for less operational headaches, but also make reacting to the changing demands of the industry faster and more controlled.
A case in point is the Real Estate Settlement Procedure Act's (RESPA's) 2010 reform when the Department of Housing and Urban Development (HUD) mandated a new Good Faith Estimate (GFE) and new HUD-1 effective Jan. 1, 2010. Today the final documents at closing place the numbers from the GFE side-by-side with the final numbers on the HUD-1.
If the numbers do not match or they stray outside the variances allowed by law, the lender is liable for the difference and must cure any incongruity within 30 days. New levels of coordination and communication between the lender and the title agency have become an ongoing necessity.
This interplay is simplified, and the risk of liability to the lender greatly minimized in the affiliated relationship. There is an incentive for the lender and its title subsidiary to pre-determine their fees in relation to each other, creating greater accuracy at every stage of the transaction, as well as the foresight to compare their total fees with those of the competition.
Now, add technology to the scenario. Technology affords simple upfront programming and automatic connection between the lender's loan origination system (LOS) and the title production system. The ability to push data, such as pre-determined fees, between the two systems allows for accuracy at the time the GFE is disclosed and when the final HUD-1 is prepared, resulting in a seamless sharing among the lender, its title agency and, ultimately, the satisfied and well-informed borrower.
Throughout your assessment process, it is important to sit down with your outside counsel or staff attorneys to obtain legal advice regarding federal and state regulations, such as anti-kickback statutes, RESPA regulations and the new Dodd-Frank Wall Street Reform and Consumer Protection Act.
I am sure many of us in the industry have heard stories about lenders that owned title agencies that were fabulously successful. But for every success story, I assure you, there were failures. I have personally experienced both the success and failure of affiliation, so my advice comes from the joy and pain of both perspectives.
It is wise not to jump into ownership before you have at least answered the following questions and anticipated how each answer will play out.
Does the mortgage product you sell enable you to actively control where the title business is placed?
You must be able to exert control over and...