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Escrow Standards “The Imperative for Change” January 29, 2012

ALTA Title Topics. Escrow Standards “The Imperative for Change” January 29, 2012. Richard M. Reass CEO/President, RynohLive dick.reass@rynoh.com. Rampant Fraud Staggering Losses Check Fraud / Wire Fraud / Mortgage Fraud Employee Embezzlement / Defalcation Agency Relationships Changing

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Escrow Standards “The Imperative for Change” January 29, 2012

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  1. ALTA Title Topics Escrow Standards “The Imperative for Change” January 29, 2012 Richard M. Reass CEO/President, RynohLive dick.reass@rynoh.com

  2. Rampant Fraud Staggering Losses Check Fraud / Wire Fraud / Mortgage Fraud Employee Embezzlement / Defalcation Agency Relationships Changing Regulators Outraged Lenders Seeking Protection NAIC Initiatives Failed Businesses Industry at-Risk Today’s Environment

  3. Monthly Reconciliation No Positive Pay Good Funds Ignore Banking Regulations Audit Standards Lax Escrow Standards DatedAdvantage Criminal Inadequate Controls - Conflicting Guidance - Agent and Underwriter at Risk

  4. New York Bureau of InsuranceAnti-Fraud Task Force Findings

  5. Raising The Bar Software - Systems - Procedures - Bank • Automated Reconciliation • Positive Pay w/ Payee Match • Online Bank Wiring /Cyber Protection • Robust Settlement Software • Administrative Controls • Freeze Files • Track Changes • Prevent Disbursing Uncollected Funds • Built-in Audit and Fraud Monitoring

  6. Daily 3-way Reconciliation Positive Pay Mandatory Disburse Collected Funds On Line Banking Requirements Cyber Fraud Protection Universal Audit Standards Escrow Standards RightAdvantage Attorney/Agent “Insanity: doing the same thing over and over again and expecting different results.”

  7. Escrow Management Practices • Disbursing Control • Settlement Software utilization • “Balanced” files • Funds Verification • Check Signing • Factors Often Neglected by Agent • Items “Banked but not Booked” • Negative File Balances • Pending Deposits • Retained Funds • Stale Dated Checks

  8. Positive Pay • Bank only clears validated checks • Payee Match or Non-Payee Match • Teller Line Positive Pay • Check Fraud - Who is Liable? • UCC Sections 3-103(9) and 3-406 • Reasonable commercial standards • Ordinary - Comparative Fault “Only Bank with Banks offering Positive Pay” -Frank Abagnale, ALTA Conf 2003

  9. “The most important banking development in years” The RDC Process Scanner to Bank Image Replacement Document Agent Responsibility Risks & Liabilities Deposit Cut-off Times Funds Availability Late Closing Remote Deposit Capture

  10. Good Funds ≠ Collected Funds Expedited Funds Availability Act 1987 AZ 6-843 citation Underwriter Guidance Statute Definition v. Bank Definition Banking Regulation CC Collected Funds Legislation Limit Good Funds at Settlement Illinois $50,000 Utah, Indiana & North Dakota $10,000 Disbursing Collected Funds“Irrevocably Credited” “All Good Funds Are Not Good” - RMR

  11. Merely a pass through account Primary account protected Wiring instructions used for check fraud Wires can’t be recalled It happens despite Fed Wire rules ACH cannot occur Proxy Account Numbers (ZBA) ZBA Primary Account Primary Account ZBA

  12. PC Target Of Attacks • Malicious software spreads through emails • New variants each day go undetected • Steal login credentials • Modify wire and ACH transactions • Thwart even the latest anti-fraud measures

  13. ZeuS, SpyEye, OddJob, and Ramnit.th Dual Controls Malware Protection! Bank Wiring

  14. Dedicated Computer Banking Only Use Malware Protection Automatic Updates Strong Authentication NACHA & FBI Guidelines

  15. Corporate Account TakeoverAvailability Exception Option Specifically, the Availability Exception Option Rule:  • Provides an RDFI that reasonably suspects that a credit Entry is unauthorized with an exemption to the Rules provisions requiring the RDFI to make certain credit Entries available to customers more quickly than required to under Regulation CC; and • Requires the RDFI promptly to notify the ODFI if the RDFI makes use of this exemption to the funds availability requirements of the Rules. • This exemption does not allow the RDFI to delay availability because of the RDFI’s own errors in processing an Entry. 

  16. Daily Account Reconciliation Positive Pay w/ Payee Match Collected Funds Expanded Review/ Oversight Reduces Disbursing Losses / Errors Virtually Eliminates Fraud Thwarts Embezzlement The New Paradigm

  17. Upcoming Events • Business Strategies Conference, March 25-27 in Louisville • Go to www.alta.org/meetings for more information and to register

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