The old saying that “the devil’s in the details” can be applied to many different circumstances. And it’s undeniable that the title and settlement services industry is, at its very core, about close attention to the little things. After all, title insurance is only issued after the public records are thoroughly scrutinized.
But now, more than ever, title agents should be mindful of the axiom, especially when it comes to decision-making and budget cuts.
While the extraordinary market pivot of 2022 and the title industry’s ongoing surge towards digitalizing production are two of the defining trends facing the title industry over the past two years, there are other emerging trends that may not be winning headlines yet. An increasingly aggressive regulatory enforcement stance at the federal and state levels, plus the perennial threat of fraud and error in the production (and support) processes are very real dangers to title agents and business owners. We’ve already seen a few examples of what cyber attacks and malware can do to affect businesses.
Cutting expenses, especially those deemed “less necessary,” is a proven ingredient in the recipe for riding out a market dip. It’s painful, but this industry especially has long used a business model in which expenses rise and fall with order volume. That means actions like slowing planned investments in technology, layoffs and the elimination of third-party provider or service contracts that aren’t deemed mission critical.
However, now is not the time to indiscriminately cut back on all professional support services.
Compliance, for example, because it is not usually considered a profit-driver or revenue stream, is one of the first things targeted by budget-conscious CFOs and CEOs. Managed IT services and cybersecurity are other functions too often considered expendable.
Escrow reconciliation is another key responsibility that many title businesses already delegate to untrained employees or managers. Even those who have retained expert employees or third-party service providers in this field, unfortunately, look to cut them early in the budget process as well.
Tough markets and low revenue cycles are precisely when the risks of internal theft or fraud rise. All hands are on deck seeking new revenue and fewer eyes are focused on internal procedures.
While none of these specialties generates revenue directly, the costs that can be associated with their elimination or dramatic downsizing can be substantial enough to put a firm out of business altogether.
For many title firms, it’s quite common to delegate things like compliance or escrow reconciliation on a part-time basis to staffers already responsible for things like escrow assistance or closing. Most everyone wears a few hats at the typical title firm! But in leaner markets, such as we’re experiencing now, there are even fewer to manage the load.
On the other hand, when (not if, but when) the market does improve, those same businesses quickly find themselves understaffed as all hands scramble to manage the influx of precious order volume.
And not all rebounds are even, either. A mini-spike in volume can cause a firm to lose orders because of mistakes or turn-time, even as they scramble to rehire and train new employees to help with the surge.
While all of this takes place, the opportunity only grows for fraud, error, cyber attack and the like. Most third-party service providers in the compliance, managed services and escrow reconciliation fields can provide a variable cost option in leaner times, meaning that the business only pays for what it uses. It’s much easier to scale up with a service provider when the market turns than it is to restaff with new employees, and there is no “lag time” while order volume backs up in the pipeline.
More than a few title businesses also place their trust in software or unqualified part-timers when it comes to the forgotten but crucial services we’re discussing here. Maybe the COO’s uncle dabbles in IT, which should help the firm muddle through until order volume increases. Or maybe an escrow officer has a passing understanding of a leading escrow reconciliation technology — to the point that she becomes the de facto escrow reconciliation professional for the time being as well. Perhaps the owner’s brother is a GP attorney in another state. Good enough to manage compliance for now, right?
In these cases, however, a lack of thorough training and expertise in these respective areas of knowledge can be devastating. Having a copy of TurboTax, for example, does not automatically qualify a non-CPA to determine the best tax strategy for a mid-sized company. Technology is only a tool, and while it can be helpful (and likely is used by professionals as well), it does not come with comprehensive expertise built in. And a bit of expertise may be just enough to bring about a substantial regulatory fine or cyber attack.
In volatile markets such as the one we’re likely to experience throughout the year, variable costs become the standard for most agency budgets. Software as a service and third-party providers can be valuable contributors to title businesses without requiring flat compensation. The key, however, is an understanding that some functions and services, such as escrow reconciliation, compliance and cybersecurity/IT, while not revenue drivers, can also be pivotal contributors to “keeping the lights on,” especially during times like this.
Mary Anne Harris founded Positively Balanced in 2020 to help law firms and title companies with escrow reconciliation services. She is also president of Real Estate Closing Path.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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