Cyber Fraud Continues to Strike The Closing Process
By: Michael Rothman, Senior Manager, Legal Education, Attorneys’ Title Fund Services, LLC
Read on to learn what real estate agents need to consider.
Cyber fraud appears in seemingly endless varieties. Consider these two:
Scenario #1. Closing agent’s net proceeds wire is fraudulently diverted. Seller directs listing agent to instruct closing agent not to turn over the keys to buyer until seller’s proceeds are confirmed received. Buyer’s lawyer responds that her client has the keys and taken possession. She further demands that closing agent promptly record the deed. Who is in the right?
Scenario #2: Closing agent’s payoff wire of seller’s mortgage is similarly stolen. However, no one learns of this fraud until weeks later, when seller receives calls from his mortgage company looking for an overdue payment. By then, buyer has long moved into the home and the deed has been recorded. Who will be responsible to pay-off the open mortgage?
Unfortunately, wire transfer fraud is an ever-increasing plague on our industry. The threat vectors continue to widen, with the bad actors now scheming to divert wires intended to pay-off seller’s mortgage loan. The FBI recently warned of this specific and directed threat against the settlement service industry, an industry singularly targeted by cyber criminals - with Florida among those states hardest hit.
An industry has sprouted to combat the disease of wire fraud, but the stunning year-over-year growth in losses demonstrates the lack of a meaningful cure. A true panacea likely only lies within the banking system itself -- which has shown no willingness to require the financial institution receiving a wire transfer to confirm that the account number being wired-to matches the payee’s name. This failure leads to much of the wire fraud we see today. An effort by the American Land Title Association (ALTA) in 2018 calling for the adoption of this standard was rejected by the Federal Reserve. Although there are best practices that closing agents should adopt to protect against stolen wires, all those participating in the real estate transaction remain at risk for losses caused by wire transfer fraud.
It therefore behooves the prudent Florida real estate agent to associate him or herself with closing agents well-educated on the evolving threats to the real estate closing process and the measures recommended to address the dangers presented. The Fund and other leading educators regularly provide advice and training geared to make Florida’s real estate attorneys sensitive to today’s cyber threats, to protect the interests of the parties to the transaction – and their own.
As to the above-described scenarios, consider the significance of insurance in the outcomes of both. In Scenario #1, where seller’s funds were diverted, the FR/Bar-6 contract (effective 11/1/21) makes clear that a file is deemed closed when cleared funds and the closing documents are received by the closing agent. Thus, will seller have success in arguing for the return of title and possession, or a seller’s lien on the property? Might such success be dependent on whether closing agent was selected by seller or by buyer? Outcomes depend on specific facts of the case, but not to be overlooked is the importance of insurance maintained by closing agent protecting against funds transfer fraud, be it through errors & omissions insurance or cyber-risk insurance. A closing agent ought to be able to explain how its office is prepared to handle a diverted wire … and a prudent real estate agent should not be hesitant to ask.
In the second scenario, where the wire sent to pay-off seller’s mortgage loan was stolen, buyer can be expected to look to the title insurance underwriter to discharge the lien of seller’s mortgage – but only if an Owner’s Title Insurance Policy was procured by or on behalf of buyer. This fact pattern again demonstrates why it is critical for buyers to obtain a title insurance policy.
Real estate agents must stay educated on the dangers of cybercrime, for their own benefit and for the benefit of their seller and buyer clients. Since the wire transfers are most often initiated by the closing agent, real estate agents should inquire as to the closing agent’s readiness to respond to a wire fraud incident. Consider asking if the closing agent has a written response plan patterned after ALTA’s recommended plan; if the closing agent has thoughtfully considered whether it has adequate insurances in place, and if all staff of the closing agency are allowed to avail themselves of the education provided by The Fund and other educators. When it comes to wire fraud, an ounce of prevention is truly worth a pound of cure.