At this year’s National Settlement Services Summit (NS3), experts discussed how state regulatory changes are shaping the industry, the impact of emerging technologies and offered ways to stay prepared and proactive.

Francis “Trip” Riley, partner at Saul Ewing, began by noting the aim of the session was to give an overview of the disparate things happening across the states and the federal government, as the impact will trickle down to the settlement services industry within each state. He then passed the mic to John Levonick, general counsel at MAXEX, who addressed the role of technology governance in the industry.

AI governance

“The federal government is setting the stage for the next generation of financial services regarding transacting in a digital manner [with the CLARITY Act and GENIUS Act],” Levonick said. “These two acts — GENIUS was signed into law in 2025, while CLARITY is currently in the Senate — are setting the stage for supervision jurisdiction and digital payments. The Clarity Act and the Genius Act are contemplating that assets will become digitalized in some form.

“I try not to use the word token, because that’s a loaded term and causes a lot of confusion,” Levonick added. “But with the digitalization of real-world assets, it’s inevitable that we’re going to see, maybe hopefully, in our lifetime a digital native mortgage that is no longer an analog paper asset that moves to the secondary market through bankers boxes, and every time an asset is sold, traded and moved, and these giant boxes move from custodian to custodian.”

Levonick explained that the federal government is trying to demarcate who has regulatory oversight and where the lines between the Securities and Exchange Commission and the Commodity Futures Trading Commission will be so that the regulatory bodies will understand their function and their role.

“And then comes the whole AI (artificial intelligence) thing,” Levonick said. “We do not have any overarching federal guidance on how AI is going to be managed. This is the area where, absent clear federal guidance, federal directive, federal statute on how AI needs to be governed, managed, this is where the states are going to start reaching further than they traditionally would for purely consumer protection. … But Colorado came out with a very draconian first swing at AI governance. In Colorado’s infinite wisdom, the state was able to go back to the table and make meaningful revisions that made it a little bit more palatable to the industry on giving true oversight or true guidance to the industry on how AI companies need to step up to the plate.”

From a governance standpoint, the focus is on transparency and repeatability, Levonick said.

“The concept here is that AI is a new technology, concepts that are foreign to the industry. Over time, the industry will become more understanding, and even like cloud computing, AI is just an emerging tech that will become adopted,” he said. “But the AI sphere is probably the most concerning because states are going to get aggressive, and there’s going to initially be a mismatch in requirements, different taxonomies, while different terminology will put a burden on the industry. I think at the end of the day, you know, it’s just another layer of requirements that needs to exist for the protection.”

Levonick was then asked about tokenization and if he sees any benefits to the sales becoming tokenized in order to affect the way title insurance is provided.

“The biggest challenge we see as an industry is the need for good, clear, trustworthy data, the term data provenance,” Levonick said. “The token is a tokenization of these assets, whether it’s digital representation, which will probably be the first step, meaning that we’re still going to originate loans and paper files that are going to exist, but the first step is that the industry, right now, is building what’s called a digital twin, a digital representation of the asset. The goal there is to give the secondary market a collection of data as it relates to each and every individual asset that’s verified and validated.

“Our industry survives based upon the capital markets and secondary markets’ ability to provide liquidity to the primary markets,” he added. “The biggest challenge that we face as an industry is getting true and accurate data from all the disparate players within the mortgage origination lifecycle.”

Fair lending

David Friend, owner of Friend Mortgage Consulting, commented on the Consumer Financial Protection Bureau’s (CFPB) recent release of some final rules related to fair lending. Friend said he wasn’t a fair lending expert when he worked at the CFPB, but he would defer to a lawyer that he worked with at the CFPB with a good background in fair lending.

“The message I wanted to convey is that I would anticipate some litigation around those rules pretty soon. Just the way they were written from the cost-benefit analysis, there wasn’t really one done, so there’s plenty of room for both states and private entities to properly challenge these rules,” Friend said. “To the extent that they’ve been put in place, I just caution people to not think that that’s going to be the end of what’s happening with those particular areas.”

The other matters Friend has been looking at were not CFPB-based and instead focused on the Office of the Comptroller of the Currency’s present preemption on mortgage escrow servicing and on whether states can enact a minimum amount that mortgage servicers have to pay to consumers. Friend has also been paying some attention to VantageScore developments.

RESPA in the states

Marx Sterbcow, managing attorney at Sterbcow Law Group, addressed whether the actions of state regulators regarding referral relationships that may be viewed as “reverse referrals” should be a concern for the industry.

“There are several states that have intensified their scrutiny of RESPA, particularly with respect to affiliated business (AfBA) arrangements and joint ventures. Regulators are closely examining whether investors paid fair market value for their ownership interests or received subsidized entry into these arrangements,” Sterbcow said. “Washington, D.C., Pennsylvania and Maryland have been at the forefront, working in coordination with a group of other state attorneys general. Many of these efforts appear motivated, at least in part, by a desire to reduce title insurance premiums in their jurisdictions. Scrutiny of AfBAs has become a common entry point for broader examinations of industry pricing and practices.”

Riley then asked Sterbcow to talk about current state investigations regarding referral relationships. Sterbcow emphasized that he would not discuss the current class action cases regarding real estate brokerage referral models and instead analyzed lead models more generally.

“There are two primary lead referral models in use today: forward lead flow and reverse lead flow,” Sterbcow said. “In the forward lead model, a lender or loan officer receives a lead and asks the consumer whether they already have a real estate agent. If the consumer does not have an agent and expresses interest in a referral, the lender may refer them to its affiliated real estate brokerage. The brokerage’s role is to generate commission revenue from those referred transactions.”

Sterbcow noted that he has seen brokerages getting caught up in state and federal enforcement matters and the lender conversion rates are often extremely low. According to Sterbcow, the agent may say, “I don’t know that guy — you should call my cousin or friend down the street who is a loan officer.”

“However, meaningful steering often does not occur in practice. Many real estate agents prefer to work with lenders they already know and trust — such as their cousin or colleague down the street — rather than the lender affiliated with the referring brokerage. This dynamic frequently results in lower conversion rates for the affiliated lender,” Sterbcow said.

“Class actions have pursued these issues, often driven by consumer groups. However, many of these lawsuits were filed before state attorneys general and real estate regulatory agencies completed their reviews of these same models under RESPA, state consumer protection laws and UDAAP standards,” Sterbcow said. “These investigations occurred after the CFPB had closed its own enforcement review of similar issues. The regulators examined lender and real estate agent conversion data and ultimately closed their investigations due to insufficient evidence of violations or consumer harm. The reviews also found no evidence of fiduciary duty violations by the real estate agents related to these referral models.”

Riley commented that some of those claims include breach of fiduciary duty by the real estate agent and aiding and abetting fiduciary duty by the other parties, so as to address significant defenses asserted against the RESPA claims.

“The basic concept of these claims is that agents and/or brokerages are referring their customers not because they think the entity they are referring them to is the greatest thing since sliced bread, but rather there’s some other personal motivation other than to help the consumer, and thus they are breaching of fiduciary duty but advancing their own interest over that of the customer,” Riley said. “That’s concerning enough but the additional argument that the party the consumer is being referred to is somehow wrongfully aiding and abetting the agents/brokerage’s breach of fiduciary duty, is downright alarming if allowed to stand by courts.

“But what I see states looking at — and I think it’s a trickle down from one state to another — is that referring a consumer to an affiliate or a referral source, even if RESPA disclosures are made, is somehow deceptive, unfair and/or abusive,” Riley added. “However, because those terms are very amorphous and effectively open for interpretation, this allows every state attorney general to have slightly different views on if and how referrals fall under their UDAAP definition. Depending on what their goals are, they may choose to apply their definition of those terms as to allege a referral violates its consumer protection statute when a settlement service provider making a referral does not fully disclose the motivation for the referral.”

Friend pointed out that while he was at the CFPB, everyone would work with states to talk about the 30 years of precedent and the 30 years of the federal government looking at RESPA in a specific way.

“But now with the CFPB really pulling back from that sort of activity, that’s probably one of the reasons why we’re seeing more state action,” Friend said.

Riley commented that there should be an emphasis on supervisory agencies talking to the attorney generals to educate them about what the history of RESPA is.

“This way, [the attorney generals] while they don’t have to agree to be bound by the history, they nevertheless will be educated if they’re going to take a particularly unique and novel approach as to one party or parties, doing so is going to affect the entire industry,” Riley said.

Sterbcow added that the industry does not always help itself.

“This issue is especially important in real estate broker-to-broker referral models. The lender should never be referenced or inserted into a real estate broker-to-broker referral agreement, as the loan transaction is not part of that relationship,” Sterbcow said. “Including such language serves no legitimate purpose and can create unnecessary regulatory scrutiny.

“As the saying goes, perception is reality,” he continued. “Even where there is no actual RESPA violation, the wording in agreements, marketing materials or internal communications can create a misleading impression to regulators or plaintiffs’ counsel. Industry participants must be highly intentional about how they communicate with real estate agents, brokerages and lenders.”

Levonick shared that with technology, it’s getting harder to trace the traditional pathways of communication of how a consumer gets access to identifying who these service providers are, and the role of service provider relations with service providers and technology, like Facebook and Instagram.

“The financial services industry realizes that there’s true value in the consumer engagement layer, meaning that consumers do not want to go out and have to shop and find individuals, they want one location to go to where they can get everything they need without having to talk to a human being,” Levonick said. “You’ve got to request contracts, see how it works, but a technology can be configured in a way that drives a consumer to a relationship where the consumer might not make real estate choices, they might be driven to an advertisement bulletin board of third-party service providers that are listed alphabetically or listed by the highest paying service provider. Technology openings are also making it harder for regulators to truly understand how data moves and how these decisions are made.”

“It’s red flags when you’re reviewing files like that,” Friend pointed out. “I’ve been involved in some of the investigations, and you start putting together the contracts and how they work, and then you put together emails. Sometimes information in emails can be very damning when actually, such may not be the case. So, from a regulator’s perspective, you’re constantly trying to triage better cases, cases that are easier to prove than other cases, so if you have an email that seems to imply an issue with referrals, it gets a little bit more scrutiny causing one to dig a little bit deeper, and it can just start cascading from there, even if there’s nothing there.”

“There’s no question that you should avoid those red flags, and then you’re being risk adverse, and that’s good, because you don't spend the money,” Riley added. “But the problem that I have based on what I’ve seen now is that … in terms of looking at whether or not to look at joint ventures, and you know the goal of D.C. and others, we want to think our action is going to reduce the cost of title insurance, and closing.”

Sterbcow closed the session with thoughts pertaining to states and pricing regulations.

“Indiana and Virginia are two states that warrant particularly close attention due to their historical and ongoing focus on title insurance pricing and closing costs,” he said.

More broadly, there is a coordinated effort involving both parties inside and outside the industry aimed at disrupting the traditional real estate model, Sterbcow stated. “This includes efforts to reintroduce elements of sub-agency and potentially reduce the role of or eliminate the multiple listing service entirely. While views differ on whether this would benefit consumers, I do anticipate continued pressure in this direction.”