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Amy Brownstein, Esq. |
When the closing of a loan that includes real estate collateral is handled by a title agent (as opposed to a title insurance underwriter), it is common - and prudent - for the lender to obtain a closing protection letter from the agent. What is a closing protection letter, and what benefit does it provide to a lender?
A closing protection letter provides the insured party in the transaction (e.g., the lender making the loan) with protection, provided by the title insurance underwriter, against losses suffered by the lender as a result of certain acts or omissions of the agent. While the form of letter may vary from state to state, generally closing protection letters include protections from the following:
- The agent's failure to comply with the written closing instructions with respect to (i) the status of title to the interest in land or the validity, enforceability and priority of the mortgage lien, (ii) obtaining any document specifically required by the lender (excluding a determination of the validity, enforceability or effectiveness of that document), or (iii) the collection and payment of funds due to the lender; and
- The agent's fraud or dishonesty in handling the lender's funds or documents in connection with the closing.
Thus, with a closing protection letter in hand, if the title agent records documents in the wrong order (or fails to record documents), or misappropriates funds that were delivered to the agent in connection with the transaction, and the agent fails to correct its error, the lender will have recourse against the underwriter for the agent's actions.
Closing protection letters are not available in connection with all transactions; for example, they are not commonly issued in states where title agents do not disburse loan proceeds. When a closing protection letter is not available, however, it is always worth asking if there is an alternative. For example, in New York, where closing protection letters are not issued, it is possible to obtain an "Authorized Agent" letter from the underwriter that confirms that the agent is an agent of the underwriter and has the authority to prepare title reports, to clear and omit title exceptions, to collect title insurance premiums and to issue title insurance policies and endorsements.
To ensure receipt of the protections provided by the closing protection letter, the lender should be sure to comply with the conditions to its effectiveness, as specified in the closing protection letter. These conditions generally include (i) providing written closing instructions that specify the status of title, mortgage priority, any documents to be obtained and the movement of funds involved in the transaction (so that the agent's failure to comply can be established) and (ii) making sure that the closing protection letter is addressed to the lender and identifies the property that is the subject of the title insurance.
Including an acknowledgment by the agent in the closing instructions, whereby the agent agrees to be bound and comply with the instructions, will also benefit the lender. The closing protection letter should also be reviewed for additional requirements; for example, in Pennsylvania the underwriter's liability expires if a claim is not made under the closing protection letter within one year from the date of closing.
For more information regarding closing protection letters, contact Amy at [email protected], or 215-542-7070.
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