With real estate prices mired in the doldrums and borrowers walking away from their mortgage debts in record numbers, mortgage lenders have a lot of written-down assets on their hands. The FDIC, and those lenders that survived the recent crisis, have undertaken a campaign to recoup as many of these losses as possible through litigation against whoever remains solvent and can be tied to alleged mortgage fraud. Closing protection letters have proven an active object for lenders’ efforts to spread their losses to title insurance underwriters.
What Is A Closing Protection Letter?
A closing protection letter (sometimes “insured closing letter” or “CPL”) forms a contract between a title insurance underwriter and a lender, in which the underwriter agrees to indemnify the lender for actual losses caused by certain kinds of misconduct by the closing agent. Title underwriters often authorize closing agents to issue these letters to lenders when the closing agent anticipates issuing the underwriter’s title insurance policies in the transaction. An ALTA form, various state promulgated forms, underwriter’s own forms, and custom letters have all cropped up. Most letters explicitly make a third-party beneficiary out of the borrower in a purchase transaction.
What Does A CPL Usually Cover?
Typical closing protection letter provisions cover (1) failure to follow written closing instructions, to the extent that the instructions (a) affect the validity, priority, or enforceability of the mortgage lien, (b) require the closing agent to obtain, but not to vouch for the validity or effectiveness, of a specific document, or (c) relate to the collection of funds due to the lender; or (2) fraud or dishonesty in handling the lender’s funds or documents.
What Other Significant Provisions Should We Be Aware Of?
The letter usually caps liability at the face amount of the title policy. Lenders must make their claims within a certain time (often within 90 days) of their loss. Some letters provide an absolute time limit (usually a year) from the time of closing for making a claim. The letter typically provides the underwriter with subrogation rights that it prohibits the lender from impairing.
What Are The Most Important CPL Issues And Cases?
Though these letters have been issued all around the United States for at least 40 years, the body of case law interpreting them remains remarkably small. But with expensively represented lenders aggressively pursuing these claims, significant new opinions are becoming more frequent.
Here are the issues to be aware of and the cases that cover them:
- Standing. The closing protection letter claim generally follows the loss, so that either an originating lender or a successor lender usually has standing to bring the claim if they have suffered any part of an actual loss. JP Morgan Chase Bank, N.A. v. FDIC. No. 09-14891, 2011 WL 2413438 (E.D. Mich. June 10, 2011); GMAC v. Flick Mortgage Investors, Inc.. No. 3:09-cv-125, 2011 WL 841409 (W.D.N.C. Mar. 7, 2011).
CPL claims are on the rise. The CPL serves an important function in providing lenders with assurance that title agents will properly handle their funds and documents. However, it is important to understand that the CPL does not make the title insurance underwriter responsible for all types of errors that title agents may make. Thorough investigation of the facts of each claim, together with careful application of the existing body of CPL law, should be used to distinguish CPL claims that should be paid from those that should be denied.
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