WHAT IS IT?
Essentially, a Closing Protection Letter (CPL) is an agreement from a title insurance company to a lender that protects the lender against any issues arising from a closing agent’s errors, fraud or
negligence. It covers escrow activities and services performed by the settlement agent.
WHY IT’S ISSUED?
Historically, lenders were looking for an insurance product that would cover them for the risks associated with having the settlement agents perform the closing that had the same financial backing as the title policy. Since the 1960’s, lenders have been concerned about the lack of protection provided to them against several issues including: fraudulent action, failure to comply with the lender’s closing instructions, and closing agents/attorneys contracted by the title insurance company to handle the closing, but are not employed by the title company. The CPL assures the lender that their instructions for closing the transaction are followed by the title insurers agents, and that the funds given to the title insurance agent have been disbursed according to the terms of the transaction, and that it’s backed by the financial strength of the issuing underwriter.
IS THE CPL NORMALLY REQUESTED?
Yes, it is a very common request, and quite often is required in any transaction that has a title settlement agent involved. Today’s uncertain economic climate has necessitated the need for lenders to request the CPL. They are important to lenders for another very practical reason: the CPL provides vital protection to the financial institutions that purchase mortgages in the secondary loan market as those secondary lenders do not have agents at the closing table and do not have an opportunity to oversee the closing process.
WHAT DOES IT COVER?
The typical CPL covers the following:
1. Failure to follow written closing instructions
2. Fraud or dishonesty in handling the lenders funds or documents
3. Negligence of the settlement agent
IS THERE A STANDARD FORM?
Yes, the American Land Title Association (ALTA) has standardized the CPL across the nation, and in California, many title insurers have adopted the standard form.
WHAT ELSE SHOULD I KNOW?
The CPL has a capped liability of the face amount of the title policy issued in the same transaction and the coverage contained therein is contingent on the title policy being issued. The lender has a limited time in which to file a claim once the letter is issued, typically 90 days. Claims against the CPL are on the rise as lenders look to minimize their loss and spread the loss out that they have incurred.