Closing Protection Letters - Questions Asked By Title Agents

What is the Purpose of a Closing Protection Letter?

In a closing protection letter, your underwriter agrees to reimburse the addressee if your title agency is guilty of fraud or dishonesty in handling the closing money or documents, which courts have said covers more than just theft of the loan money, or if you fail to follow certain written closing instructions.

Lenders entrust loan money to your company when your underwriter puts its financial strength behind you by agreeing to pay the lender if the money is stolen or you fail to follow the closing instructions.

How Does the Closing Protection Letter Help Me?

Title insurers issue closing protection letters to make it possible for you to serve as a loan closer.

The Dodd-Frank Act and CFPB rules now say that a lender may be directly liable for the acts of a closer it hires when the closer violates the law. See 12 U.S.C. §§ 5514-15. "Service provider" is defined at 12 U.S.C. § 5481(26). See also CFPB Bulletin 2012-03 regarding Service Providers. This means it would be possible for a seller, borrower or other person to sue the lender directly when a title agent closer steals closing money. The Dodd-Frank Act requires that lenders conduct "thorough due diligence to verify that the service provider understands and is capable of complying with Federal consumer financial law." See CFPB Bulletin 2012-03, page 2. The only vetting process used by many lenders in approving a title company as their closing agents is to get a closing protection letter from your underwriter. Most lenders make the issuance of a closing protection letter the main building block of their vetting of your company for their approved-closer lists.

Now more than ever, almost no lender will hire a title agent as its closing agent without the issuance of a closing protection letter by its underwriter.

Why Do Title Insurers Issue Closing Protection Letters?

The Closing Protection Letter started as a very informal request by certain lenders in the 1970's, when those lenders were beginning to lend across the nation and title insurers were just building national agent networks.

Title insurance companies were willing to issue Closing Protection Letters to assist their agents in getting into the loan closing business by encouraging out-of-state lenders to hire them to close loans made to local residents.

The first Closing Protection Letter were issued as letters, not insurance policies or other more formal agreements, because the requests were informal and title insurers have no legal authority to issue surety bonds or other insurance for title agents.

Why Has the Closing Protection Letter Become an Issue Now?

The practices about issuance of Closing Protection Letters have changed very little over the years.

What has changed is that owners and employees of title agencies have stolen several hundred million dollars of money entrusted to them, with a steady increase in theft from the 1990's to the present.

Title insurers did not plan on paying out millions of dollars a year to provide free coverage against title agent closing acts, when they do not share in any of that closing revenue.

Also, lenders—especially the FDIC—have pushed very hard in the courts to stretch the coverage of the Closing Protection Letter so that it covers more than what the title industry intended.

For example, the FDIC has succeeded in Michigan and other states in making the insurer pay the FDIC the full amount of the loan, when the loan amount was pumped up by a fraudulent appraisal of the real estate. In the Michigan example, the title insurer paid the holder of the loan over $2 million, which was the real value of the property, under its policy claim. Then the FDIC made a separate claim under the Closing Protection Letter, which the court said it still "owned" after it assigned the loan. The court permitted the FDIC to collect the balance of the $5 million loan from the title insurer. JPMorgan Chase Bank, N.A. v. First American Title Ins. Co., 750 F.3d 573 (6th Cir. (Mich.) 2014). See also, Bank of America, N.A. v. First American Title Ins. Co., 2014 WL 1271227 (Mich.App. 2014) (unpublished), app. granted 497 Mich. 896, 2014 WL 1271227 (Nov. 19, 2014) and Federal Deposit Ins. Corp. v. First American Title Ins. Co., 2015 WL 1906139, ___ Fed.Appx. ___ (11th Cir. (Fla.) 2015) (unpublished).

Do Title Insurers Pay Claims on Closing Protection Letters When the Title Agent Has Not Stolen the Closing Money?

Yes. In Federal Deposit Ins. Corp. v. First American Title Ins. Co., 2015 WL 1906139, ___ Fed.Appx. ___ (11th Cir. (Fla.) 2015) (unpublished), the court said the "dishonesty" coverage of the Closing Protection Letter was invoked solely because the closer received the borrower's down payment from a third party. The court made the title insurer pay the entire loan amount to the FDIC, even though that loan amount was far more than the property was ever worth. It relied almost entirely...