A Closing Protection Letter (CPL) is a contract between a lender and a title insurance underwriter in which the underwriter assumes liability for actual losses caused by a closing agent’s act of fraud, negligence, or incompetence.
When Did Closing Protection Letters Start?
Closing Protection Letters have been in existence since the 1960s starting as an infrequent, informal request between lenders and title insurance underwriters. They were used sparsely until 2007 when the mortgage industry was swamped with fraudulent loans and poorly executed closings. In today’s real estate market, Closing Protections Letters are standard practice and in most states, a CPL is a requirement before a lender will engage with a specific closing or title agency.
Insurance underwriters have taken on the brunt of accountability for properly executed closings. If a title company used for a closing commits fraud, mismanages funds, or fails to follow regulations when completing documents, the insurance underwriter becomes responsible for reimbursing affected parties. As a result, the approval of title companies to process closings is more robust and the actions of individual Closing Agents are tightly monitored.
What Does a Closing Protect Letter Cover?
The specific language of CPLs varies by state and by title underwriter. Overall, these letters state that the underwriter for the title agent will be responsible for addressing title-related issues pertaining to the settlement. This includes circumstances that call into question the validity of the loan or causes a lien against the value of the property in the mortgage loan. If there is evidence of fraud, negligence, or mismanagement by the closing or title company, the underwriter is financially responsible for losses.
In short, the lender becomes absolved of any misdeeds caused by the closing or title company that was vetted by the underwriter. In many states, lenders only provide the title agent or underwriter with instructions and documents for closing after receiving a properly executed Closing Protection Letter. While it may seem to create layers of “legalese,” CPLs have actually helped reduce closing related court cases by clearly establishing lines of accountability. This means that in the rare event a closing is mismanaged, there are clear lines of responsibility and faster resolution.