In April, we posted about the significant protection afforded mortgage lenders and servicers as part of closing protection letters including recent judicial interpretations providing critical indemnity to lenders for “actual loss” in relation to closing instruction violations and fraud. Recently, we learned that title insurers are issuing a new version of the (Closing Protection Letter) CPL promulgated by the American Land Title Association with several major changes. It appears based on the ALTA committee who reviewed the old form that few, if any, mortgage lenders provided meaningful input. It also appears that the national title insurance underwriters have changed earlier indemnity language in the hopes of providing reduced indemnity in light of recent judicial interpretations. Of course, we encourage all mortgage lenders and servicers to consider the potential implications of the change in language, which we believe could detrimentally reshape the relationship between the closing agent, lender and title insurance underwriter at the closing table.
As for changes to the CPL form, we note the following:
- The old form provides indemnity for “actual loss” without restriction and the new form conditions the actual loss to “the money received by the Issuing Agent or Approved Attorney for the Real Estate Transaction.”
- The new form includes a Condition 6 defining the loss as the same as “the Company’s liability under the [title policy] at the time written notice of a claim is made under this letter.” In other words, you can expect the title insurance industry to take the position that the CPL is nothing more than gap coverage with the same (but not greater) protections found in the title policy. This change begs the question – Is the new CPL worth the paper on which it was printed?
- The new form states that a loss will be payable only if “Your loss is solely caused by” the failures or fraud of the closing agent. Mortgage lenders should expect title insurance underwriters to deny and reduce losses based on the purported contributory negligence of the lender including the age-old argument that the loss was caused by a high credit risk loan decision and not the failures or fraud of the agent.
- The new form states, “In no event shall the Company be liable for a loss if the written notice of a claim is not received by the Company within one year from the date of the transmittal of Funds.” This language is particularly troubling given the self-concealing nature of closing agent errors and fraud.
If you are a mortgage loan originator, lender or servicer, you may be asking what you can do to prevent the potential negative application of these changes to the CPL. We recommend that your instructions to local title and closing agents be amended not to allow a closing without the provision of the earlier 1987 ALTA model CPL form. If lenders do not allow the use of the new CPL form, we expect ALTA and its member title insurers to engage in a more open dialogue regarding requested CPL form changes.