Closing protection letters are not insurance against mortgage fraudAndrew L. Liput Esq.CPL, title underwriters, mortgage fraud
You are about to wire closing funds to the table and into the
hands of a lawyer or settlement company employee you have never met
before, but no worries, because you have a closing protection
letter, right? Wrong! Take a good look at the language in that
closing protection letter (CPL). The majority of CPLs insure only
against the invalidity or unenforceability of the lien of the
mortgage on the title. Thus, if the closing agent fails to properly
record the mortgage, the validity of your lien and its priority are
covered. The underwriter will take appropriate steps to re-record
or challenge priority at its cost and expense. But what happens
when the closing agent steals the settlement funds? Or there is
fraud at the closing, with borrower's funds coming from third
parties, contracts flipping in back rooms and straw borrowers, or
non-existent borrowers, appearing at the closing table? When you
try to file a claim against a title underwriter in these
circumstances, you will get one of these patented responses, which
are taken from actual claim denial letters in my files:
•"Although the borrower's identity was stolen and she never
signed the loan documents or mortgage, your lien remains
enforceable." No coverage!
•"We can find no evidence to support your claim that [XYZ]
Title acted with fraud or dishonesty, or that it did so in a manner
giving rise to our obligations under the closing protection
letter." No coverage!
•"The mere fact that there was fraud at the closing does
not support a claim that [ABC] Title was implicit in any fraud." No
coverage!
Title underwriters approach CPL claims in the same manner as any
insurance company responds to claims. Their initial review will be
to determine whether the claim can be denied on the facts and the
policy exclusions. Particularly, in today's mortgage industry
environment, with rampant fraud claims and mounting losses, title
underwriters would suffer financially if they failed to carefully
scrutinize claims with an eye to supporting denials of
coverage.
In reality, a CPL does not act as an insurance policy against
mortgage fraud at the closing table, and lenders are foolish to
rely on them except as they apply to the validity of their lien. In
addition, there is no national standard for issuing CPLs, which are
typically given out by agents who, because of business
relationships with closing agents, have a conflict of interest in
evaluating their credentials. As a result, lenders can have no
comfort in the existence of these letters as a method of evaluating
the experience, trustworthiness and reliability of the agents who
will handle their funds and documents at a closing.
Similarly, most lenders have no standard policy for reviewing
and verifying CPLs, not just for their validity (i.e., were they
properly issued), but also to verify the credentials of those to
whom the letters were issued. So, what does a lender do under these
circumstances? Initiate policies to ensure that whoever you are
relying upon to handle a closing is legitimate, experienced and
trustworthy before the closing takes place. If you cannot handle
the verification in-house, find a reliable third-party who can do
the vetting for you.
If you are still not convinced that the CPL is useless when it
comes to deterring or insuring against fraud at a mortgage closing,
I will leave you with an actual claims response, which is my
personal favorite, filed in California:
"Our title agent has no legal obligation to even report any
fraud it may suspect at a closing, and we deny any responsibility
for how funds were brought to the closing table, or to whom they
were disbursed, as long as the closing instructions were followed."
No coverage!
Andrew L. Liput Esq. is president of The Liput Group and
owner of New Jersey-based Repurchase Resolution Specialists Inc. He
may be reached at (888) 424-3728, through his companys Web site www.repurchasespecialists.com
or e-mail
[email protected].
