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National Mortgage Professional
Aug 19, 2008

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 or e-mail [email protected]
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