What You Need To Know About Closing Protection Letters (Final)Presentation Transcript
Presented by Closing Protection Letters and Title Insurance Coverage
Catic’s policy of title insurance (the “policy”), and Catic’s closing protection letter (“CPL”) which is sometimes called an insured closing letter (“ICL”) You may not realize that CATIC’s insureds are protected by two sources of recovery:
Coverage under the title insurance policy relates to the quality of the borrower’s title tothe real estate collateral offered to guarantee repayment of the mortgage loan. The title insurance policy provides that the insured lender’s mortgage is:
a valid instrument
recorded in the correct lien priority.
Coverage under the closing protection letter relates to the quality of the lender’s security interest in the real estate collateral offered to guarantee repayment of the mortgage loan. The closing protection letter provides recovery in the event that a closing attorney’s error or fraud results from:
mishandling of documents
mishandling of funds.
Title insurance covers unresolved title defects and survey matters:
Examples of matters covered by title insurance – Faulty document execution and homestead issues. The closing attorney’s failure to obtain the signatures of both borrowers when more than one person holds title can impair the lender’s mortgage interest. The closing attorney’s failure to subordinate a Homestead Declaration for a spouse when only one spouse is the sole owner and borrower, can impair the lender’s ability to retake the collateral in the event of a default.
Outstanding mortgages, equity lines of credit, or creditors’ liensare also covered by title insurance. The failure to record Discharges for mortgages, equity lines of credit, or secured creditors’ liens impairs the lender’s lien position.
In many instances, title insurance may provide coverage for perfected mechanics liens. Mechanics liens that are missed or not properly released may impair the lender’s priority position and result in a title claim.
A final example of matters covered by title insurance – encroachments. Survey matters such as encroachments of existing improvements onto abutting property may be covered by title insurance—even though the encroachment does not appear in the records of the Registry of Deeds.
A closing protection letter covers the mishandling of documents or funds:
CPL claims may arise from the closing attorney’s failure to follow written closing instructions. Closing attorneys cannot rely on oral instructions, and must advise the lender when closing instructions conflict with HUD Regulations or local Title Standards.
CPL claims also arise from the lender’s loss of its security interest or priority position. CPL claims typically arise when a closing attorney: Delays the mortgage recording; Fails to record a mortgage; Records mortgages in the wrong order; Records a mortgage in the Registry of Deeds that should be filed with the Registry District of the Land Court or vice versa; and/or Records a mortgage after a borrower has filed a Bankruptcy petition.
Unrecorded mortgages cause a loss of security interest in real estate that is both CPL and a title claim. If not detected and corrected promptly, the failure to record a mortgage can give rise to a claim under the title insurance policy and the CPL, resulting in double recovery to the lender.
Defalcation - misuse of mortgage funds or failure to remit premium. “Forgetting” to remit title insurance premium collected at closing, or disbursing mortgage funds improperly, is considered defalcation.
Even accidental misuse of funds is a CPL claim. Misuse of funds includes: not disbursing funds in accordance with the HUD Settlement Statement; “shorting” mortgage payoff amounts; and failing to pay off mortgages.
But CPL coverage is destroyed if:
Failure to remit a final title insurance policy is a basis for claim. Failure to remit premium is a basis for Bar discipline. Failing to remit a final title insurance policy (and premium) may ruin coverage. Without CPL coverage, the lender may look to the closing attorney for recovery in the event of a claim.
What our best agents and underwriters recommend: Preserve your client’s CPL coverage. Protect title coverage. Safeguard client funds. Demonstrate your expertise.
Obtain a Closing protection letter for each transaction. Never alter or reuse a Closing protection letter . Name CATIC on the Closing protection letter , Policy Commitment, Line 1108 on the HUD, and final title insurance policy. Preserve your client’s CPL coverage:
Examine titles for no less than 50 years for purchase-money mortgage closings. Examine titles for no less than 20 years for refinance transactions. examine Probate and Bankruptcy records before issuing your policy commitment. issue Policy Commitments only after reviewing a completed title examination. Amend Policy Commitments promptly if you discover new information. Protect title coverage.
Balance your HUD-1 Settlement Statements prior to closing. Record mortgages promptly and only after confirming receipt of funds in your iolta account. disburse funds (including title insurance premiums) immediatelyafter recording. Safeguard client funds.
Issue THE Certification of Title as required under G.L.c. 93, §70. Submit closing packages with original final title insurance policies promptly after closing. Reconcile your conveyancing account according to iolta rules. Demonstrate your expertise.