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January 20, 2016

Best Practices: Closing Instruction Letters

by Jessica L. Conn

The last few days before a closing can be a hectic time. Each party has its own responsibilities and everyone must make sure that there is an agreement as to when and how a closing will occur. No matter how chaotic this time can be, lenders should consider preparation of written closing instructions to be a priority.

Any time a title agency or escrow company is handling a closing and disbursing funds on a lender’s behalf, the lender should obtain a closing protection (aka “insured closing”) letter. By obtaining a closing protection letter, the lender may be indemnified by the title insurance company against the actions of the title agent. However, in order for such indemnification to be effective, the lender must be sure to comply with the terms set forth in the closing protection letter. The ALTA closing protection letter provides that the lender is indemnified:

“[provided that the] loss is solely caused by:

1.    failure of the Issuing Agent or Approved Attorney to comply with Your written closing instructions that relate to

a.   the disbursement of Funds…; or
b.   the obtaining of any document, specifically required by You…; or

2.    fraud, theft, dishonesty, or misappropriation of the Issuing Agent or Approved

Attorney in handling Your Funds or documents in connection with the closing…”

While each title insurance company has its own form of closing protection letter, many contain a similar provision. Therefore, in the absence of fraud, the closing protection letter may only provide protection to the extent that written instructions were provided.

It is imperative that closing instruction letters contain clear guidance regarding the various aspects of the closing. Since one of the primary purposes of the instruction letter is to set forth directions for the disbursement process, most instruction letters contain a section related to the settlement sheet. This section might include the lenders fees, the various sources of funds, including without limitation the loan proceeds and borrower’s funds, and disbursement information. If the title company will be getting loan documents executed, it is also a good idea to outline the documents that are being sent to a closing and need to be executed. Most importantly, lenders should be sure to set forth the required documents to be recorded or filed, including the jurisdiction and order in which such documents should be recorded. Finally, Lenders should be very specific with respect to the requirements they have for the final title policy. If certain exceptions should be removed from or amended in the final policy, lenders can add this information to the instruction letter. It is a good idea to outline all required endorsements in the instruction letter as well.

Lenders may want to include additional information related to the transaction, as it deems appropriate. In certain states the instruction letter cannot be signed by a title agent, but in most it can be. Lender must determine whether execution of the instructions is appropriate based on the local laws and regulations governing the transaction.

For more information regarding closing instruction letters, please contact Jessica at 267-470-1188 or at jconn@starfieldsmith.com.