Best Practices: The Importance of a Closing Protection Letter

Most participating lenders are aware that under the current version of the Standard Operating Procedure 50 10 6 (“SOP”), U.S. Small Business Administration (“SBA”) loan proceeds may be used to finance the acquisition of commercial real estate.  Compulsory evidence of lien priority on these types of transactions often require the lender obtain a loan title insurance policy insuring the lender has the required lien position.  Lenders are generally familiar with  specific loan policy coverages and endorsements required, depending on the type of project being financed by the SBA loan, as well as the type of real estate involved in the transaction (e.g., retail condominium, agricultural land or multi-parcel unit).  But, what is often not understood is the importance of who is conducting the closing and issuing the loan policy, i.e., the title insurance underwriter itself or an “agent” who is acting on behalf of the title insurance underwriter.  In cases of the latter, a Closing Protection Letter (“CPL”) is indispensable.

As agents of the title insurance underwriter, issuing agents are authorized to issue title insurance policies on behalf of the title underwriter.  Under agency principles, title agents have authority to act on behalf of title underwriters for the sole purpose of issuing title insurance commitments and policies.  Agents, however, are often called upon to also act as agents for the lender, buyer or seller, pursuant to specific instructions to conduct the closing of the real estate transaction and act as settlement or escrow agents in transactions connected to the title insurance.  These additional duties necessitate the need for a CPL and highlight the need for clear, thorough instruction letters.

A CPL is an indemnity agreement issued by the title underwriter wherein the title underwriter agrees to indemnify the lender for actual losses which are caused by certain kinds of  misconduct, whether by action or inaction, of the title agent in closing the real estate transaction.   Subject to state law variations, as interpreted by local courts, a CPL generally indemnifies the bank for actual losses sustained when the title agent fails to comply with lender’s closing instructions pertaining to: (1) the status of title to interest in land or the validity, enforceability and priority of the lien of the mortgage (or Deed of Trust), including documents and the disbursement of funds necessary to establish title or bank’s lien; or (2) fraud, dishonesty or negligence by the title agent in handling of funds or documents in connection with the closing but only as it relates to the status of title or lien priority.

It is incumbent upon the lender, at the onset of requesting title insurance, to determine if the closing and the issuing of the title insurance policy will be conducted directly by the title underwriter or one of its approved title agents.  In cases where the closing is conducted by the underwriter’s agent rather than the underwriter itself it is prudent for a lender to request a CPL.  The cost of obtaining a CPL is nominal  (usually $50.00).

CPLs are not available, or necessary, in situations where the closing will be conducted directly by the title underwriter, since no agent is acting on behalf of the title underwriter.  Where agents are conducting the closing and issuing the policy on behalf of the insurer, the best practice  for all participating lenders should be to always request a CPL.  The CPL will provide lenders with additional assurances that title agent will not only issue the requested policy, but properly handle their funds and documents.

For further assistance please contact the attorneys at Starfield & Smith, P.C. at 215-542-7070 or email us at info@starfieldsmith.com.