Best Practices: The Importance of Closing Instruction Letters

When Lenders rely on a third party closing agent, such as a title agent or escrow agent, to assist with loan closing and disbursement on behalf of the Lender, it is important for Lenders to provide clear written instructions to the closing agent with respect to the Lender’s funding, title and closing requirements. An instruction letter not only aids in a smoother closing, and makes the closing agent aware of the Lender’s expectations for closing, but it may also be necessary in order for the Lender to receive any protections afforded by a closing protection letter.

A closing protection letter is essentially an agreement issued by a title underwriter which indemnifies the Lender for certain losses caused by the actions or inactions of the underwriter’s closing agent, provided that the loss is caused by (i) the closing agent’s failure to comply with the Lender’s written closing instructions for disbursement and documentation or (ii) fraud, theft, dishonesty or misappropriation by the closing agent in handling closing funds and documents. Absent a fraudulent act by the closing agent, such protections may only be afforded to a Lender who has provided written closing instructions.

Below is a non-exhaustive list of information that a Lender may wish to include in its instruction letter to the closing agent:

• Fees and Disbursement Instructions – Lenders should provide the closing agent with a list of all fees and sources of funds to appear on the settlement statement. The list may include lender fees, third party fees, invoices being paid at closing, the amount of loan funds being disbursed, seller financing funds, and any applicable credits to be shown on the settlement statement.  Lenders should also provide instructions as to any funds that Borrower needs to bring to closing.
• Real Estate Recording Instructions – Lenders should provide clear instructions as to the jurisdiction and required order of all real estate filings. If a Lender is requesting that the closing agent record un-insured collateral documents as a courtesy to the Lender, this information should also be set forth in the instruction letter.
• Other Collateral Instructions – If a closing agent is assisting the Lender or parties to the transaction with the perfection of non-real estate collateral, such as through UCC filings and motor vehicle title transfers and liens, or if a closing agent is handling miscellaneous recordings and filings such as fictitious name filings, such instructions should be included in the instruction letter.
• Title Instructions – It is helpful for the instruction letter to set forth all of the Lender’s title requirements, such as the required loan policy amount, the removal of specific title exceptions on the loan policy and the request for specific endorsements.
• Funding Requirements – Lenders often want to review copies of executed loan documents, settlement statements and transaction documents prior to approving funding. The instruction letter is a good place to set forth the specific items that the lender requires in order to fund.
• Instructions for Return of Original Documents – Does the Lender want the original executed loan documents to be returned to its headquarters, its attorney’s office or somewhere else? If any original stock certificates are being pledged as collateral and held by the Lender, or the Lender requires delivery of original vehicle titles, such instructions should be provided in the instruction letter.
• List of Documents – It is often helpful to include a list of documents that need to be executed at closing.

In addition to making sure that Lenders are not prohibited from the safeguards of a closing protection letter and ensuring that the closing agent understands the Lender’s expectations for closing, an instruction letter can be helpful for a Lender’s post-closing department as well. It can provide a road map of the documents, recordings and disbursement information that the Lender’s post-closing department will likely be looking for after closing.

For questions regarding commercial closing transactions, contact the attorneys at Starfield & Smith at 215-542-7070 or email us at info@starfieldsmith.com.