Closing Protection Letters: When And Why They Are Important

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Financial lenders should be aware that Small Business Administration (SBA) loan proceeds can finance commercial property acquisitions, as outlined in the most recent Standard Operating Procedures. These transactions typically require title insurance policies that insure the lender’s lien priority.

Lenders are usually aware of the required endorsements and specific policy coverages involved in a project financed by an SBA loan, which may vary depending on the kind of property involved. Property types can include multi-parcel transactions, retail condominiums, and agricultural lands, to name a few.

However, what many lenders may not be as familiar with is the vital role that is played by the underwriter’s authorized agent in the closing and policy issuance process.

The Importance of a Closing Protection Letter

A title insurance underwriter’s agent is permitted to issue the title insurance policy on the underwriter’s behalf. This means that a title agent can act for the primary purpose of giving title insurance policies and commitments. However, title agents may also be called upon to act as authorized agents to conduct transaction closings for lenders, buyers, and sellers, as well as to act as settlement agents and authorized escrow agents.  When an agent takes on these additional roles, it necessitates the importance of having a closing protection letter (CPL) and for clear and thorough instruction letters.

What is a Closing Protection Letter?

The Closing Protection Letter (“CPL”) is essentially an indemnity agreement provided by a title underwriter that outlines the underwriter’s commitment to repay the lender if any losses are caused by specific types of misconduct—specifically, the actions or inactions of the authorized title agent during the closing process.

Although laws governing the use of CPLs vary from state to state and may be interpreted differently among the courts, the CPL will generally indemnify the lender for losses that result from an authorized agent’s failure to follow the lender’s closing instructions regarding:

  • The priority, validity, and enforceability of the lien or the status of ownership in land, including the necessary documents and disbursement of funds to establish title or lien priority; or
  • Negligence, dishonesty, or fraud on behalf of the agent regarding the handling of documents or funds at closing, but only in connection with title status or lien priority.

Upon requesting title insurance, it would behoove the lender to determine whether it will be the title underwriter or an authorized title agent who will conduct the closing and issuance of the title policy.

If it is determined that an authorized agent will conduct the closing, the lender should request a closing protection letter, the price of which is usually quite nominal (typically $50.00).

If it is determined that a title underwriter will conduct the closing directly, then a CPL is neither necessary nor an available option for the lender to request. This is because no agent is acting on the title underwriter’s behalf. When an agent is charged with conducting and issuing the title insurance policy on the insurer’s behalf, it is best practice for lenders to request a CPL. This letter provides the lender with additional protection by assuring that the agent is not only issuing the policy requested, but also properly handling all related documents and funds.

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