CPLs Are NOT Protection Against Settlement Agent Fraud!

You are about to wire closing funds to the table, into the hands of a lawyer, title agent or escrow company employee you have never met before, but no worries because you have a Closing Protection Letter right? Wrong.

Take a good look at the language in this warranty letter.  The majority of CPLs insure against two events: (1) outright theft of the mortgage proceeds, and (2) any other event that impairs the invalidity or unenforceability of the lien of the mortgage.

But what happens when the closing agent engages in a conspiracy with others to commit fraud such as the borrower, seller, realtor or all three?  Or, the agent is “willfully blind” ignoring fraud taking place in their presence, such as undisclosed intervening property flips, cash outside closing, straw buyers, identity theft, fake POAs?  These issues can create a loan defect (triggering future repurchase) but not impair title because you can still foreclose.

When you try and file a claim in these circumstances you may get one of these responses, taken from actual claims denial letters:

“Although the borrower’s identity was stolen and she never signed the loan documents or mortgage at the closing, your lien remains enforceable.”  No coverage!

            “We can find no evidence to support your claim that [XYZ] Title acted with fraud or dishonesty, or that it did anything in a manner giving rise to our obligations under the Closing Protection Letter.”  No coverage!

The mere fact that there was fraud at the closing does not support a claim that {ABC} Title was implicit in any fraud.”  No coverage!

Title underwriters naturally approach CPL claims in the same manner as any insurance company.  They are inclined to avoid paying through the letter’s coverage limitations.  It is rare for a lender to recover 100% of its losses on defective loans in a CPL claim and/or resulting litigation.

In addition, there is no uniform approach to vetting by underwriters. Some may conduct “one and done” background checks on title agency owners but they do not work with one another nor share information publicly.  Rarely if ever do they examine the backgrounds of agency employees, let alone the independent closers, mobile notaries and attorneys who are delegated much of the actual closing table functions.  It involves little or no ongoing monitoring discounting its effectiveness as an indicator of the clear and present danger of fraud losses the day you wire funds to the closing table. Random audits of trust accounts are a standard practice for some, but that’s like checking the barn after the horse has already run off.

Lenders must initiate policies to verify settlement agents are legitimate, experienced, and trustworthy, before the closing takes place. A reliable third party can do the vetting for you. Today, despite early objections, third party agent vetting firms are accepted as a necessary and reliable fraud tool. Lenders know the risk from escrow and settlement fraud is manageable through emerging technology and deterrence programs, and is a key component of overall loan quality assurance.

Still not convinced that the CPL is not a reliable tool for deterring or insuring against fraud at a mortgage closing? I will leave you with an actual claims response from California:

“Our title agent has no legal obligation to even report any fraud it may suspect at a closing, and we deny any responsibility for how funds were brought to the closing table, or to whom they were disbursed, as long as the closing instructions were followed.”  No coverage!

 

 

 

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