We all know that the buyer, seller and lender are required to have a Closing Protection Letter (CPL) for closing, but why? The experts at our title company break it down for you.
What is a Closing Protection Letter?
The CPL is nothing new. Formerly known as an Insured Closing Letter, many lenders (especially those out of state) required them of title agencies when insuring their loan at closing. The Insured Closing Letter was a contract between the title insurance underwriter and the lender and protected the lender against actual loss for certain kinds of misconduct by the closing agent.
In other words, if the title agency closing on a particular loan did not follow the lender’s specific instructions, the title insurance underwriter would protect the lender from the title agent’s misconduct. You can see why this was important to out of state lenders that didn’t have a relationship with a local title company. You can also see why a title agency would strictly follow lenders’ instructions for closing, and why there is an additional process after closing documents are signed for funding/closing to actually occur.
The History Behind Closing Protection Letters
Let’s go back many years to a time when many title companies started going out of business. Buyers had no recourse against any monies held in escrow prior to closing, and sellers had no recourse against lost proceeds at closing. It was an unprecedented time.
Law was enacted after that time which required a title agency to issue a CPL to the lender and buyer of a transaction. This was easy because an underwriter for the title agency that was insuring the buyer and lender at closing could easily issue a CPL to both.
It is important to note that the CPL is issued by the title agency’s underwriter. The underwriter, not the agency itself. Remember, the Insured Closing Letter insured the lender against acts of misconduct by the title agency, so a third party is necessary to issue these contracts.
But what about the sellers? Were they just hung out to dry with no protection? We’ll cover that in an upcoming post, so keep an eye out on our blog our subscribe to our newsletter below!