Premier Member Editorial: Why Closing Protection Letters Are Insufficient for Risk Management

Andrew Liput is President and CEO of Secure Insight, Hamilton, N.J. 

A closing protection letter offers limited protection to banks and borrowers in real estate closings, falling short of comprehensive risk management.

Issued by title insurers, closing protection letters indemnify against specific losses due to title agent misconduct, such as fraud or failure to follow instructions. However, they do not cover all risks inherent in complex transactions.

For banks, closing protection letters may not address losses from lien priority issues, unrecorded encumbrances, or errors in public records, which can jeopardize loan security. Borrowers face risks from undisclosed defects, like easements or tax liens, that closing protection letters typically exclude. Additionally, closing protection letter coverage is contingent on the title insurer’s solvency, and if the insurer fails, the protection becomes void.

Closing protection letters also have strict claim deadlines and exclusions for negligence or third-party actions, limiting their scope. Without supplemental due diligence, such as thorough title searches, surveys, and escrow oversight, banks and borrowers remain vulnerable to financial loss. Relying solely on a closing protection letters leaves gaps in risk mitigation, necessitating robust legal and procedural safeguards to ensure a secure real estate closing.

Knowing who you are doing business with is a critical function of risk management at a closing. With one firm or person handling a bank’s loan documents, a borrower’s personal and financial information, and the settlement funds, the process creates an environment ripe for criminal fraud. Stringent vetting and risk monitoring of attorneys, title agents and escrow officers, with ongoing monitoring for changes in risk, is paramount to fraud prevention.

Since 2012, Secure Insight has vetted and monitored over 90,000 professionals in all fifty states for risk. Our lender clients have closed more than 25 million transactions without any financial loss. They have successfully embraced our corporate motto, “trust–but verify.”

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)