A closing protection letter is a legal agreement between a mortgage lender and a title insurance underwriter. The intent is to guarantee that a title agent acting on behalf of the insurer will handle a lender's funds and documents properly. First developed in the 1960s -- according to Carlton Fields Jorden Burt, LLP, a California law firm -- CPLs became more common as instances of mortgage fraud increased. Under the terms of a CPL, the underwriter agrees to assume liability for monetary losses that could result from errors, fraud or negligent acts committed by a title insurance agent during closing.
What a CPL Covers
CPLs are written on industry-approved forms developed by the American Land Title Association and cover two important points. The first is failure of a closing agent to follow written closing instructions from the lender if it affects the enforceability of the mortgage lien or the collection of funds -- such as closing costs -- due to the lender on the closing day. The second point concerns fraudulent or dishonest acts in handling the lender's funds or documents, such as failing to pay the lien on a home buyer's current mortgage.
Limits and Liability
According to Carlton Fields Jorden Burt, CPLs generally cap any monetary liability to the face amount -- the principal amount the lender is advancing to the home buyer -- of the title insurance policy. In addition, most require lenders to make any loss claims within a specific time, typically 90 days to one year. In addition, CPLs most often give the underwriter the right to seek reimbursement from the responsible party without interference from the lender.