What is an insured closing letter and why am I paying for it?
An insured closing letter, also called a closing protection letter, is issued for an agent by the title insurance underwriter to your lender prior to your closing. This letter is for lender purposes only and is not issued to individuals for owner’s title insurance.
The letter is from the underwriter to the lender stating the underwriter will insure the lender against any title claims arising due to the title agent non-compliance with the lender’s loan instructions.
In other words, prior to the lender’s instructions being issued, the title agent provides to the lender a letter stating the underwriter for the title agent will insure any title-related issues arising out of the settlement that directly affects the loan as a lien against the property being used as collateral for the loan.
(There are some exceptions, i.e. perpetration of fraud, certain lender instructions directing the agent to change terms in the policy, etc.)
As the lender must make sure the closing agent is insured and able to provide title insurance for the loan, this letter must be sent to the lender prior to issuance of the lender’s closing package.
Once the letter is issued and the loan is ready to be closed, the lender provides instructions to the title agent along with the documents for the borrower to sign. This letter does not protect the title agent from recourse – it gives the lender another avenue to recover for any claims arising from the title agent’s action or inaction.
In the District of Columbia, the new laws provide that there is to be a separate fee on the settlement statement (HUD-1) for the Insured Closing Letter (ICL) or Closing Protection Letter (CPL).
The fee for the letter is a pass-through cost to the borrower like the lender’s title insurance policy. At this juncture in time, Maryland and Virginia are not requiring the additional fee.
For further information, feel free to contact Catherine Schmitt.