Fraud and Litigation Involving Real Estate Closings, Closing Protection Letters, and Title Insurance Industry Standard Practices and Procedures

TASA ID: 322

In the mortgage origination frenzy of the last few years, many problems occurred in the closing of loans that never should have been closed.  The mortgage banking and mortgage lending industries rely upon the expertise of title insurance companies to make sure that mortgage loan closings are carried out properly.  Mortgage lenders send their loan funds to a title insurance company and rely on the title insurance company to be their eyes and ears in properly closing loans.  Most of the time, this system works well.  However, in some instances, it fails miserably, with costly results.

            When a lender sends closing funds to an agent of a title insurance company, including funds intended to pay for a Closing Protection Letter and a Title Insurance Policy, and then the lender receives a Closing Protection Letter and a Title Insurance Policy, then it is my opinion as an experienced mortgage lending professional that this constitutes a reasonable and industry standard practice and procedure for obtaining a Closing Protection Letter and coverage by a Title Insurance Policy.

            Let's examine some of the problems that I have seen surface in the last year or two:

•           I have seen title insurance companies try to deny coverage even though they issued a Closing Protection Letter and a Title Insurance Policy citing the name of the borrower, the name of the lender, and the address of the property.  In my professional opinion, adding all of these descriptive and informational identifying items to a title insurance company's standard forms, and forwarding them to their closing agent or to the lender, clearly indicate the title insurance company's desire and intention to provide the protections paid for by the lender. 
•           In some cases, title companies try to weasel out of being responsible for coverage since the signature on the title policy they issued is not an original signature.  However, it is a widely known practice in the title insurance industry that many policy forms are issued with preprinted or facsimile signatures; and those signatures are considered to be as valid as if they were originals.  It has been my experience that this is a common practice in the title insurance industry since the reality of how the real estate lending business is practiced is that closings can take place anywhere in the country, thus making it difficult as well as impractical for an original signature to appear on every title policy document.  In order to deal with this everyday problem, it is common for title insurance companies to issue valid documents with a pre-printed signature or a typed signature.  As a longtime mortgage lending professional and former banking regulator who has been involved in the origination of over 36,000 mortgage loans, if I were involved in a real estate loan closing involving a Closing Protection Letter and Title Insurance Policy provided by a known title insurance company and bearing a preprinted or facsimile signature, then I would consider them to be valid documents and would afford the lender all of the protections for which they had paid.

            Let's look at some of the duties and responsibilities that title insurance companies have to the parties that rely on the closing protection letters and title insurance policies that they issue:

•           It is fundamental that a title insurance company owes a duty to all of the insured parties relying on its title insurance policies and closing protection letters to accurately determine the title status of properties it insures. 
•           It is also fundamental that a title insurance company owes a duty to all of the insured parties relying on its title insurance policies and closing protection letters to hire only qualified people to serve as its authorized agents, approved attorneys, and settlement agents.
•           It is my professional opinion that a title insurance company owes a duty to all of the insured parties relying on its title insurance policies and closing protection letters to avoid obvious conflicts of interest among the parties that are involved as borrowers and closing staff.
•           A title insurance company owes a duty to all of the insured parties that rely on its title insurance policies and closing protection letters to ensure that its designated settlement agents and approved attorneys are properly trained in how to do their job correctly.
•           Likewise, a title insurance company owes a duty to all of the insured parties that rely on its title insurance policies and closing protection letters to ensure that its designated settlement agents and approved attorneys are continually trained in how to do their job correctly.
•           A title insurance company owes a duty to all of the insured parties that rely on its title insurance policies and closing protection letters to ensure that its designated settlement agents and approved attorneys properly secure their official forms and insurance policy documents from access by unauthorized third parties so as to ensure that only authentic title insurance policies are issued.
•           A title insurance company owes a duty to all of the insured parties that rely on its title insurance policies and closing protection letters to ensure that its designated settlement agents and approved attorneys are knowledgeable and aware of the importance of the proper management of funds that flow through their office.
•           A title insurance company owes a duty to all of the insured parties that rely on its title insurance policies and closing protection letters to ensure that its designated settlement agents and approved attorneys properly manage their business bank accounts through which funds are handled to fund loan closings.  This includes insuring that the bank account is properly secured and access to it is properly controlled.
•           A title insurance company owes a duty to all of the insured parties that rely on its title insurance policies and closing protection letters to regularly conduct onsite inspections and audits of their designated settlement agents and approved attorneys to ensure that they are conforming with prudent business practices in the management of their office including the security of important forms, access to their business bank account, and other important security matters.
•           A title insurance company has a heightened duty to all of the insured parties that rely on its title insurance policies and closing protection letters to ensure that all of its designated authorized agents, settlement agents, and approved attorneys who work almost exclusively in the office of one client lender maintain a proper relationship with that lender and do not jeopardize or compromise the integrity of the insurance company.
•           Title insurance companies are responsible for obtaining and verifying a completed and signed application from potential authorized agents, settlement agents, and approved attorneys before they approve them to represent the title insurance company.
•           A title insurance company is responsible for properly supervising and overseeing the work of their designated authorized agents, settlement agents, and approved attorneys that represent the company in dealing with the public.
•           A title insurance company should perform periodic inspections and audits of the office procedures of their designated authorized agents, settlement agents, and approved attorneys in order to ensure that they are conforming with prudent business practices in the management of  their office, including the security of important forms, access to their business bank account, and other important security matters.

            It is my opinion that title insurance companies that do not follow these industry standard practices and procedures that I have observed in over forty years of dealing with title insurance companies are violating industry standards of good faith, fair dealing, honesty in fact, and commercially reasonable practices that make it highly likely that they could be the proximate cause of damage to a party relying on their expertise in closing and funding loans, their closing protection letters, and their title insurance policies.  Furthermore, failure to follow these industry standard practices and procedures increases the likelihood that fraud can be committed.

About the Author

This expert provides consultation, fact examination and analysis, advice, Affidavits, Declarations, reports, and sworn testimony at deposition and in court for parties engaged in litigation involving lending, loan closing, and all areas of banking and finance.

His expert witness experience and background includes over 400 cases for plaintiffs and defendants nationwide, over 100 testimonies, and 12 courthouse settlements in all areas of banking, finance, FACTA issues, real estate, economic damages, identity theft, business valuation, intangible asset valuation, and many related matters going back to 1989.  He renders impartial opinions and is privileged to be listed in the databases of recommended expert witness consultants of both the Defense Research Institute and the American Association for Justice.

This expert's clients have included 8 of the top 10 banks in the country, over 60 banks worldwide including 12 of the top 45 banks in the world, 8 of the top 10 mortgage banking companies in the country, 33 of the country's top 250 law firms, and numerous governmental clients including many banking regulators (FDIC, FSLIC, RTC and others), IRS, USAID, U.S. Air Force, State of New York, State of Texas, World Bank, International Accounting Standards Board, and hundreds of others.

His employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, Bank of America, Regions Financial, and Guaranty Bank, as well as a two-year stint as a high-level governmental financial institution regulator.

This expert holds a B.A. degree from the University of Alabama, and completed postgraduate and executive education work at Alabama, the University of Houston, Southern Methodist University, Spring Hill College, and the Harvard Business School.

In addition to lending and banking, this expert provides consulting services in many additional areas including business valuations, intangible asset valuations, business plan writing, feasibility studies, marketing studies, bank taxation matters, anti-money laundering policies and procedures, policy and procedure manuals for financial institutions and other organizations, merger and acquisition due diligence and assistance, research, and many other related areas.

As part of his wide-ranging consulting activities, this expert has been called on by clients in 27 countries for work assignments involving 56 countries.

He is widely published on banking and financial subjects and is often sought out by the media for interviews and comments.

This expert serves clients worldwide from his office in the metro Atlanta, Georgia USA area.

This article discusses issues of general interest and does not give any specific legal, medical, or business advice pertaining to any specific circumstances. Before acting upon any of its information, you should obtain appropriate advice from a lawyer or other qualified professional.

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