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Closing Protection Letters (CPLs) in Illinois Help Protect against Wire Fraud Losses
Illinois Act shows that legislature is holding the major title companies and underwriters responsible for creating a situation which makes it easier for unscrupulous parties to steal funds
By: Gaia Title, Inc.
Mr. Blanchard explains that a "Closing Protection Letter" (CPL) which must now be used is a form of insurance issued by title insurance companies, insuring the actions of a particular attorney, agent, and/or closer in conducting a closing. The business of issuing title insurance commitments, owner's and lender's policies and administering closings in Illinois, underwent a dramatic change during the 1980s and '90s. Residential real estate contracts, following established practice in Northern Illinois, provide that seller's attorney is responsible for selecting the title company to provide title and escrow settlement services for the transaction. Title companies, attempting to increase title orders, took steps to build a base of loyal attorneys in a competitive market by entering into independent agent agreements. These agreements provided financial rewards to attorney/agents through generous premium splits in exchange for placement of title orders.
By the turn of the Century major title companies engaged in fierce competition to attract new agents until now virtually all real estate attorneys have affiliated business arrangements with at least one title underwriter. As a result, attorney policy premium splits quickly reached 80-20%. Attorney revenue continued to grow rapidly as title companies had to increase premiums in order to remain a competitive attorney recruitment program.
Title companies dealt with lost revenue from lower premium margins by increasing the cost of other services such as escrow settlement and closings fees. After profits from providing ancillary services and products grew, attorneys and investors opened full service title agencies allowing them to enter the lucrative escrow and settlement business. Most new agencies were and continue to be undercapitalized and are staffed by real estate attorneys and administrative staff having little hands-on title experience. Mistakes before, during and after closings increased as did the volume of claims. Dissatisfied lenders complained as they had to look to undercapitalized independent agencies to recover losses resulting from title errors and mishandling or theft of escrow funds. The result was a reluctance amongst mortgage lenders to recognize these new agencies as approved vendors for their closings.
Facing a need to bolster lender's confidence in agency closings, major title companies and underwriters issued CPLs indemnifying lenders and buyers from losses occurring during the closing process. Underwriters paid or settled claims quickly in order encourage lenders to accept the newer agencies as approved vendors.
At first, CPLs were issued by underwriters to lenders and later to buyers upon request. Later Illinois enacted statutory coverage for CPLs and provided that title company underwriters must issue letters to buyers and lenders in all residential real estate transactions. Then on September 1, 2011 the Illinois legislature added CPLs for sellers under the Act and provided for payment of fees to title companies that issued CPLs (Illinois Public Act 96-1454) ("Act").
Attorney William Blanchard notes that "theft of closing funds or sale proceeds is not just an Illinois problem as losses are prevalent throughout the country. Courts in many states without CPL legislation are struggling to justify decisions finding title companies and individual agency or agent's errors and omission insurers responsible to the parties to real estate transactions that fail due to loss of funds or to sellers whose proceeds end up somewhere other than intended. Other state courts have moved in the opposite directions finding underwriters and insurers free from legal responsibility for losses."
Even though millions of dollars are being hijacked by unscrupulous closing agents, attorneys and hackers, there are no appellate or supreme court cases on the issue of title insurance company responsibility for loss due to fake wire transfer instructions involving CPLs. Statutory defenses are provided in the Act, but for now it appears that underwriters are accepting claims under CPLs with a reservation of right to deny the claims. Therefore, if buyer, lender or seller closing funds are misappropriated and the closing does not occur, insurers are still settling claims very early in the process to prevent courts from interpreting issuer's liability under the Act. The obvious desire not to litigate may be realization that it would be rare for a claim of diversion of funds to result from settlement actions by closing agents or attorney/agents who were completely free from negligence, error, fraud, or intentional taking.
Mr. Blanchard concludes that "the language of the Illinois Act makes it clear that the legislature is holding the major title companies and underwriters responsible for creating a situation which makes it easier for unscrupulous parties to steal funds and will now hold insurers strictly responsible for the damages."
About William B. Blanchard, Real Estate Attorney
Bill Blanchard is a solo practice attorney with offices in St. Charles and Oakbrook Terrace, Illinois.
Attorney Directory: https://solomonlawguild.com/
William B Blanchard, Esq.
Gaia Title Inc.