SVB Failure Starts Aggressive Regulation Talk in Washington, IMBs Take NoteWhat is the CPL if It Is NOT Insurance?

February 21, 2018
It did not take long after the Silicon Valley Bank failure for politicians in Washington to rush to the next available microphone and lament the “loosening of bank regulations”. Instinctively the finger pointing began, and in many quarters ended up in the direction of the prior administration’s policy to generally roll back stringent business regulations and allow free market decisions to govern various industries. Chief among the complainants (no pun intended) was Sen Elizabeth Warren, who emerged out of the 2008 crisis as an architect and advocate for the Wall Street Reform Act and the creation of the vaunted Consumer Financial Protection Bureau ( CFPB), which she briefly directed. Just yesterday in DC’s The Hill publication, Sen Warren was reported as blaming the the collapse of Silicon Valley Bank on Republicans in Congress, which in 2018 helped pass a law to ease bank regulations put in place following the 2008 financial crisis. “No one should be mistaken about what unfolded over the past few days in the U.S. banking system: These recent bank failures are the direct result of leaders in Washington weakening the financial rules,” Warren is quoted as saying. According to The Hill piece, Warren, who voted against the 2018 bank deregulation bill, said that the crises would have been avoided if the banks were required to hold more liquid assets because the bill exempted banks with less than $250 billion in assets from rigorous Fed stress tests. Warren and other Democrats say the old rules could have caught the issues at SVB sooner. Given that politicians generally “never let a crisis go to waste,” many now suspect that the banking industry is about to be slammed with heightened regulatory scrutiny, tighter operational rules, more audits and exams, and larger and very public fines, penalties and consent orders. What does this mean for independent mortgage bankers (IMBs)? It means that they have to get back to the compliance mindset they were frightened into adopting between 2008 and 2018, and before the bottoming out of interest rates led everyone to believe that easy money was here to stay and that self-regulation meant hiring more loan officers. Keep those risk management officers and compliance directors close by folks, we are all in for a bumpy ride on the regulatory

A frequent question I often hear from lenders who have a claim related to a title or closing agent is “What is the insured closing letter all about?”  When I turn the tables and ask them what they think it is, the answers I usually receive are (a) a part of the title insurance, (b) an insurance policy covering the settlement agent, and more typically (c) “I have no idea.”

Considering that in many states title insurers may charge a borrower between $25 and $100 for the privilege of the issuance of this letter in connection with a transaction, it seems that lenders should make it a point to become educated regarding the matter.

Title insurers are licensed by states to issue insurance policies, just like any insurance provider.  However the nature of title insurance is a form of property and casualty product.  It covers for losses incurred where real property is impaired by claims against title.  In an era of electronic records and recording this rarely happens; title claims are not very common today.  When they do occur most instances involve minor defects, such as mis-recorded documents or missed liens which can be remedied without a total loss or major claim.

Title insurers are not licensed to issue fidelity coverage or errors and omissions insurance, the type of coverage one would look to when a person or firm engages in intentional or negligent acts causing harm. This includes losses from stolen funds, coordinated fraud, looking the other way, or selling consumer private data.  Thus the insured closing letter was born.  In some states it is known as the closing protection letter.  It is merely a letter from the title insurer warranting that in certain circumstances they may cover a lender and (and if they are named) the borrower from losses actual caused by the settlement agent who may or may not an employee of the title company.

Simple right?  Not really.  A warranty letter is not an insurance policy. It is not governed by insurance laws and contract laws in the same way.  It is not subject to the same insurance claim procedures and statutory rights governing bad faith claims practices.  In the case of a serious claim coverage will likely be excluded (theft of funds is an exception) and may require costly litigation to resolve issues of liability and damages.

The takeaway from all of this is the following:  the insured closing letter is not insurance and it is not a substitute for good risk management.  Settlement agents are in a lender’s highest risk bucket.  Manage that risk carefully, because if you are hoping that a CPL will protect you chances are it will not do so.


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