Closing Without Funds

I received an interesting email regarding Closing Protection Coverage (CPC) in Ohio. A buyer wanted to know if "Closing Protection Coverage covers a case where a purchase closes but the lender fails to fund the loan." Funding seems to be a bigger problem these days. Usually, the funding is just late... but I have heard reports of lenders who have lost their sources of capital and have been unable to fund. From the email I received, it sounds as though this lender was in the latter category.

The lender was a small broker/lender who was also the mortgagee. The closing was moved from 10:30am to 1:30pm because the wire was originating from California. The wire, however, was never received. Apparently the lender blamed it on a "credit exception" and said that they would need 24 to 48 hours to clear it up and send the wire.

It was at this point that I received the email asking if the CPC provided any protections if the loan was never funded. "Do you know if there is anything I can do if it doesn't fund?" He asked. His settlement agent seemed to think that the CPC would provide some protection if the lender did not fund.

Source of Title Blog ::

Closing Protection Coverage is an agreement by the underwriter to:

...reimburse [the covered parties] for actual loss incurred... in connection with the Closing, when such Closing is conducted by [the licensed agent] and where such loss arises out of:

1. Theft, misappropriation, fraud or any other failure of the Licensed Agent, or anyone acting on the Licensed Agent's behalf, to properly handle and disburse [the covered party's] funds or documents in connection with such Closing to the extent such fraud or dishonesty relates to the status of the title to said interest in land or the marketability thereof as insured, or to the validity, enforceability, and priority of the lien of said mortgage on said interest in land; or

2. Failure of the Licensed Agent, or anyone acting on the Licensed Agent's behalf, to comply with any applicable written closing instructions, when agreed to by the Licensed Agent, to the extent that they relate to: (a) the status of title to said interest in land or the marketability thereof as insured or the validity, enforceability and priority of the lien on said mortgage [on] said interest in land, including the obtaining of documents and the disbursement of funds necessary to establish such status of title or the lien; or (b) the obtaining of any other document, specifically required by [the covered party], but only to the extent the failure to obtain such other documents affects the status of title to said interest in land or the validity, enforceability and priority of the lien of said mortgage on said interest in land, but not to the extent that said instructions require a determination of the validity, enforceability or effectiveness of such other document.

[followed by Conditions and Exclusions]

I do not see where the CPC would provide any coverage in this situation. The purpose of CPC is to protect the covered parties against wrongdoing by the "licensed agent," not the lender. If the lender fails to fund, there are no funds for the agent to mishandle. In my mind, the transaction isn't actually "closed" in this situation. The agent merely proceeded with the signing of documents which are held in escrow until the money actually changes hands. Otherwise there is no consideration for the deed.

I am also unclear on exactly what his "actual loss" would be if the loan didn't close. Perhaps he would have had some out of pocket costs associated with applying for the loan, but that hardly seems like something the title company should be liable for since this was due to the lender's failure to provide funding. Maybe if he were getting a really good deal on the property, he would have some loss of the difference between the purchase price and the fair market value. But, again, that is hardly the title agent's fault.

Perhaps there would be coverage if, for instance, the buyer brought in a sizable downpayment and the agent decided to go ahead and make partial disbursements, hoping to receive the wire soon, to record the documents and pay the net proceeds to the seller. Now we would have a valid conveyance but without any funds to payoff the seller's mortgage the title is impaired. That truly would be an ugly situation that could give rise to a claim under the CPC if the funds are not received. Making any disbursements without all of the funds is a "failure of the licensed agent to properly handle and disburse" the funds, in my opinion.

Fortunately, I received a follow-up email from the buyer and they did receive funds the next day and they re-closed the loan. The lender's "funding warehouse" had denied to fund the loan all together. However, the lender had another source that agreed to provide funding. I don't know what would have happened if the second source had not been available to this lender, but it would not have been pretty. That brings up another interesting question - is there any recourse for the buyer when the lender makes a commitment to make the loan and is unable to fund at the closing?

It is my impression that the CPC is major source of headaches for the underwriters. Many people try to make claims under the CPC that were never intended to be covered. Because the failure to comply with the closing instructions can lead to a claim, it is very important to read closing instructions very carefully. Lenders (even sellers) can write things into closing instructions that could add unanticipated responsibilities that may lead to additional liabilities.

I'd be interested in your comments. What do you think is covered under the CPC? How far should covered parties be able to stretch the coverage? And, one more thing to think about as a title agent - should you require parties providing closing instructions to purchase CPC before you sign their closing instructions?

Robert A. Franco
SOURCE OF TITLE
rfranco@sourceoftitle.com

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Categories: Escrow/Funding, Risk, Liability and Claims, Small Agents, Title Industry

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	I honestly don't know why it isn't ...
	I honestly don't know why it isn't done like it is in California. We need all the money on deposit the day before closing. If it isn't there we don't close. Closing a transaction without the lenders funds would not happen.
	by Greg Knowles \| 2008/04/04 \| log in or register to post a reply

	That would be fantastic - it should...
	That would be fantastic - it should be required! However, I rarely get the closing package before the day of closing... let alone funding. I just did a witness-only closing for another title company and I was still printing docs when the parties arrived. Funding arrived while we were signing. It seems no matter how much I insist that we receive the package the day before closing, there is always some reason why it gets "delayed." That is the problem with email - if they can wait 'til the last minute they will! I have even gone so far as to tell a couple of lenders that I WILL NOT accept emailed docs. But, when they file to get the package out in time, what choice do you have but to give them an email address? If you refuse to close, the borrower pays the consequence and that is not fair to them. I feel obligated to accommodate the borrower. I haven't finished reading the RESPA reform proposal, but that is an issue that seriously needs to be addressed. I hope there is something in there that will help. I like the California rule - thanks for sharing, Greg.
	by Robert Franco \| 2008/04/04 \| log in or register to post a reply

Source of Title Blog

Robert A. Franco The focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco
SOURCE OF TITLE

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