Illinois’ Closing
Protection Letters (CPLs) 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
St.
Charles, Illinois (August 2018) - Real Estate Attorney William B. Blanchard commented
that the loss of funds due to wire transfer scams is now the Number 1 insurance
claim category for title companies, escrow closing services and their
attorney/agents. Cunning hackers can intercept and replace wire transfer
instructions sent via email between the various parties to a real estate
transaction and have now diverted over a billion dollars in the U.S. alone. Cyber
thieves and unscrupulous closing agents make off with closing funds or proceeds
belonging to buyers, sellers and lenders involved in real estate transaction at
a rapidly increasing rate. Once gone,
the money is virtually impossible to recover as it moves quickly through a maze
of domestic and foreign accounts.
Criminals are having greater success now than ever before, with a large
percentage of thefts taking place in Northern Illinois.
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. He specializes in
representing real estate clients for purchases and sales as well as home owner
real estate tax assessment appeals. He is also General Counsel for Gaia Title,
Inc. a title insurance agency and settlement services provider. The Company is
owned by real estate attorneys who demand exemplary title insurance services
and accurate and efficient settlement services.
As General Counsel he is responsible for title examination, commitment
and policy review, escrow settlement supervision and regulatory review.
More information:
There are
numerous news reports about this type of scam elsewhere in the U.S., for
example:
The Illinois Statutory CPL
now reads as follows:
Illinois Agent Issued Seller Closing Protection Letter
7/19/2018
[…] Transaction File Number
(hereafter, “the Real Estate Transaction”): Buyer/Borrower:
Property Address:
Loan Number:
Name of Issuing Agent or Approved Attorney ("title
insurance agent"):
Re:
Seller Closing Protection Letter
Dear
Sir or Madam:
___________________ Title Insurance Company (the
“Company”) agrees, subject to the Conditions and Exclusions set forth below, to
reimburse you for actual loss not to exceed the amount of the settlement funds
deposited with the title insurance agent and incurred by you, the Seller/Lessor
in connection with the closing of the Real Estate Transaction conducted by the
title insurance agent of the Company provided:
(A)
A title insurance
policy of the Company is issued in connection with the closing
of the Real Estate Transaction;
(B)
You are to be the (i) Seller of an interest
in land, or (ii) Lessor
of an interest in land;
and
(C)
The aggregate of
all funds you transmit to, or are to receive from the title insurance agent for
the Real Estate Transaction does not exceed $2,000,000.00 on a nonresidential transaction; and provided
the loss arises
out of:
1. Failure of the title insurance agent to comply with
your written closing instructions to the extent that they relate to (a) the
status of the title to that interest in land or including the obtaining of documents
and the disbursement of funds necessary to establish the status of title, or
(b) the obtaining of any other documents, specifically required by you, but
only to the extent the failure to obtain the other documents affects the status
of the title to that interest in land and not to the extent that your
instructions require a determination of the validity, enforceability or the effectiveness of the other documents, or
2. Fraud, dishonesty, or negligence of the title
insurance agent in handling funds or documents in connection with closings to
the extent that the fraud, dishonesty, or negligence relates to the status of
the title to the interest in land or, in the case of a Seller/Lessor, to the
extent that the fraud, dishonesty, or negligence relates to funds paid to the
Seller/Lessor or on behalf of the Seller/Lessor.
Conditions
and Exclusions:
1.
The Company
will not be liable for loss arising
out of:
A.
Failure of the
title insurance agent to comply with your written closing instructions which
require title insurance protection inconsistent with that set forth in the
title insurance binder or commitment issued by the Company. Instructions which
require the removal of specific exceptions to title or compliance with the
requirements contained in the binder or commitment shall not be deemed to be inconsistent.
B.
Loss or
impairment of your funds in the course of collection or while on deposit with a
bank due to bank failure, insolvency or suspension, except as shall result from
failure of the title insurance agent to comply with your written closing instructions to deposit the funds in a bank which you designated by name.
C.
Defects, liens,
encumbrances, mechanics' and materialmen's liens, or other matters in
connection with the Real Estate Transaction if it is
a sale, lease or loan
transaction except to the extent
that protection against those defects,
liens, encumbrances or other matters is afforded by a policy of title insurance
not inconsistent with your closing instructions.
D.
Fraud, dishonesty
or negligence of your employee, agent, attorney, broker, buyer/borrower/lessee,
borrower’s lender or warehouse lender.
E.
Your settlement or release of any claim without the written consent
of the Company.
F.
Any matters
created, suffered, assumed
or agreed to by you or known to you.
G.
The title
insurance agent of the Company acting as a Qualified Intermediary/Accommodator
pursuant to IRC 1031, Like Kind Exchanges. However, the Company is liable for
the acts or omissions of the title insurance agent pursuant to the coverage’s afforded by this Closing Protection Letter if the title insurance agent fails to follow written instructions directing the
disbursement of exchange funds to a third party Qualified
Intermediary/Accommodator. The terms and conditions of this Closing Protection
Letter extend only to the disbursement of exchange funds to a designated
Qualified Intermediary/Accommodator disclosed in written instructions and not
to the subsequent acquisition of the replacement property
as defined in IRC 1031, Like Kind Exchanges.
2.
When the Company
shall have reimbursed you pursuant to this Closing Protection Letter it shall
be subrogated to all rights and remedies which you would have had against any
person or property had you not been so reimbursed. Liability of the Company for
such reimbursement shall be reduced to the extent that you have knowingly and
voluntarily impaired the value of this right of subrogation.
3.
The title
insurance agent is the Company’s agent only for the limited purpose of issuing
title insurance policies. The title insurance agent is not the Company’s agent
for the purpose of providing other closing or settlement services. The
Company’s liability for your losses arising from closing or settlement services
is strictly limited to the protection expressly provided in this Closing
Protection Letter. Any liability of the Company for loss does not include
liability for loss resulting from the negligence, fraud or bad faith of any
party to the Real Estate Transaction other than the tile insurance agent
pursuant to this Closing Protection Letter; the lack of creditworthiness of any
borrower connected with the Real Estate Transaction, or the failure of any
collateral to adequately secure a loan connected with the Real Estate
Transaction. However, this letter does not affect the Company’s liability with
respect to its title insurance binders, commitments or policies issued
by the title insurance agent in connection with the Real Estate Transaction
4.
You must promptly send written notice of a claim
under this letter to the Company at its principal office, First American Title Insurance Company, Attn:
Claims National Intake Center, 1 First American Way, Santa Ana, CA 92707. The
company is not liable for a loss if the written notice is not received within
one year from the date of the closing. from the date of the closing.
Any
previous Closing Protection Letter or similar agreement is hereby cancelled
with respect to the Real Estate Transaction.
**** Mr. William B. Blanchard (“Bill Blanchard”) is a Real Estate Attorney with offices in St. Charles and Oakbrook Terrace, Illinois. Bill specializes in representing real estate clients for purchases and sales as well as home owner real estate tax assessment appeals. Mr. Blanchard is General Counsel for Gaia Title, Inc. a title insurance agency and settlement services provider. The Company is owned by real estate attorneys who demand exemplary title insurance services and accurate and efficient settlement services. As General Counsel he is responsible for title examination, commitment and policy review, escrow settlement supervision and regulatory review. - Attorney Profile: https://solomonlawguild.com/william-b-blanchard%2C-esq - Attorney News: https://attorneygazette.com/william-blanchard%2C-esq#40b43d7b-94b2-48d3-b055-1979a636f1e7
