In one sentence
An indemnity from a title underwriter covering the lender against loss from its settlement agent's fraud or failure to follow closing instructions.
The longer version
The title policy insures the state of title. It does not insure that the settlement agent behaved. The closing protection letter fills that gap by making the underwriter answerable for its agent's dishonesty or deviation from written instructions.
Because it responds to instruction failures, its value depends on the instructions being written, specific, and delivered. Vague instructions weaken the letter, which is the practical reason lenders keep closing instructions detailed even when the transaction feels routine.
Common questions
- What does a closing protection letter cover?
- Loss from the settlement agent's theft or misapplication of funds, and from the agent's failure to comply with the lender's written closing instructions.
- Is it the same as title insurance?
- No. Title insurance covers defects in title. The letter covers the conduct of the closing agent, which title insurance does not reach.
- Who issues it?
- The title underwriter, not the agent, which is the point: it puts a larger and more creditworthy party behind the agent's conduct.
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