REAL ESTATE TITLE AGENT LIABILITY TO LENDERS
1. Convey Clear Title to the Borrower and Place the Lender’s Loan in the Lien Position Requested
To perfect the Lender’s security interest, it is the obligation of the settlement agent to convey clear title to the borrower and place the lender in the lien position that the lender has requested. In most case, the title agent must ensure that the lender has a "first lien position" providing it with top priority in foreclosing upon the property in the event that its loan goes into default. Naturally, no lender would want to extend a loan that is secured by pricey real estate only to find that it must stand in lien behind other creditors who have superior security interests.
2. Comply with Closing Instructions
Regardless of the number of settlements you have performed and the number of closing instructions you have reviewed, never assume that you know what the lender wants in a given transaction. Read these instructions very carefully before closing any loan. Arguably, the lender’s closing instructions create a contractual relationship between the lender and the title agent. At a minimum, the title agent has agreed to act as an escrow agent for the lender and to distribute loan proceeds only when the title agent is able to convey clear title to the borrower and deliver to the lender a valid and enforceable mortgage or deed of trust.
Traditionally, beyond acting as an escrow agent, a title agent’s relationship to a lender has been viewed as primarily as one in tort. However, lenders are increasingly asserting that a contractual relationship exists between a lender and a borrower, suing title agents for breach of contract for failing to comply with the closing instructions provided. Indeed, lenders today do not hesitate to blame the title agent when something goes wrong in a transaction. Beyond more traditional contractual duties dealing with the handling of escrow funds and the delivery of mortgage or deed of trust in the first (or other) lien position, some lenders seek to shift the risk and costs of a borrower defaulting on its loan to another party by including "instructions" which seek to transfer this risk of loss to the settlement agent. One now defunct sub-prime lender included the following "instruction" in its letter of closing instructions:
1.2 Compensation for Damages: Your willingness to act as the settlement attorney/officer signifies your agreement to indemnify us (whether by virtue of an insured closing letter or otherwise) for any and all damages we may suffer as a result of your negligence or your failure to comply with our instructions. If you have not provided us with an insured closing letter from each of your title companies, please forward to this office prior to closing.
Wow. This "closing instruction" essential converts unassuming title agents into title insurers who must protect the lender even if they adhered to the proper standard of care in conducting settlements. Notice that this language would require that title agents indemnify this lender for loss even where a breach of closing instruction was not due to the negligence of the title agent. Watch out for closing instructions that expand the duties of a title agent to impermissible levels and – more importantly – beware of lenders who try to sneak this fine print into your transactions. Often the best settlement is the one that you walk away from.