When you secure a mortgage to purchase a home or other piece of real estate, your lender will require that you purchase title insurance to protect the loan. This title insurance premium will be paid one time during the escrow/settlement period of the real estate transaction, and the coverage will last until the loan is settled — paid, refinanced or foreclosed. When the title insurance company agrees to insure the loan, they often send a closing protection letter, or CPL, to the lender.
A closing protection letter is essentially an agreement from a title insurance company to a lender that indemnifies the lender against any issues arising from a closing agent’s errors, fraud or negligence. For instance, if a closing agent misappropriates loan funds, the title insurance company agrees to make any necessary financial remediation.
Now title-industry approved forms, closing protection letters have been used widely in real estate transactions since the 1960s. Upon their inception, lenders requested CPLs because they were concerned about their lack of protection against the fraudulent action — or failure to comply with the lender’s closing instructions — of closing agents or attorneys contracted by the title insurance company. Now, CPLs are common in most real estate transactions.