What is a closing protection letter?

The letter runs from the title underwriter to the lender. It says that if the settlement agent handling the closing steals or misapplies the loan funds, or ignores the lender's written closing instructions in a way that causes loss, the underwriter will indemnify the lender within the terms of the letter.

It is not a title insurance policy. Title coverage responds to defects in the record. The letter responds to the conduct of the closing itself, which is a different risk and a different document. A file can have one and not the other, and lenders normally require both.

Borrowers see the letter referenced in the loan package and sometimes see a small fee on the settlement statement. The protection itself runs to the lender. A borrower who wants comparable comfort on the handling of funds gets it from the escrow arrangements and from the wire verification discipline, not from this letter.

For the borrower's attorney the letter is a checklist item with a date on it. It is issued for a specific closing, a specific insured amount and specific parties, so a change in the loan amount, the closing date or the underwriter means the letter has to be reissued before funding.

If a lender's closing instructions and the letter conflict, the conflict is worth raising in writing before the closing date rather than at the table, because the underwriter's obligations are measured against the instructions actually followed. The borrower's attorney should keep a copy of both the letter and the closing instructions in the file.