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Lender Liability for the Acts of Settlement Agents

By Marvin Bagwell
October 29, 2012

Suppose you are lender's counsel. You receive a call from a homeowner who has just been served with a summons and complaint foreclosing the mortgage from his prior closing, which he thought your bank, as his new lender, had paid off. Your stomach falls into a pit. You confirm that yes, your bank provided the homeowner with a mortgage a few months ago. You also confirm that the bank your mortgage paid off at the closing is the bank that is bringing the foreclosure action. You are not panicking yet, because if as you suspect, the bank's closing attorney absconded with the pay-off funds, the title company, under its closing protection letter (CPL), will cover your loss. CPLs indemnify lenders or mortgagees against loss caused by improper acts or omissions by the lender's settlement agent such as the improper execution of the loan documents or the misappropriation of the loan funds. Then you examine the loan file and you discover to your horror that the property is located in New York. Now you begin to panic.

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