DAWN ENOCH MOORE - TLTA

2003 Texas Land Title Institute – Lender Instructions 1

DAWN ENOCH MOORE

Dawn Moore is President, Chief Executive Officer of Allegiance Title Company. She graduated from Southern Methodist University, magna cum laude, with a Bachelor of Science Degree in Economics and graduated with honors from Southern Methodist University School of Law. In 2000, the Texas State Bar Association appointed her to the Texas Real Estate Commission’s Broker/Lawyer Committee, which is responsible for drafting new real estate contracts. She has served on various Boards of Directors, including the Texas Land Title Association, Dallas Association of Realtors and Collin County Association of Realtors. She is immediate, past chair of the Board of Directors of the Texas State Affordable Housing Corporation. Currently her other activities include serving as chair of Board of Interfaith Housing Coalition, member of Alumni Board of Directors of SMU, and member of Dallas Assembly. She is a wife and mother of three.


LENDER INSTRUCTIONS YOU MAY NOT HAVE SEEN BEFORE, AND WHAT IF YOU MISS ONE?

Dawn Enoch Moore

President and CEO

Allegiance Title Company

Dallas, Texas


Purpose and Scope of Outline

The purpose of this outline is to highlight some provisions contained in lender instructions that cause repeated escrow claims. Escrow claims result in losses to the closing agent as opposed to the underwriter. Claims arising out of the failure of the closing agent to follow the lenders instructions are often caused by the lender trying to use generic instructions not specific to Texas or making requirements in an over abundance of caution.

Residential transactions differ from commercial transactions in that generally the instructions received from the lender for a commercial loan closing is “tailor-made” to the specific transaction. Moreover, the borrower’s counsel, the lender’s counsel and Title Company underwriting attorney are usually involved in the negotiation of final closing instructions. Residential transactions are generic forms for volume closings.

The focus of this outline is on residential transactions. The scope of the outline is narrow, giving just a few examples of lender instructions giving rise to claims for failure to comply. The intent is to bring awareness to the closing agent of the importance of review, understanding and response to the lender instructions.


Lender Instructions You May Not Have Seen Before, and What if You Miss One?

I. Introduction

Procedural Rule P-35 promulgated by the Texas Department of Insurance expressly prohibited giving affirmative coverage, guaranties, indemnifications or certifications.

“P-35. Prohibition Against Guaranties, Affirmations, Indemnifications, and Certifications. – No Title Insurance Company, Title Insurance Agent, Direct Operation, Escrow Officer, nor any employee, officer, director or agent of any such entity or person, shall issue or deliver any form of verbal or written guaranty, affirmation, indemnification, or certification of any fact, insurance coverage or conclusion of law to any insured or party to a transaction other than: (i) a statement that a transaction has closed and/or has been funded, (ii) issuance of an insured closing service letter, or any insuring form or endorsement promulgated by the State Board of Insurance, or (iii) certification of copies of documents as being true and exact copies of the original document or of the document recorded in the public records.”

Many, if not all, lender instructions contain some provision requiring the closing agent to guaranty, affirm, indemnify and/or certify some aspect of the closing and/or title to the property outside the scope of Procedural Rule P-35. In response, the closing agent will simply stamp the lender instructions with what is known as the P-35 stamp.

II. Typical Requirements contained in Lender Instructions with which the Closing Agent Cannot Comply

A. Lenders commonly instruct the title company to provide the “standard ALTA policy.” (see Appendix A, page 3) This instruction appears in both commercial and residential lender closing instructions. Of course, Texas does not issue an ALTA policy.

Generally, the residential lender simply acknowledges the difference and approves issuance of the “standard TLTA policy.” Commercial lenders, however, require more negotiation on the policy and endorsements. A creative underwriter is crucial in commercial transactions.


B. Many lenders require an “Original marked-up Title Binder to be returned with closing package.” (see Appendix B, page 2) These lenders are requesting a pro forma title policy which is expressly prohibited in residential transactions under Procedural Rule P-52 (2) which reads:

“A Company may not prepare and deliver to a proposed insured for review a pro forma policy unless (a) the land is not residential real property…”

C. Some lenders require the closing agent to meet unrealistic, but not necessarily impossible, deadlines. For instance, the instructions state, “This loan must record in 1st lien position on or prior to the disbursement date noted above.” (see Appendix C, page 1) In commercial transactions, it is common to require recording on the date of disbursement and procedures are set up to meet those deadlines. However, in residential transactions, the volume dictates that the recording of the documents occur the day after the closing, or sometimes as much a two days, particularly when closing on Friday.

D. Lenders often make requirements that conflict with the terms of the buy/sell agreement between the Buyer and Seller. Examples include:

1. “Purchase Agreement to be re-signed and dated with closing date by all parties”.(see Appendix C, page 3) Most contracts contain deadlines that are tied to the contract execution date. This lender requirement creates an inherent conflict with other contract performance deadlines

2. “A valid survey dated within 90 days of closing is required in areas where surveys are customary.” (see Appendix C, page 4) Surveys are customary in most areas of Texas, but the insurance rules allow the title company to insure on surveys older than 90 days in both commercial and residential transactions. Moreover, the promulgated TREC residential contract provides for acceptance and use of an existing survey for closing.

III. Typical Lender Instructions Frequently Missed.

A. “Borrower to initial each page of note where applicable.” (see Appendix B, page 2) Failure to have the borrower initial each page means the transaction does not fund until the borrower returns to initial or the note is delivered to the borrower, initialed, and returned to the title company.


B. “All documents should be signed in BLUE INK.” (see Appendix A, page 3) There is no consistency among lenders in this requirement. Some lenders require black ink so the signatures show up when the documents are faxed for funding. The lenders requiring blue ink have a problem detecting the original from a copy. Failure to comply with this instruction requires a resigning by all parties and sometimes a redraw of the papers (at your expense).

C. “Do not proceed unless you accept full responsibility for following these instructions. DO NOT CLOSE THIS LOAN OTHERWISE.” (see Appendix D, page 4) Most closing agents ignore this statement and close the transaction under their “usual procedure”. This omission on the part of the closing agent has caused significant losses to the title agent under the estoppel theory. Simply stamping the instructions with the P-35 stamp is not enough to protect the closing agent from the agreement created by that statement.

IV. Examples of Unusual Lender Instructions.

A. “Borrowers and closing agent to sign closing instructions …” (see Appendix D, page 3) This is somewhat controversial, because it requires some experience with the closing conditions and processes on the part of the borrower. However, failure to get the borrower’s signature will delay funding until the borrower signs .

B. “You are not authorized to disburse funds until Lender has approved the following: copy of cert funds to close (no cash – must be from Compass Bank acct listed on 1003) (see Appendix A, page 2). This instruction requires the closing agent to review the borrower’s 1003, which should be kept confidential, and verify the source of funds. Failure to follows this instruction, once again, causes delays in funding.

C. “Closing Agent to witness note and mortgage.” (see Appendix C, page 3) The closing agent should not be required to witness the note.

D. Many lenders require the closing agent to attach the legal description to the loan documents, but World Savings gives very specific instructions for this. “Preparing Exhibit ‘A’ – Detach the legal description from your Preliminary Title Report/Commitment to Insure dated 8/14/03. Using clear tape, attach the legal description to the Exhibit ‘A’ page and photocopy. Attach the photocopy of the legal description to our Security Instrument and submit for recording.” (see Appendix E, page 6) Obviously, World Savings wants to avoid possible typos!


E. Provident Home Loans requires the Notary to be an employee of the title company. Their instructions state: “All loan documents must be signed in the presence of, and notarized by a notary employed by the title company. Failure to follow these escrow instructions will result in an automatic redraw of loan documents at a charge of $300.00 to be paid by the escrow company. No exceptions.” (see Appendix D, page 3)

In other words, a remote closing will not be possible unless an employee of the title company can be present and notarizes the documents.


V. New Lender Instructions made in Response to New Laws:

A. A recent amendment to the home equity lending laws requires that the Borrower receive a final HUD 1 Settlement Statement one business day prior to execution of the documents. In an abundance of caution, some lenders do not release the closing package to the closing agent until the borrower has signed off on an acknowledgment of receipt of the final HUD1. The closing agent has to prepare the final HUD1 from fax copies of the lender Instructions. It is difficult to provide a truly accurate and final HUD1 without the complete closing package; recording fees and endorsement fees will have to be estimated.

B. New regulations under the USA Patriot Act as of October 1, 2003, require lenders to collect some additional information from the borrowers. The lenders have been requiring the closing agents to assist in this collection. The lender instructions on home equity now make requirements for the closing agent to complete an “Applicant Identification Verification” (see Appendix F) and sign it. It is permissible to sign such a form to confirm that the ID has been checked, but the closing agent must be careful to strike anything that imposes liability for inaccuracy of the information. Note that the ID used for verification must be unexpired under the USA Patriot Act.

VI. What Happens if the Closing Agent Misses a Requirement under the Lenders Instructions?

A. Failure to comply with lender instructions can result an escrow claim as opposed to a title claim. Escrow claims are those claims not covered by the title policy; they result in a loss to the agent and not a loss to the underwriter. Common escrow claims result from written misrepresentations, verbal misrepresentations and/or misrepresentation by omission. Obviously, failure to pay close attention to the lender instructions can cause an escrow claim under any of these forms of misrepresentation. For example:

1. The Lender’s Closing Instructions from World Savings state that “If the actual settlement date shown on the certified settlement statement is later than the scheduled settlement dated, World may owe the borrower a refund. At World’s discretion, any prepaid interest may either be credited to the principal balance of the borrower’s loan or refunded directly to the borrower by check.” (see Appendix E, page 9) Most lenders leave this option to the borrower. The closing agent must be careful not to misrepresent of this option to the borrower.


2. In addition to stamping the lender instructions with the P-35 stamp, the closing agent must be careful not to make any unintended representations, guaranties or affirmations in correspondence to the lender, which violates P-35 and may create a cause for written misrepresentation.

3. Failure of the closing agent to respond to the lender when the instructions state, “If you are unable to close and fund the loan as specified in these Master Closing Instructions and the Escrow Instructions, contact the Lender immediately,” (see Appendix D, page 11) can result in a claim for misrepresentation by omission.

B. The most common, and often times most painful, result of not complying with lender instructions is costs associated with a delay of funding. If the transaction does not fund timely, the closing agent is held responsible, leading to the following possibilities:

• Borrower cannot move in and has no place to stay • Seller cannot close on new house • Agent cannot get their commission • Seller’s loan cannot be paid off, leaving you short on interest • Lock may expire and borrower’s interest rate adjusted upwards • Documents have to be redrawn (at your expense) • Have to re-close (with upset parties)


C. Sometimes the transaction funds and the lender learns of the closing agent’s failure to comply with the instructions only after the documents are returned to the lender. The lender, then, cannot sell the loan, therefore, loses money and looks to the closing agent to make it whole.

VII. Tips to Help Avoid the Problems Caused by Missing a Lender Instructions.

A. Wait to make appointments for closing until after receiving the closing package and instructions from the lender. Making appointments in anticipation of delivery of the document often allows no time for review of the instructions. Carefully review the lender instructions and highlight any special requirements needed at closing.

B. Do not ignore any statement contained in the lender instructions irrespective of whether it is inconsistent with Texas law or not. Get lender’s written approval to any variance to the instructions. In the least, document any verbal approval to a variance on the face of the lender instructions noting date, time and persons giving and getting approval.

C. Keep a file of Master Closing Instructions from commonly used lenders to refer to in cases in which variances have been previously granted.

D. Refer any questions the borrower may have regarding the loan conditions and fees to the lender.

APPENDIX A

2003 Texas Land Title Institute – Lender Instructions Appendix A - 1

APPENDIX A


APPENDIX A


APPENDIX B

2003 Texas Land Title Institute – Lender Instructions Appendix B - 1

APPENDIX B


APPENDIX B


APPENDIX B


APPENDIX C

2003 Texas Land Title Institute – Lender Instructions Appendix C - 1

APPENDIX C


APPENDIX C


APPENDIX C


APPENDIX D

2003 Texas Land Title Institute – Lender Instructions Appendix D - 1

APPENDIX D


APPENDIX D


APPENDIX D


APPENDIX D


APPENDIX D


APPENDIX D


APPENDIX D


APPENDIX D


APPENDIX D


APPENDIX D


APPENDIX E

2003 Texas Land Title Institute – Lender Instructions Appendix E - 1

APPENDIX E


APPENDIX E


APPENDIX E


APPENDIX E


APPENDIX E


APPENDIX E


APPENDIX E


APPENDIX E


APPENDIX E


APPENDIX F

2003 Texas Land Title Institute – Lender Instructions Appendix F - 1