As an attorney specializing in lender loss recovery in instances of mortgage fraud, I was
shocked recently to learn that California has long held that title companies, acting as
settlement agents, have no significant fiduciary liability to lenders. More specifically,
when California settlement agents conduct a closing, they are under no obligation to
disclose to a lender any suspicion that a party to the closing is perpetrating a fraud, or
engaging in suspect or illegal practices surrounding the transaction.
You can imagine my surprise when I confirmed this statement, made to me by legal
counsel to a major title agency out West which had sent an agent to conduct a closing
where monies were received and disbursed involving parties not present nor having any
disclosed connection to the transaction. As I was investigating a first payment default,
leading to a repurchase demand by an investor to my bank client, I was engaging in the
type of grass roots investigatory procedures that help build a case for loss recovery,
through a lawsuit or negotiated settlement.
Sure enough, counsel for the settlement agent was correct. California's courts have given
escrow companies a free pass to look the other way when fraud is taken place right in
front of them. In Vournas v. Fidelity National Title Insurance Company, decided in
1999, the California Court of Appeals held that a closing agent has "no general duty to
police the affairs" of a lender, nor to "disclose to one escrow party its suspicion that the
other escrow party may be perpetrating a fraud or engaging in sharp practices in the
In an earlier case in 1968 which is still good law, Lee v. Title Ins. & Trust Co., the court
said that where an illegal "flip" transaction took place, the closing agent had "no
fiduciary duty to go beyond the escrow instructions, and notify each party...of any
suspicious fact or circumstance...which could conceivably affect such party even though
the act or circumstance is not related to the specific escrow instructions."
In another often cited case when closing agent acts or failures to act are challenged,
Axley v. Transmedia Title Ins. Co., a California court told a bank that had suffered losses
from fraud, that "a closing agent has no duty of reasonable care and diligence" to advise
the bank of a possible risk to its security position, as when multiple deeds or mortgage
instruments are filed, clouding title or impairing lien position.
The consequence of this body of legal opinions is that banks who lend in California and
expect that their interests are being served by the closing agent handling their funds, are
sadly mistaken. Furthermore, lenders can take little comfort in closing protection letters
issued to cover the closing ceremony. Those letters almost universally limit a claim for
damages to acts or omissions by an escrow agent that impair the enforceability of a
mortgage instrument. Thus, unless you can prove that a closing agent did something that
would prevent a successful foreclosure action, a claim for coverage under a CPL will not
prevail. Where a lender has a claim for identity fraud, where illegal and improper
property flips occur at closing, or even where there are unusual financial transactions at
the closing table, the CPL, in most instances will not cover a lender's losses. Remember
too, that a closing protection letter is like a policy of insurance, money is not simply
turned over when a claim is made, but only after investigation and every effort to find
exclusions and limit recovery.
The burden, then, falls upon a lender in California (and everywhere) to carefully
investigate the background, experience, and trustworthiness of closing agents. Before
you wire your next six figure mortgage proceeds, you need to ask whether or not you
really know to whom you are sending your funds, and who will look out for your
interests, including the proper recording of your mortgage instrument and the return of a
properly executed, original mortgage note.
As someone who has campaigned for tighter controls at real estate closings, a ceremony
that has not changed considerably in the past century, I can only hope that the latest
mortgage failures are a wake up call, in California and around the country. A lender's
closing agent, the only representative who attends and controls the lender's proceeds,
must be considered carefully and chosen wisely.