Letters of Indemnity:
Insuring Over a Recorded but Unreleased Lien
By Kent Pelt, Esq.
Mortgage lenders are required to release mortgages or reconvey deeds of trust following payoff. Because this process is often delayed, the title insurance industry developed letters of indemnity (LOI) exchanges to facilitate purchase or refinance title orders when there is a paid-off, but unreleased mortgage lien.
To make the process even easier, many eastern states have indemnification treaties between major title insurance companies. Under these treaties, requesting a specific LOI from the company that paid off the mortgage or deed of trust in question is not necessary. Indemnification is automatic in accordance with the terms of the treaty.
In other states, particularly in the west, specific LOI requests are made between title companies. The exception is California, where title companies stopped exchanging LOIs routinely around 2001. At Doma Title Insurance Inc., our underwriting counsel are tasked with reviewing the request to confirm that the mortgage or deed of trust was paid off by one of our policy-issuing agents. If that is the case, an LOI will be issued from our underwriting department.
However, if the mortgage or deed of trust was not paid off by our company’s title agent, we will refer the matter to our company’s claims department for further investigation and handling. At Doma, LOI requests are submitted to the global email address for each state, [State Postal Abbreviation]@doma.com. For example, a Nevada request would be submitted to [email protected].
Here are some additional situations to watch out for when dealing with letters of indemnity.
Escrow Holdback Agreements
Occasionally, closing agents are asked to withhold funds. Most often, the purpose behind this is to allow sellers or borrowers to resolve disputed liens or payoff amounts with creditors.
Doma’s requirements for its agents are found in National Bulletin 2018-12.
Escrow holdbacks are not part of the title insurance policy. However, they are necessary to protect the title agent and Doma from claim losses when things don’t go exactly as planned. That is why Doma must approve the terms of the proposed escrow holdback agreement. Escrow holdbacks should only be used for monetary liens that can be paid off and released, and not for any matter that requires a cure with a lawsuit, for example. Doma should not be listed as a party to any escrow holdback agreement.
Escrow Agreement Checklist
Doma agents have a checklist with our company’s requirements, which include:
The agreement must have a specific date and include seller and buyer, or just the borrower for refinances. Lenders should not be mentioned unless they are parties to the withholding agreement. The escrow/closing agent must be clearly identified, and sign only as escrow agent and not as a full party to the escrow agreement. The escrow agent only holds funds, so its obligations are limited.
A description of the property is needed, and the subject matter of the agreement must be specifically described; conditions to be performed or the shortcoming that creates the need for the escrow agreement. The exact dollar amount withheld must be clearly stated. As a general rule, 125% to 150% of the face amount of the lien must be withheld.
Specify whether the funds will be in the escrow trust account, or in a separate, interest-bearing account. The duration of the agreement must be specific, too. The escrow agreement should have a fixed completion date or expiration date that assumes all parties will do what they are supposed to by that date. Normally, escrow agreements include a second later date, which triggers if the parties have not done what they are supposed to do. For example:
Seller will replace the HVAC within 30 days following closing. If this work is not completed within 45 of closing, Buyer may hire their own HVAC contractor and the escrowed funds shall be delivered to the Buyer.
In the event of a dispute between the parties, the escrow agreement must contain a provision allowing the escrow/settlement agent to interplead funds. Also, the agreement must clearly state the conditions for releasing the withheld funds. In no event should the escrow agent determine if the parties to the agreement have performed. The escrow agreement should provide that the escrow funds are to be disbursed solely upon the escrow agent’s receipt of documents stating that the conditions for the release have been satisfied. This is strictly a clerical function.
If conditions are not satisfied within the time allotted, the escrow/closing agent should have the unilateral authority to release the funds to the creditor in exchange for a release. The withholding agreement must clearly instruct who the funds go to. For example, if the debtor negotiates a compromise with the creditor, excess funds go back to the debtor. If funds are insufficient to pay off a lien, the withholding agreement should state who is liable for the deficiency – not the escrow/settlement agent.
Finally, an indemnification clause is required. The parties must indemnify and hold the escrow/settlement agent harmless for any liability relating to the performance of their duties. That should include an attorneys’ fees clause for the benefit of the escrow/settlement agent.
Record Matters Indemnity
The second step to insuring over a recorded, unreleased lien is the Record Matters Indemnity. Unlike the escrow withholding agreement, this form is for the benefit of the title insurance underwriter. For Doma agents, this document is available from Doma underwriting counsel for your particular state.
The Record Matters Indemnity will be secured by the same funds withheld by the escrow/closing agent. The Record Matters Indemnity gives the title insurance underwriter increased remedies in the event the withholding agreement between the parties fails, and a claim arises requiring the underwriter to resolve.
Kent Pelt, Esq., is Vice President, Deputy Chief Underwriting Counsel for Doma.