CHCP Insurance & Liability Considerations 5 — Questions and Answers
Question 1: Which party typically pays for the lender's title insurance policy in a standard US residential transaction?
- The lender always pays
- The buyer, as a condition of obtaining the mortgage loan (Correct answer)
- The seller, as part of the closing costs they are responsible for
- It is split 50/50 between buyer and seller by federal law
Correct answer: The buyer, as a condition of obtaining the mortgage loan
In most US markets, the buyer pays for the lender's title insurance policy as part of the closing costs required to obtain the mortgage.
Question 2: What is the purpose of a 'closing protection letter' (CPL) issued by a title underwriter?
- To guarantee the property is free of all liens
- To protect lenders and buyers from closing agent fraud or negligence when handling closing funds and documents (Correct answer)
- To provide liability coverage for the real estate agents involved in the transaction
- To insure the property against physical damage during the closing process
Correct answer: To protect lenders and buyers from closing agent fraud or negligence when handling closing funds and documents
A CPL extends the title underwriter's protection to cover losses caused by the acts or omissions of the closing agent in handling closing funds and documents.
Question 3: An HOA has an unpaid assessment lien on a condominium unit being sold. How does this typically affect closing?
- HOA liens are not valid against new buyers and can be disregarded
- The lien must be paid at or before closing to transfer clear title (Correct answer)
- The lien automatically transfers to the buyer's name after closing
- HOA liens only apply if the unit is being rented, not sold
Correct answer: The lien must be paid at or before closing to transfer clear title
HOA assessment liens attach to the property and must be satisfied at closing to prevent the new owner from inheriting the debt.
Question 4: What is 'title insurance binder' (also called a commitment)?
- A final title insurance policy issued after recording
- A preliminary document committing the title company to issue a policy subject to listed conditions and exceptions (Correct answer)
- An endorsement added to an existing title policy
- A summary of the property's physical condition
Correct answer: A preliminary document committing the title company to issue a policy subject to listed conditions and exceptions
A title commitment or binder is the title company's promise to issue a final policy once specified requirements are met and closing occurs.
Question 5: Which scenario would typically trigger a claim under a buyer's homeowner's insurance policy rather than their title insurance policy?
- A pre-existing forged deed discovered after closing
- A roof damaged by a hailstorm six months after closing (Correct answer)
- An undisclosed easement that was recorded before closing
- A property tax lien that existed before the purchase
Correct answer: A roof damaged by a hailstorm six months after closing
Homeowner's insurance covers physical perils like hail damage occurring after closing, while title insurance covers pre-existing title defects.
Question 6: A closing agent disburses funds before verifying that the lender's wire transfer has fully cleared. What risk does this create?
- Violation of RESPA disclosure requirements
- Exposure to loss from wire fraud or bounced transfers, creating personal liability for the closing agent (Correct answer)
- Automatic cancellation of the title insurance policy
- A federally mandated rescission period for the buyer
Correct answer: Exposure to loss from wire fraud or bounced transfers, creating personal liability for the closing agent
Disbursing before funds clear exposes the closing agent to personal liability if the wire is fraudulent or reversed, a growing risk given wire fraud incidents.
Question 7: What is the 'doctrine of merger' and its relevance to warranty claims after a real estate closing?
- All pre-closing contracts merge into the deed, so deed warranties replace prior contractual promises (Correct answer)
- Buyer and seller merge their interests at closing, eliminating all liability
- The lender's interest merges with the buyer's title after payoff
- Prior liens merge into the new mortgage at closing
Correct answer: All pre-closing contracts merge into the deed, so deed warranties replace prior contractual promises
Under the doctrine of merger, the purchase contract merges into the deed at closing, meaning only the covenants in the deed survive for post-closing warranty claims.
CHCP Insurance & Liability Considerations 5
Which party typically pays for the lender's title insurance policy in a standard US residential transaction?