Closing Customs by Region
A loan must be closed in a location that is convenient for the borrower. Regional and national lenders do not have offices in every place where their borrowers are located. They often arrange for loans to be closed at the offices of local companies that are experienced in the closing and disbursement of loans. There is quite a variety of such people and companies, in part because of the ways in which state customs vary.
Certain Western states conduct escrow closings. Documents are signed in front of an escrow officer who works for an independent escrow company or a title company. In escrow states, the parties do not all sit together at the same table, and the escrow is "closed" when all of the conditions stated in the written escrow instructions have been fulfilled.
States that do not follow the escrow system are called table closing states. As the name implies, the parties all sit at the table together, and the loan is closed while the borrowers sit at the table with the loan officer or loan closer.
Not all table closing states follow the same customs as to who serves as the loan closer. Some table closing states have declared that the closing of a mortgage loan is the practice of law. In those states, a loan closing must be performed by an attorney or under the direct supervision of an attorney. In other table closing states, the closing of a loan is not considered the practice of law, but it is still customary to have an attorney involved in that process, in a system known as the "approved attorney" model. The term "approved attorney" is used in many states, but the functions of an approved attorney vary considerably from state to state. In states that do not follow the escrow, attorney or approved attorney models, most loans are closed by title companies or independent closers. However, no two states are identical in their customs for loan closings.
In many states, the same person or company that closes the loan issues a title insurance policy to the lender. In attorney states, it is common (but not universal) for an attorney who closes loans to own a title agency or to be affiliated with one. In approved attorney states, the approved attorney works with a title company in the issuance of the policy, or is a title agent. In full service title company states, it is common for the company that closes the loan to issue the title insurance policy also. In escrow states, the loan closer is sometimes an independent escrow company that has no affiliation with a title company, but it is more common for one company to perform the escrow and the title services through two different departments.
Real estate laws and customs are intensely local and vary significantly from state to state. Each state began with the laws and customs of the nation or nations who first colonized it. Thus, New York has many customs that emanate from Dutch law, while California has many Spanish customs, Louisiana follows French real estate law and much of the rest of the country follows English real estate customs. Also, title insurance is regulated by the states and not the federal government, which multiplies the variances from state to state.
As a result, many terms used in the lending, loan closing and title businesses have different definitions in the various states; also, there are many tasks or functions that have a number of different labels from state to state. For example, the person who closes a loan may be termed the loan closer, settlement agent, closing agent, escrow officer or closing attorney. I will in most cases use the term loan closer.
Most national banks orchestrate the loan closing and some part of the loan underwriting process through their closing departments. The closing department selects or approves the loan closer, prepares the loan documents, reviews title, appraisal and survey, approves the HUD-1 Settlement Statement, and funds the loan. Most national banks also have post-closing departments, who take over after the loan is funded and closed. The post-closing department receives the closing "package" of documents from the loan closer, communicates with the borrower after closing, collects loan payments, verifies that the new mortgage has been recorded and that loan payoffs have been made and old liens have been released, and obtains title insurance policies (which are always issued after closing).
There are three essential documents in any mortgage loan closing: the promissory note, which is the borrower's promise to pay back the loan; the security instrument given by the borrower, which places a lien or security interest on the real estate that is the loan collateral; and the loan settlement statement. Every state has slight variances in the form of the promissory note. There are many differences in the security instrument, which may be called a mortgage, deed of trust, trust deed, deed to secure debt, security deed or a hypothecation. I use the term "mortgage" to refer to the security instrument.
Title Insurance Policy Issuance Customs by Region
One important part of a mortgage loan is the issuance of a title insurance policy. The policy insures the lien of the mortgage or lien given to the lender as security for the loan.
The process of issuing such a policy includes a review of real estate records to determine the true owner of the property and the liens and encumbrances that affect the parcel. Part of that process is known as a title examination. However, there are a number of ways in which a title examination is performed, and there are many terms connected to that process. People in the title insurance business break down the process into two functions: the title search and the title examination. A title search is a review of the relevant public records that affect the title to the parcel. A title examination is the review of the results of that title search to make the judgment call as to which people are the true owners of the parcel and which of the recorded instruments presently affect the title to the parcel.
The searching and examination of title is a complicated and arcane science. Many sets of records get searched other than real estate documents, from tax records to judgment lien indices to pending lawsuits to bankruptcy filings. In one state that is fairly typical, there are 26 different sets of public records that are searched and examined as part of the title examination.
Every state has adopted laws that allow persons to record (or file) documents affecting the title to real estate with a public custodian, so that they can be indexed and searched by the public. This recording system provides certainty as to land ownership and gives protection to lenders who lend money based on the security of real estate as collateral. This recording system has been lauded as the fundamental system that allows for orderly transfer of land and borrowing of money, as the engines of economic progress.1
However, there is no uniformity from state to state as to the offices designated to serve as the custodian for documents such as deeds and mortgages that are recorded (or filed) for the purpose of giving constructive notice. Real estate records may be filed in the office of the register or registrar of deeds, recorder, county clerk, clerk of courts, the Torrens officer, or the probate registrar. I use the term register of deeds to refer to the record custodian.
In some locales, the title search and examination process is broken down into many steps, performed by as many as four different people or companies. In other locales, one person performs the entire search and examination of title, from the review of the title indices and records to the issuance of the title insurance commitment and policy.
There are many different terms used for title searches and examinations, some of which are synonyms and others of which have more narrow or specialized meanings. A title search is variously known as a run sheet, search sheet, date-down, down-date, update, title run, proceedings run, abstract, letter report or title notes. A title examination is also sometimes called a title search, title opinion, opinion letter, or a write-up. One important factor that affects the nomenclature is whether the title examination is performed by a lay person or an attorney.
The result of all of this diversity of terms and practices is that the HUD-1 Settlement Statement may show a variety of charges in the 1100 series. For example, on a HUD-1 Settlement Statement, the fee for a title examination typically appears on Line 1103. However, it is not uncommon for the title exam fee to be called a title "search" or "opinion," due to local practice, or to have that fee appear on a line other than 1103. Also, in some places, there are charges incurred for searches conducted in either public or private sets of real estate records, known as title "plants." A title plant fee is sometimes labeled as such, or can be called a "search" fee or "access" fee, and may appear on lines 1101 through 1103.2
A title insurance commitment is the binder of insurance that is issued before the loan closes. A title insurance commitment also has these synonyms: preliminary title report or PTR, title binder, title report, commitment to insure, preliminary title or just preliminary. A title insurance policy is also often called a "final" policy, to distinguish it from the "preliminary" title report. Also, a policy is sometimes called a guaranty (that term is used frequently in Texas, for example). However, in a number of states, such as Ohio and California, a guaranty is not a title insurance policy, but a different form of title product that is sometimes ordered in lieu of a title insurance policy.
There is some uniformity as to the form of a title insurance policy, which is due to the fact that policy forms promulgated by the American Land Title Association are used in almost every state. Although Iowa officially bans the use of title insurance, policies are still issued in that state. Texas promulgates policy forms, but they are very similar to ALTA policy forms. However, non-standard title insurance products exist also.
Footnotes
1 See Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, Basic Books, New York, NY (2000). de Soto is a Peruvian economist, and the president of the Institute for Liberty and Democracy.
2 The General Instructions for completing the HUD-1 Settlement Statement, as found in 24 CFR § 3500.23, provides this description for Lines 1100–1108, which are for title charges and settlement agent services: "This series covers title charges and charges by attorneys and closing or settlement agents. The title charges include a variety of services performed by title companies or others, and include fees directly related to the transfer of title (title examination, title search, document preparation), fees for title insurance, and fees for conducting the closing. The legal charges include fees for attorneys representing the lender, seller, or borrower, and any attorney preparing title work. The series also includes any settlement, notary, and delivery fees related to the services covered in this series. Disbursements to third parties must be broken out in the appropriate lines or in blank lines in the series, and amounts paid to these third parties must be shown outside of the columns if included in Line 1101. Charges not included in Line 1101 must be listed in the columns. Line 1101 is used to record the total for the category of 'Title services and lender's title insurance.' This amount must be listed in the columns. Line 1102 is used to record the settlement or closing fee. Line 1103 is used to record the charges for the owner's title insurance and related endorsements. This amount must be listed in the columns. Line 1104 is used to record the lender's title insurance premium and related endorsements. Line 1105 is used to record the amount of the lender's title policy limit. This amount is recorded outside of the columns. Line 1106 is used to record the amount of the owner's title policy limit. This amount is recorded outside of the columns. Line 1107 is used to record the amount of the total title insurance premium, including endorsements, that is retained by the title agent. This amount is recorded outside of the columns. Line 1108 used to record the amount of the total title insurance premium, including endorsements, that is retained by the title underwriter. This amount is recorded outside of the columns. Additional sequentially numbered lines in the 1100-series may be used to itemize title charges paid to other third parties, as identified by name and type of service provided."
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