Describes important considerations for lenders with respect to their title insurance coverage. Provides lenders with best practices for ordering title insurance coverage, but more important, for MAINTAINING the coverage during the life of the loan. Gives specific mistakes for lenders to avoid and steps lenders can take to prevent denial of coverage by title insurer.
The following is a review of certain, but not all of the title insurance issues which you may encounter in a loan transaction, and of procedures that may be considered in dealing with title insurance coverage or the general processing and closing of loan transactions. This is only a highlighting of certain steps to be taken, and may not be comprehensive.
In all title insurance related dealings / actions, keep in mind that there are two separate and distinct contracts in existence in each insured loan transaction: (This does not include a third contract, with the escrow agent.)
· The contract between the lender and the borrower
· The contract between the insurer (title co) and the
insured (lender)
There’s often a tendency to underwrite a loan with the thought that you’ve received and reviewed a preliminary title report, possibly addressed any questionable items on that report, and that your primary remaining concern with respect to title insurance is being sure the actually policy is being obtained at closing.
Knowing that title insurers may attempt to deny coverage, there are a number of steps that can be taken to improve your chances of getting coverage. Certain seemingly normal actions or omissions by a loan originator may have a significant impact on the insurer’s ability to “wiggle out of providing coverage.”
When Originating New Loans1) Expand your loan application to include a “property addendum,” which may include, among other things:
· a clearly spelled out description of the property, including a description of the improvements (i.e. a 10-unit apartment house, consisting of five two-bedroom units and five one-bedroom units, located at 123 Elm Street, Los Angeles, CA.) offered as collateral, including the complete street address (Obtain endorsement to title policy including full description, where possible.) (CLTA 116 endorsement)
· the complete legal description, and what document or information the borrower relied upon to provide that information
· the property tax assessor’s parcel number
Have the borrower(s) separately sign and date this
description.
2) Add an addendum to your application, where borrower
makes a specific, written representation as to who is on title, and in the case of an entity holding title, who the authorized signers are for that entity.
3) Watch item 3A, “items created, etc., by the insured”
4) Watch item 3B, “items neither known to the insurer,
recorded in the public records, but known to the insured”
5) Obtain proper Endorsements.
6) Appropriate disbursement of loan proceeds. Parties to a
loan transaction always have compelling reasons for disbursement of loan proceeds to someone other than the holder of title or the lienholders. It leaves you open for a multitude of title coverage (and other) problems.
7) Construction loans: (or any loan, for that matter) Be sure
no work has commenced at time title policy is issued.
Request true “Seattle Endorsement” for construction loans.
Look for wording, “insurer will not raise the fact that
insured has undisbursed loan funds, as a defense againsta claim,” as opposed to wording that says “insurer will not
raise the fact that the lender has undisbursed loan funds,
provided that those funds are handed over to the title
insurer.”
8) Permanent loans (non-constructions loans): How do you
know that no construction has commenced and no mater-
ials have been delivered to the site, and that loan pro-
ceeds aren’t, unbeknownst to you, going to construction?
When closing a loan
1) Post closing review: On receipt of title policy, check title policy issued against lender’s instructions to escrow/title.
2) If additional proceeds are to be disbursed, have title
company disburse them
Loan Servicing Issues
1) Attempt to avoid any deviation from the terms of the loan. (Any deviation, even slight, from the terms of the loan documents may be raised by the title insurer as grounds to deny coverage.)
2) For any modification of loan terms, obtain appropriate
endorsement from title insurer. (Usually CLTA form 110.5)
3) Give written notice to insurer when modifying/altering
any aspect of the loan agreement.
Foreclosure / REO Issues
1) Deeds in lieu of foreclosure: Don’t take a deed in
lieu of foreclosure unless you obtain appropriate
policy of title insurance. This would mean obtaining
an owner’s policy of title insurance and a CLTA form
107.11 (non merger endorsement) Note the problem
with deeds in lieu is that liens, judgements, taxes, and
other recorded notices against the owner all attach to the
property.
2) During foreclosure, operate with awareness that actions
taken during the foreclosure are all “post-policy” and insurer may take the position that they are not covered
by the policy.
3) A TSG (Trustee’s Sale Guarantee) is only an opinion of
the insurer, not a policy of title insurance. Loan policy
doesn’t insure validity of your foreclosure.
Where possible, obtain TSG from same company that
insured original loan origination.
4) Obtain an owner’s policy o title insurance after fore-
closure sale. This could eliminate or minimize all of
the problems outlined in the last two points.
(Remember that your loan policy only provides coverage
to the extent that there’s an unpaid loan balance. Whether you’re going to sell or keep the property, you’ll
need title insurance.
Title Insurance Claims
1) Immediately tender to the title company any borrower
complaint that questions the validity or enforceability of your deed of trust.
2) Notify title insurer in writing by Fed Ex or other
traceable delivery service (that obtains a signature of
receipt of delivery) if you have any reason to believe
that you have a claim.
3) Obtain your own counsel, rather than relying on the
counsel hired by title company to “represent you.”
Where they “represent you,” they get a large amount
of business from the title insurer and generally act in
the best interest of the insurer.
4) Watch for acts on the part of the insurer, such as
conducting protracted and unnecessary “investigations,” (which serve only to delay payment
of the claim), or filing of unnecessary litigation, or
inappropriately modifying your loan documentation, without obtaining the correct endorsements to cover new risk.
5) If obtaining any appraisals of the collateral, consider
having your attorney order the appraisal, with him/her
being named as client. This makes the appraisal “privileged,” and unavailable to other parties of the
litigation.
A Loan on Half A House?
Informs reader and describes how a loan can be made to an owner of a partial interest, say, a 50% owner of a property, WITHOUT the signature of the other owners. Reader will learn that a loan can be made to the owner of a partial interest, when this might be useful and what the limitations and pitfalls are.
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Article is for lenders, performing the foreclosure function in collecting on a loan. Article explains procedures for entering lender’s minimum “credit bid” or required minimum bid at the trustee’s sale. Article instructs reader on how to avoid the common mistake of entering a full credit bid, resulting in loss of certain type of insurance coverage, or loss of ability to pursue debtor.
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