This article will provide a brief overview of some of the potential title insurance issues that you might encounter in a loan transaction. It also includes procedures that could be used to deal with title insurance coverage, or general processing and closing of loans transactions. This article is intended to highlight some steps that should be taken and not all of them.
The agreement between the lender & the borrower
The contract between the insurer (title company) and the insured(lender).
It is common to think that you have reviewed and approved a preliminary title report. If that is the case, your main concern regarding title insurance is to make sure that the policy was actually purchased at closing.
There are several steps you can take to increase your chances of being covered. Title insurers might try to deny coverage. Some seemingly ordinary actions or omissions of a loan originator could have a significant impact upon the insurer’s ability “wiggle out” of providing coverage.
Loan Origination
1) Add a property addendum to your loan application. This could include, among others:
A clearly written description of the property and a description about the improvements (i.e. A 10-unit apartment house consisting of five units with two bedrooms and five units with one bedroom, located at 123 Elm Street in Los Angeles, CA. As collateral, the entire street address was included (Obtain endorsement for title policy, including full description). (CLTA 116 endorsement)
The complete legal description and the source of the information used by the borrower to get that information
The parcel number of the property tax assessor
This description should be signed and dated by each borrower.
2) Attach an addendum (where the borrower makes a written representation about who is on title and, in the case where an entity holds title, who are the authorized signers for that entity) to your application.
3) Check item 3A, “Items created, etc. by the insured.”
4) Check item 3B “Items not known to the insurance, recorded in public records but known to insured”.
5) Obtain proper Endorsements.
6) Proper disbursement for loan proceeds. Every party to a loan transaction has compelling reasons to disburse loan proceeds to another person than the lienholders or the title holder. This leaves you open to a variety of title coverage (and other), problems.
7) Construction loans: (or any other loan) Make sure that no work has begun at the time your title policy is issued. For construction loans, you must obtain a “Seattle Endorsement”. You should look for words that say “insurer won’t raise the fact insured has undisbursed loans funds as a defense to a claim” rather than “insurer won’t raise the fact the lender has undisbursed loans funds, provided those funds are transferred to the title insurance.”
8) Permanent loans (non constructions loans): How can you tell if construction is not underway and no material has been delivered to the site? And that your loan pro-ceeds won’t be going to construction?
Closing a loan
1) After closing review: Check title policy received against the lender’s instructions for escrow/title.
2) Have title company pay additional proceeds if they are to be distributed
Questions regarding Loan Servicing
1) Avoid any deviation from the terms and conditions of the loan. The title insurer may raise any deviation from the loan terms as grounds for denying coverage.
2) To modify loan terms, you must obtain the appropriate endorsement from your title insurer. (Usually, CLTA form 110.
When you modify/alter any aspect of the loan agreement, notify your insurer in writing.
Foreclosure/REO Issues
1) Deeds in place of foreclosure: You should not take a deed of in lieu for foreclosure unless you have appropriate title insurance. This would require you to obtain an owner’s policy in title insurance and a CLTA Form 107.11 (non-merger endorsement). The problem with deeds of lieu is that all recorded notices against owners attach to the property, including liens, judgments, taxes, and any other recorded notices.
2) When you are in foreclosure, be aware that all actions during foreclosure are “post-policy”. In some cases, the insurer might claim that they are not covered.
3) A TSG is a Trustee’s sale guarantee. It is not a policy or title insurance. Your foreclosure is not covered by a loan policy.
If possible, get TSG from the same company that originated your loan.
4) After fore-closure sale, obtain an owner’s insurance policy or title insurance. These policies could help to eliminate or reduce the problems mentioned in the previous two points. Remember that your loan policy will only cover the amount of unpaid loans. Title insurance is required regardless of whether you intend to sell or retain the property.
Title Insurance Claims
1) Tender immediately to the title company any complaint from a borrower that challenges the validity or enforceability your deed-of-trust.
2) If you believe you have a claim, notify the title insurer by Fed Ex or another traceable delivery service (that obtains signature of receipt)
3) Get your own counsel rather than having the title company “represent” you. They “represent” you, but they are often paid a lot of business by title insurance companies and act in the best interests of the insurer.
4) Be aware of any acts by the insurer such as a protracted and unneeded “investigation” (which only serves to delay payment of a claim), or the filing of unnecessary litigation or the inappropriate modification of your loan documentation without obtaining the appropriate endorsements to cover the new risk.
Consider having your attorney order any collateral appraisals. He/she will be named as the client. This makes the appraisal confidential and unobtainable to any other parties in the case.