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Previous Issues
Issue 30: Loan Sale Premiums Hold Steady in November

Issue 29: Proper Risk Management Protection and Credit Worthiness

Issue 28: BoeFly Helps Veterans With Disabilities Connect With Lenders to Obtain Small Business Loans

Issue 27: Loan Sale Premiums Level off in October

Issue 26: SBA Secondary Market changes - Warranty Period and Premiums on New Larger Loans

Issue 25: BoeFly Surpasses the $1 Billion Transaction Mark

Issue 24: Loan Sale Premiums Continue Climb in September

Issue 23: Robert Tannenhauser, CEO of BoeFly, Interviewed by Michael McKee on Bloomberg Radio

Issue 22: Lender Optimism is up While Anxiously Awaiting the Small Business Jobs Bill

Issue 21: Loan Sale Premiums Blast to Record Highs in August

Issue 20: Title Insurance- the Lender's Perspective

Issue 19: Condemnation and Mortgage Lender's Rights

Issue 18: Long-Term Deals Continue Record Climb; Short-Term Deals Fade

Issue 17: Congressman Walt Minnick (D-Idaho) Gets It

Issue 16: Deeds and Forms of Ownership

Issue 15: SBA Loan Sale Premiums Hit Record High in June

Issue 14: What You Need to Know About Property Insurance

Issue 13: SBA Fixed Interest Rate Loans are an Important Product to have at the Ready

Issue 12: 504 Guaranteed Pool Program Summary and Survey Results

Issue 11: Loan Sale Premiums Surge to Record Highs in May

Issue 10: Environmental Risk for Lending Opportunities

Issue 9: How To Take Advantage of the First Lien Position 504 Loan Pool Guarantee Program

Issue 8: Investors Remain for SBA Loans

Issue 7: Retirement Funds for an Equity Injection - Selecting the Right Plan Provider

Issue 6: Why Outsourcing Environmental Risk Management makes Cents for Lenders

Issue 5: Loan Monitoring: Comfort in a Crisis

Issue 4: BoeFly Case Study: The economics of selling SBA guaranteed loans

Issue 3: BoeFly Lender Survey Results Q1 2010

Issue 2: Loan Sale Premiums Rally in Q1

Issue 1: The Importance of Efficiency in Secondary Markets

Title Insurance- the Lender's Perspective

By BoeFly Member: Ken Wurtenberger


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Many recent articles have been written on the subject of whether a Lender should obtain a mortgage title policy for a loan transaction on a purchase or refinance. The discussions weigh the expense to the Borrower versus the protection afforded to the Lender. As a Lender, the following provides incite into the process and protections of the mortgage policy.

Pre-Closing

  1. The Title Commitment . The first step in obtaining a mortgage policy is to obtain a title commitment. Title to the property is searched and the parties' names are searched to discover outstanding judgments and liens. The form of the title commitment provides for two schedules: (1) the B-I Schedule - conditions precedent to issuing the policy; and (2) the B-II Schedule - matters which will remain of record after the mortgage is recorded.


  2. The B-I Schedule. This provides a checklist to the Lender and closing agent of the title documents (such as the proper parties to the deed and mortgage) necessary to close and other required documents including resolutions required from the borrowing entity if the Borrower is not an individual and a list of mortgages and liens which must be satisfied.


  3. The B-II Schedule. Everything on the B-II Schedule will be superior to the mortgage. Accordingly, each item must be read and analyzed to determine how it affects the Borrower and its business activities.

    The first items listed are generally matters which title companies provide to protect them against potential claims. These are called "standard exceptions" and include: matters shown on an accurate survey, intervening liens and parties in possession. The title insurer will remove these exceptions if the Lender follows prescribed guidelines such as obtaining an updated survey which plots the B-II exceptions and certain affidavits from the property owner.

    The balance of the B-II exceptions deal with matters of record or state statutes which may give rise to liens. The matters of record may include a declaration of covenants and restrictions, plats (which contain easements and limitations) and other restrictions and easements. These must all be examined to determine the effect upon the Borrower's use of the property. The items which refer to state statutes should be examined to determine possible exposure. Local municipal liens give rise to more title claims than all other title claims combined.


  4. Endorsements. Once satisfied the B-II items are acceptable, other questions arise which should be of concern to the Lender. Does the property have access to a public road? What is the zoning? Is the variable rate in the note enforceable? Are there other issues unknown to the Lender? These are all matters which can be insured through the mortgage title insurance by obtaining endorsements to the final policy. Each state regulates the types of endorsements it may allow. The permissible endorsements should be obtained for full Lender protection.



The Closing

  1. The Marked-up Commitment. The Lender must require the closing agent confirm that all the conditions precedent necessary to close and insure have been received. To confirm this, the Lender should obtain an update to the commitment which reflects that all matters shown on the B-I Schedule have been satisfied. This is typically done at the closing by the closing agent by "marking up" the commitment wherein the date of the commitment is revised to the date of the closing, the B-I items are deleted, the B-II standard exceptions and other objectionable exceptions are removed and the endorsements to the final policy are stated.


  2. The Closing Protection Letter. Once the loan documents have been signed, the Lender is ready to disburse, typically by sending a wire transfer to the closing agent. At this time, Lender can be protected from the dishonest or incompetent closing agent by having the title underwriter issue a closing protection letter wherein the title underwriter (typically with a net worth in excess of $500,000,000), will insure title and the closing process.



Conclusion
A mortgage title policy should be obtained for every loan transaction. When the closing process is understood and followed, a mortgage title policy will substantially diminish the Lender's risk for title claims, closing errors and defalcations.