Bulletin: NC2015001

Date:
June 11, 2015
To:
All North Carolina Issuing Offices
RE:
UNDERWRITING - Mechanic's Liens Coverage During Construction - Initial Priority if No Commencement

Dear Associates:

Mechanic's liens are a significant source of claims. This bulletin advises you of required procedures relating to mechanic's liens and mechanic's liens coverage only on Loan Policies during construction (including rehabilitation, renovation, and the like). It should be read in conjunction with other National and state-specific Bulletins relating to mechanic's liens.        

Summary        

(A). Do not delete the general mechanic's liens exception from the Loan Policy during construction without underwriter approval.    

(B). Require documentation described in paragraph B below if no visible commencement of work done.        

(C). Require Mechanic's Liens Documentation described in paragraph C below if visible commencement of construction has caused loss of priority.    

(D). Include our Pending Disbursement Clause as described in paragraph D below if the Loan Policy is issued during construction.    

(E). Other forms of coverage, including an acceptable Down Date Endorsement, are described in paragraph E below.        

(F). Any Future Advance Endorsement must contain a mechanic's liens exception as described in paragraph F below.        


A. The General Mechanic's Liens Exception 

All commitments and policies should contain a general mechanic's liens exception for "Any lien, or right to a lien, for services, labor, or material heretofore or hereafter furnished, imposed by law and not shown by the Public Records."        

Before or during construction, or if you are unable to determine that no construction has been or will be performed, you may not delete the general mechanic's liens exception from a Loan Policy without underwriter approval.

Under North Carolina law, a mechanic's lien takes effect from the time of the first furnishing of labor or materials at the site of improvement pursuant to either an express or implied contract with the owner of the property. N.C. Gen. Stat.  §§ 44A-8 and 44A-10. These lien rights remain inchoate until perfected upon serving a copy of the claim of lien upon the record owner, filing a claim of lien in the county where the property lies within 120 days after the date of the claimant’s last furnishing of materials or labor to the property and, if applicable, appointment of a lien agent. N.C. Gen. Stat. §§ 44A-11, 44A-11.1 and 44A-12. The lien claimant must bring an action to enforce the lien within 180 days after the date of the claimant’s last furnishing of materials or labor to the property. N.C. Gen. Stat. 44A-13.      

B. Commencement if Mortgage Recording before Work Establishes Priority: Documentation that No Lienable Work has been Performed    

The recording of a construction deed of trust prior to commencement of work can in certain cases establish the priority of the deed of trust, including the priority of future advances over subsequently-filed mechanic's liens. In such situations, as a condition to providing mechanic’s lien coverage, you must confirm that no work was performed during the applicable period. This should be accomplished by: (1) the documentation (“Visible Commencement Documentation”) in Exhibit 1 below and (2) NCLTA Form 1 Owner Affidavit and Indemnity Agreeement (No Recent Improvements and No Executory Contracts for Improvements) from every seller (sale) or borrower (on refinance). Click here to access www.nclta.org for NCLTA Forms.

Approval: An underwriter must approve issuance of the Loan Policy

You must retain these documents and approval in your file.    

C. Mechanic's Liens Documentation if No Priority or Loss of Priority/Lost Priority 

Initial priority of the deed of trust can be established by recording the deed of trust prior to commencement of work. However, the failure to record the deed of trust before commencement of work can jeopardize such priority ("loss of priority" / "lost priority"). These "no priority" or "lost priority" situations present the potential for substantial claims.        

In "no priority" or "loss of priority" situations, the Company requires the following, unless otherwise approved by an underwriter:     

1. Receipt of applicable North Carolina Land Title Association's lien waiver/ lien subordination and affidavit forms detailed in Stewart Bulletin NC2013002 (or substantially similar form approved by Company), completed, executed and notarized. 

2. STG Indemnity Against Mechanics Liens executed by owner and general contractor.

3. Closing Attorney must certify prior to recording deed or deed of trust and prior to disbursement of funds that:

a.)  project either qualifies or does not qualify for the appointment of lien agent;

b.)  If lien agent applies, closing attorney has received a project report from the lien agent/liensnc.com website identifying which contractors and/or subcontractors have filed notices regarding work performed or materials delivered to the land;

c.)  the closing attorney has obtained the appropriate lien waivers or lien subordinations from each contractor or subcontractor who  has filed a Notice to Lien Agent or who were entered as contractors, pre-permit workers or design professionals in the LiensNC.com system and those who first provided labor or services or materials to the project within the last 15 days prior to closing and those who those who have filed a claim of lien on funds (with owner or contractor) and/or a claim of lien on real property with the Clerk of Superior Court, whether or not filed with LiensNC.com, or if the project does not require a lien agent, that the appropriate lien waivers or subordinations were obtained.

4. If lien agent applies and no lien agent has been appointed, you must contact an underwriter.

Approval: An underwriter must approve issuance of the Loan Policy   

You must retain these documents and approval in your file.      

D. Pending Disbursement Clauses/Endorsements         

A pending disbursement clause, either inserted as an exception or added as an endorsement, must appear in all Loan Policies issued prior to and during construction. This requirement applies whether you have been able to document the absence of construction or not. You should usePDCX06, or PDCX07, if approved by an underwriter. You may not modify the clause and an underwriter must approve the clause. You may only use PDCX08, if the Visible Commencement Documentation establishes that no commencement of work has occurred when the Insured Mortgage is recorded and if an Underwriter approves use of PDCX08.        

PDCX06 provides limited coverage for mechanic's liens arising from non-payment of bills for labor performed or material furnished prior to a specific date, which date may be the date of the current disbursement. PDCX07 provides limited coverage for mechanic's liens by those persons or entities receiving payments directly from the Insured pursuant to written disbursement authorization approved by the Insured. PDCX08 does not require ongoing receipt and review of lien waivers, or documentation of payments, etc., as a condition of issuing a down date endorsement; however, as a condition of each disbursement, title must be continued and no liens must be of record.        

E. Other Forms        

(1) Use of any other form of pending disbursement clause, or any other endorsement providing mechanic's liens coverage, or issuance of a "clean" policy (i.e., where the general mechanic's liens exception is deleted but no suitable pending disbursement clause has been inserted, although the Exclusions still apply) requires approval of the Senior Underwriting Committee.        

(2) Down Date Endorsement. During construction, upon satisfaction of the requirements stated in the pending disbursement clause, you may issue an endorsement dating down the Date of Policy and increasing the Amount of Insurance. You should use STG Construction Loan Endorsement 1 or a substantially similar endorsement. Any other form of Down Date must be approved by an underwriter.      

F. Future and Future Advance/Revolving Credit Endorsements        

Some states purport to provide priority only to "obligatory" future advances made by the lender as opposed to discretionary (non-obligatory) advances. You may not rely upon obligatory advance protections to provide mechanic's liens coverage.        

If you are asked to provide an endorsement relating to obligatory advances, you must delete any coverage relating to mechanic's liens and the form of endorsement must be approved by a Senior Underwriter.      

You may not issue a Future Advance/Revolving Credit Endorsement (such as ALTA Endorsement 14-06, 14.1-06, or 14.2-06) on a Loan Policy insuring a construction loan mortgage unless the endorsement includes a mechanic's liens exception, such as the general mechanic's lien exception. 

EXHIBIT 1 – STG Mechanic’s Liens Documentation     

If you have any questions relating to this or other bulletins, please contact a Stewart Title Guaranty Company underwriter.

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