Bulletin: NM2015002

Date:
June 16, 2015
To:
All New Mexico Issuing Offices
RE:
UNDERWRITING - Insuring Construction Loans in New Mexico; New Rules Effective August 1 and August 15, 2014

Dear Associates:

Pursuant to the authority granted in Section 59A-30-4 NMSA 1978, the Office of the Superintendent of Insurance (OSI) held the biennial rate and non-rate hearing in Santa Fe on November 4-8, 2013. The OSI issued its initial Order on May 21, 2014, and its final Order on the non-rate matters on June 12, 2014. Portions of that final Order were published in the New Mexico Register on July 31, 2014, and became effective August 1, 2014; the rest of the Order was published August 15, 2014, and became effective August 15, 2014.

The publication in the New Mexico Register of the non-rate Order in two separate publications resulted in some inconsistencies and incongruities in the period from August 1, 2014, to August 15, 2014. For example, the Construction Loan Policy form was decertified effective August 1 though the OSI issued a supplemental order retracting that, but the new regulations implementing the new construction loan forms did not become effective until August 15. Also, the pricing rules for Loan Policies insuring construction loans were not effective during the August 1 to August 15 time period, so the proper charge during that time period was the standard Loan Policy rate.   

This Bulletin summarizes the principal changes and cross-references the more detailed underwriting guidelines applicable to the new forms now used in New Mexico to insure construction loans.

Background (The Prior Way to Insure Construction Loans)

Since 1986, insuring construction loans in New Mexico has been based on the ALTA form of Construction Loan Policy and its related endorsements. The forms used in New Mexico have been the Construction Loan Policy (NM 3), Endorsement A (NM 18) and Endorsement D (NM 19). In addition, the Construction Loan Policies usually contemplated issuance of the Pending Disbursement Down Date Endorsement (NM 22) as construction loan proceeds were disbursed by the construction lender. In New Mexico, the Construction Loan Policy had a term of two (2) years, but the term could be extended for up to four (4) successive six month periods (with the payment of an additional $25.00 per extension).

The premium for a Construction Loan Policy was $30 plus $1/thousand of policy coverage. The lower pricing for this policy was premised on the assumption that the lender would obtain a new standard Loan Policy upon completion of construction and expiration of the Construction Loan Policy. This pricing remains in effect under the new regulations for policies insuring construction loans, which contain a two-year claims made limitation.

When the Construction Loan Policy was used, mechanic's lien coverage was provided by the issuance of either Endorsement “A” or Endorsement “D.”  Endorsement “A” insured against lack of priority of the insured mortgage over mechanic's liens for labor and materials which were provided before a specified date and for which the insured has advanced funds. Endorsement “A” was used when there was “broken priority” (i. e., where work was commenced prior to the recording of the mortgage). Issuance of Endorsement “A” cost an additional $5/thousand of coverage.  Endorsement “D” insured against lack of priority of the insured mortgage over mechanic's liens for labor or material furnished before or after the date of policy. Endorsement “D” was used when there was no “broken priority.”  Issuance of Endorsement “D” cost $25.00.

The New Way to Insure Construction Loans

In February 2011, ALTA decertified the Construction Loan Policy and adopted a procedure whereby construction loans would be insured using the standard Loan Policy form with newly promulgated endorsements dealing with mechanic's liens coverage and a new form of disbursement endorsement. With the adoption of the new regulations effective August 1 and August 15, 2014, New Mexico will now follow the ALTA procedure and utilize the corresponding ALTA forms.

Insuring a Construction Loan Only

A Construction Loan Policy may not be issued; the form has been decertified. NMAC § 13.14.7.18(A). If the insured loan is a construction loan only, then the standard Loan Policy may be issued with a standard term or with a two-year claims made limitation, which may be extended for up to four successive six-month periods. NMAC § 13.14.7.18(B). By analogy, a standard Loan Policy with a two-year claims made limitation has the same duration as the decertified Construction Loan Policy. 

If a Loan Policy is issued subject to the two-year claims made limitation, there is new required language for the commitment and for the policy.

Commitment: by regulation, the following language must be included in the commitment:

The construction loan policy or a loan policy containing a two-year (2) claims made limitation will contain an exception limiting its coverage to two (2) years duration pursuant to 13.14.7.18 NMAC.  

We recommend placing this language on Schedule B-1 of the commitment prior to the enumeration of the specific exceptions.

Policy: by regulation, the following language must be included in the policy:

Notwithstanding any other provision of this policy, the company shall be liable only for such loss or damage insured against by this policy which is actually sustained by the insured and reported to the company as provided in the conditions and stipulations on or before two years after the recording of the mortgage described in Schedule A. (Upon payment to the Company of the required full Loan Policy premium prior to the expiration of said policy, the term limitation may be deleted from this policy.”  

We recommend placing this language in Schedule B-2.

The above language is not required when issuing a Loan Policy during construction with a standard term (e.g., a construction-to-permanent loan). 

Pricing of Loan Policies Insuring Construction Loans

The pricing of Loan Policies during construction will be based upon the following factors: (A) whether the Loan Policy contains a two-year claims made limitation or not, and (B) whether the project involves “broken priority” or not.

NOTE:  WHETHER YOU ISSUE A LOAN POLICY WITH A TWO-YEAR CLAIMS MADE LIMITATION OR A STANDARD LOAN POLICY – IN EITHER SITUATION - IF MECHANIC’S LIENS COVERAGE IS PROVIDED FOR A CONSTRUCTION LOAN IN A “BROKEN PRIORITY” SITUATION, SUCH LOAN POLICIES ARE SUBJECT TO AN ADDITIONAL EXTRA-HAZARDOUS RISK PREMIUM, AS DESCRIBED BELOW

A. Construction Loan: Pricing of a Loan Policy with a two-year claims made limitation

On and after August 15, 2014, a Loan Policy with the two-year claims made limitation costs $30.00 plus $1/thousand of coverage. NMAC § 13.14.9.40(A). It may be extended for up to four successive six-month periods by the payment of an additional $25.00 for each six-month extension. NMAC § 13.14.9.40(B). In contrast, a Loan Policy with a standard term is issued at the customary rates.  

The premium for a Loan Policy issued after the expiration of a Loan Policy with a two-year claims made limitation is the basic rate for a Loan Policy. If a Loan Policy with the two-year claims made limitation expires, then the lender will have to obtain a new Loan Policy and will not be able to continue coverage under the expired policy.

Under the prior regulations, a Construction Loan Policy could not be used as the basis for a credit on a subsequently issued policy. NMAC § 13.14.7.18(B). That language was muddled in the new regulations. Until that is fixed, Stewart recommends that credit be given for an issued policy with a two-year claims made limitation. NMAC § 13.14.9.40(C).  

B. Construction Loan: Pricing of a Loan Policy with a standard term (i.e., without a two-year claims made limitation)

If the insured loan is a construction loan, but the policy does not contain a two-year claims made limitation, then you will issue the standard Loan Policy, as you would for any other insured loan, and charge the appropriate Loan Policy premium (not the reduced two-year claims made limitation policy premium). As a reminder, this policy may still be subject to additional premium based upon mechanic’s liens coverage, as described below.

Mechanic's liens coverage in a Loan Policy insuring a construction loan (i.e., either a Loan Policy with a two-year claims made limitation or a Loan Policy with a standard term)

Mechanic's liens coverage on a Loan Policy during construction will continue to be underwritten in accordance with current Stewart practices and procedures, whether you are issuing a Loan Policy with the two-year claims made limitation or whether you are issuing a Loan Policy without that limitation.

The General Mechanic's Liens Exception

In situations where you will be issuing a Loan Policy before or during construction, 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" unless and until an underwriter approves its deletion.

Approval:  You may not delete the general mechanic's liens exception from a Loan Policy during construction without underwriter approval. The approval to delete the general mechanic’s liens exception will be made simultaneously with the approval of the applicable method of providing mechanic's liens coverage, as described below.

A. No Broken Priority:  Visible Commencement if Mortgage Recording before On-Site Work Establishes Priority: Documentation that No Lienable Work has been Performed.

In New Mexico, recording of a construction mortgage prior to commencement of work will establish the priority of the mortgage - including the priority of future advances - over subsequently-filed mechanic's liens. You should be familiar with New Mexico’s definitions and requirements for “commencement” and “work,” and you should determine that the mortgage complies with state law for future advances and for a construction loan. As a condition to providing mechanic's liens coverage, you must confirm that no work was performed during the applicable period. This should be accomplished by the documentation ("Visible Commencement Documentation") in the STG Mechanic’s Liens Documentation referenced below.

Approval: An underwriter must approve issuance of the Loan Policy.

You must retain these documents and approval in your file.

B. Broken Priority: Mechanic's Liens Documentation 

As noted above, initial priority of the mortgage can be established by recording the mortgage prior to commencement of work. However, the failure to record the mortgage before commencement of work can jeopardize such priority (”broken priority”). These "broken priority" situations present the potential for substantial claims.  

In "broken priority" situations, in addition to the Visible Commencement Documentation, the Mechanic's Liens Documentation consisting of "Financial Documentation and Indemnities" and "Project Documentation", all in a form acceptable to the Company, are required as a condition to providing mechanic's liens coverage, unless otherwise approved by an underwriter (See the STG Mechanic’s Liens Documentation referenced below).

Approval: An underwriter must approve issuance of the Loan Policy.

You must retain these documents and approval in your file.

Forms/Endorsements

A. No Broken Priority

In order to provide mechanic’s liens coverage where there is no broken priority, you may delete standard exception 4, with underwriter approval, provided that you also include a pending disbursements clause, as follows:   

“Pending disbursement of the full proceeds of the loan secured by the Insured Mortgage, this Policy insures only to the extent of the amount actually disbursed for improvements, but increases as each such disbursement is made in good faith and without Knowledge of any defects, liens or encumbrances on the Title, up to the face amount of the Policy. At the time of each such disbursement of the proceeds of the loan, the Title must be continued in writing by the Company for defects, liens or encumbrances on the Title intervening or recorded between Date of Policy and the date of the disbursement.”

It is also possible to provide mechanic’s liens coverage by issuing any of the NM83 endorsements, as discussed in detail below.

Continuation of coverage is to be given by issuance of a NM84 endorsement, as discussed in detail below.

B. Broken Priority

Where there is broken priority, there are several ways in which to provide mechanic's liens coverage in the construction loan context, based upon the ALTA 32 series endorsements (promulgated in New Mexico as the NM83 series), if your underwriter has approved mechanic's lien coverage (and mechanic's liens coverage in any construction loan is an extra-hazardous risk that must be approved by an underwriter). Do not use Endorsement “A” or Endorsement “D” to provide mechanic's liens coverage. Do not delete standard exception 4 unless approved by an underwriter.

Mechanic's liens coverage when the loan is for construction purposes can be provided by any of the following three endorsements:

NM 83: Construction Loan Endorsement (ALTA 32.0-06, 02-03-11)

NM 83.1: Construction Loan - Direct Payment Endorsement (ALTA 32.1-06, 04-02-13)

NM 83.2: Construction Loan - Insured’s Direct Payment Endorsement (ALTA 32.2-06, 04-02-13)

The NM 83 series of endorsements may be issued whether or not there is broken priority. Each of these three endorsements insures against loss or damage by reason of: (a) the invalidity or unenforceability of the lien of the Insured Mortgage as security for each Construction Loan Advance made on or before the Date of Coverage; (b) the lack of priority of the lien of the Insured Mortgage as security for each Construction Loan Advance made on or before the Date of Coverage, over any lien or encumbrance on the Title recorded in the Public Records and not shown in Schedule B; and (c) the lack of priority of the lien of the Insured Mortgage, as security for each Construction Loan Advance made on or before the Date of Coverage over certain Mechanic's Liens, if notice of the Mechanic's Lien is not filed or recorded in the Public Records.

You should issue these endorsements as directed by your underwriter, in the circumstances described more fully in the Stewart Guidelines for the ALTA 32-06, 32.1-06, and 32.2-06.

NM 83:  This insures only to the extent that the charges for the services, labor, materials or equipment for which the Mechanic's Lien is claimed were designated for payment in the documents supporting a Construction Loan Advance disbursed by or on behalf of the Insured on or before Date of Coverage. This endorsement does not require that the Company or its agent will be involved in disbursement of funds.

NM 83.1:  This insures only to the extent that direct payment to the Mechanic's Lien claimant for the charges for the services, labor, materials or equipment for which the Mechanic’s Lien is claimed has been made by the Company or by the Insured with the Company's written approval. This contemplates that the Company or its agent will be involved in the direct payment to specific mechanic’s lien claimants - either by making the payment or by approving payment.

NM 83.2:  This insures only to the extent that direct payment to the Mechanic's Lien claimant for the charges for the services, labor, materials or equipment for which the Mechanic’s Lien is claimed has been made by the Insured or on the Insured's behalf on or before Date of Coverage. This does not require that the Company or its agent will be involved in disbursement of funds.

Continuation of mechanic's liens coverage for subsequent disbursements is now provided only by the NM 84 Disbursement Endorsement (ALTA 33-06, 02/03/11). The NM 22 Pending Disbursement Downdate Endorsement was decertified effective August 1, 2014. The Disbursement Endorsement (NM 84) will be the only endorsement that may be issued when any of the NM 83 series endorsements has been issued. The NM 84 extends the “Date of Coverage” as defined in the NM 83, NM 83.1 or NM 83.2, with respect to mechanic's liens coverage only.

The cost of each NM 84 is $25.00. NMAC § 13.14.10.18. Please see the Stewart Guideline for issuing the ALTA 33-06 for more detailed underwriting guidance.

NOTE:  Use of any other forms, 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 without pending disbursement language or without one of the NM83 endorsements, although the Exclusions still apply) requires approval of the Senior Underwriting Committee.  

You may not issue a Future Advance/Revolving Credit Endorsement on a Loan Policy insuring a construction loan mortgage unless the endorsement includes a mechanic's liens exception, such as the general mechanic's liens exception.

Pricing for Mechanic’s Lien Coverage

NOTE:  The following pricing applies whether you are issuing a Loan Policy with a two-year claims made limitation or a Loan Policy with a standard term.

A. No Broken Priority. If you delete standard exception no. 4 and include the pending disbursement clause the charge will be $25. If you issue any of the NM 83 series in anon-broken priority situation (i.e., if you are able to document the absence of visible commencement pursuant to the Company’s guidelines), the charge will be $25.  

B. Broken Priority.  If you issue any of the NM 83 series in a broken priority situation(i.e., in all situations where you are unable to document the absence of visible commencement pursuant to the Company’s guidelines), there is an extra-hazard premium charge of $5/thousand of coverage, whether you are issuing a Loan Policy with a two-year claims made limitation or a Loan Policy with a standard term. There is no separate charge for the endorsement other than the extra-hazard premium charge. 

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

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THIS BULLETIN IS FURNISHED TO INFORM YOU OF CURRENT DEVELOPMENTS. AS A REMINDER, YOU ARE CHARGED WITH KNOWLEDGE OF THE CONTENT ON VIRTUAL UNDERWRITER  AS IT EXISTS FROM TIME TO TIME AS IT APPLIES TO YOU, AS WELL AS ANY OTHER INSTRUCTIONS. OUR UNDERWRITING AGREEMENTS DO NOT AUTHORIZE OUR ISSUING AGENTS TO ENGAGE IN SETTLEMENTS OR CLOSINGS ON BEHALF OF STEWART TITLE GUARANTY COMPANY. THIS BULLETIN IS NOT INTENDED TO DIRECT YOUR ESCROW OR SETTLEMENT PRACTICES OR TO CHANGE PROVISIONS OF APPLICABLE UNDERWRITING AGREEMENTS. CONFIDENTIAL, PROPRIETARY, OR NONPUBLIC PERSONAL INFORMATION SHOULD NEVER BE SHARED OR DISSEMINATED EXCEPT AS ALLOWED BY LAW. IF APPLICABLE STATE LAW OR REGULATION IMPOSES ADDITIONAL REQUIREMENTS, YOU SHOULD CONTINUE TO COMPLY WITH THOSE REQUIREMENTS.