11.28 Loan Policies

11.28.1

In General

A title insurance loan policy, also referred to as a title insurance mortgagee's policy, is a policy specifically designed to insure the validity, enforceability and priority of the lien of a mortgage, a deed of trust or an assignment thereof.

The most prevalent forms of loan policies are the American Land Title Association (ALTA) loan policy forms revised in 1970, 1984, twice in 1987, 1990 and 1992.

Other forms of loan policies have been promulgated by the California Land Title Association (CLTA), and the Texas State Board of Insurance.

Some of the insuring provisions of the loan policy extend to the lender protection comparable to that extended to an owner under an owner's policy. Other provisions address themselves solely to the coverage with respect to the lien of the insured mortgage.

The ALTA loan policy contains several exclusions which are not applicable to an owner's policy. It specifically excludes loss or damage on account of the invalidity of the insured mortgage because of:

  • Usury
  • Consumer protection or truth in lending statutes.
  • Failure to comply with doing business laws in the state where the land is located.
  • Mechanic's liens arising from improvement of work related to the land which is contracted for and commenced subsequent to Date of Policy and is not financed in whole or in part by proceeds of the indebtedness secured by the insured mortgage which at Date of Policy the insured has advanced or is obligated to advance.

In general, it may be said that the Conditions and Stipulations contained in the standard loan policies are substantially the same as those appearing in the owner's policies with the only exception of those modifications necessitated by the fact that the insured is a mortgagee rather than an owner of an interest in the land.

Schedule A of the loan policy is similar to that found in the owner's policy except for an additional paragraph describing the mortgage and any assignments thereof.

Schedule B of the loan policy lists exceptions similar to those found in an owner's policy; that is, those specific defects, liens, or encumbrances that affect the title to the land being insured.

Depending on the state where it is to be used, Schedule B of the loan policy may be:

  • A Schedule B identical to that found in the owner's policy. All the general or standard exceptions appear printed in this schedule.
  • A blank Schedule B. Some of the general or standard exceptions appear printed.
  • A hybrid Schedule B. Some of the general or standard exceptions appear printed.

ALTA has also promulgated a Schedule B, Part II, in which to insert those existing matters to which the estate or interest in the land described or referred to in Schedule A is subject but which matters are subordinate to the lien or charge of the insured mortgage, the title insurance company insuring that the same are subordinate. Wherever a Schedule B, Part II, is used, it is necessary to label the first part of Schedule B as Part I.

It should be noted that in many jurisdictions, Schedule B, Part II, is not used. In this case, if there is a lien, encumbrance or outstanding interest clearly junior or subordinate to the lien of the insured mortgagee, but affecting the estate or interest on the insured described in Schedule A, it is permissible to show such subordinate matter in an additional numbered paragraph in Schedule B (without designation of Parts I and II) with the following language added to each such additional exception:

"Note: This policy insures that the rights created by the aforesaid instrument are junior and inferior to the lien of the mortgage described in Schedule A hereof."

This procedure would not be appropriate for more than a very few items and may not be acceptable to some customers.

If Part II is to be used, the following wording must precede the showing of any subordinate matters:

"In addition to the matters set forth in Part I of this schedule, the title to the estate or interest in the land described or referred to in Schedule A is subject to the following matters, if any be shown, but the Company insures that such matters are subordinate to the lien or charge of the insured mortgage upon said estate or interest."

11.28.2

Insuring A Mortgage

Note: The term "mortgage" also applies to "deed of trust."

The following items must be fully ascertained or complied with in connection with the insurance of a mortgage:

  • Has the mortgagor's title been thoroughly examined?

    A complete examination of the fee title, leasehold estate, easement, or any other interest in real estate, capable of being mortgaged must have been performed.

  • Are there any liens or encumbrances affecting the property or interest in real property at the time of the execution of the mortgage?

    It is necessary to ascertain what liens and encumbrances, if any, are affecting the fee or interest in real property.

  • All outstanding liens and encumbrances found of record to be affecting the fee or interest mortgaged or to be mortgaged must be shown as proper title exceptions.

  • Has the mortgagor legal capacity to execute the mortgage?

    The general rules in relation to the legal capacity of the grantor are fully applicable to the mortgagor's legal capacity, viz;

    • Joinder of the spouse
    • Minor
    • Incompetent
    • Corporation
    • Partnership
    • Limited Partnership
    • Trust
    • Guardian, executor, personal representative, etc.
    • Pension plan
    • Joint venture
    • Credit union

    In some jurisdictions, the following areas may present very special problems in regard to the mortgagor's capacity, viz;

    • Trustee has not been given the power to mortgage or encumber the property.
    • State, county, municipality or local governmental agency is mortgaging. Is the entity authorized by either state or local law? Any special requirements or restrictions?
    • A bank or savings institution is mortgaging. Is there any statutory prohibition or limitations?

  • Does the lender have the legal capacity to be a mortgagee?

    State law must be reviewed in order to ascertain whether there is any legal impairment, disability or prohibition in connection with the legal capacity or the lender or a mortgagee, viz;

    • Foreign corporation
    • Bank or savings association
    • Partnership
    • Partnership borrowing from a general partner
    • Limited partnership borrowing from a limited partner
    • Joint venture
    • Credit union
    • Pension fund

  • Property Covered

    It is vital that an insurable legal description be the subject matter of the mortgage instrument.

  • Easements

    It is necessary to ascertain the validity of the easement and to comply with all guidelines pertaining to the insurance of appurtenant easements.

  • Leaseholds

    It is necessary to ascertain the validity of the leasehold and to comply with all guidelines pertaining to the insurance of leasehold estates.

  • After-Acquired Property Clause

    Any mortgage arising on property as a consequence of a clause contained in a recorded mortgage extending the lien thereof to property subsequently acquired by the mortgagor is uninsurable.

  • Date of the Mortgage

    Is the title or interest to be the subject of the mortgage vested in the mortgagor at the time of the execution of the mortgage?

  • Description of the Debt

    Does the mortgage describe and identify the debt that it intends to secure?

    If the debt is not adequately described, does state law provide that subsequent mortgages, purchasers, and judgment creditors may acquire rights superior to those of the mortgagee?

  • Form and Contents

    Do the form and contents of the mortgage comply with the pertinent statutory or jurisdictional requirements?

  • Disbursement of the Proceeds

    • Has the full amount of the proceeds been disbursed?
    • Are the proceeds not being disbursed to the mortgagor?
    • Is it necessary to include in the policy a pending disbursement clause?

  • Does the mortgage contain any recital giving notice of interests or encumbrances not appearing of record?

    Proper consideration must be given to any interest or encumbrance not appearing of record but notice of which is disclosed by the mortgage.

  • Miscellaneous Statutory Requirements

    Are there any miscellaneous statutory requirements that need to be complied with?

    • Showing the name of the draftsman.
    • Payment of mortgage tax.
    • Other

    Does the lack of compliance with any miscellaneous statutory requirement invalidate the mortgage?

  • Waiver of Homestead and Dower

    Does state law require that a mortgage on homestead land include a clause releasing and waiving the homestead rights?

    Does state law require that a mortgage signed by the spouse of the mortgagor contain a clause stating that the spouse thereby waives all dower as against the mortgagee?

  • Signature

    Has the mortgage been properly signed by the mortgagor?

    Has the mortgagor's spouse also signed the mortgage?

  • Seal

    Does state law require that the mortgage instrument be sealed?

    If executed by a corporation, has the corporate seal been affixed?

  • Witnesses

    Does state law require that the mortgagor's signature be witnessed?

  • Acknowledgment

    Has the mortgage been properly acknowledged in compliance with state law?

  • Recording

    Has the mortgage been properly recorded in compliance with state law?

  • Recorded in the Chain of Title

    Is it necessary to have the mortgage re-recorded if it was recorded prior to the deed through which the mortgagor acquired the title or interest being mortgaged?

11.28.3

Describing The Mortgage In The Loan Policy

Mortgages and deeds of trust should be identified as clearly and simply as possible. The description should avoid any reference to the terms of the document.

Reference to extension agreements, modification agreements, assignment of rents, UCC's, etc., should not be made part of the mortgage description. All those matters must be shown as proper exceptions in Schedule B of the policy.

The only permissible reference may occur in regard to an assignment of a mortgage or deed of trust when the assignment is intended to be insured.

The following language is recommended although local practice may dictate slight changes or modifications.

Mortgage

Mortgage dated __________ recorded _________ at _______ (a.m.) (p.m.) in the office of the (Recorder) (Registrar) (County Clerk) of ________________ County, ______________, in Book ___________ Page __________, executed by _____________ to ____________, which states that it secures a debt in the principal sum of $________.

Note: In some jurisdictions, local practice does not require that the amount of the Deed of Trust be shown.

Deed of Trust

Deed of trust dated ________ recorded ____________ at _________ (a.m.) (p.m.) in the Office of the (Recorder) (Registrar) (County Clerk) of ________________ County, ___________, in Book __________ Page __________, executed by ____________ to _____________ trustee for __________, which states that it secures a debt in the principal sum of $___________.

Note: In some jurisdictions, local practice does not require that the amount of the Deed of Trust be shown.

11.28.4

Insuring An Assignment Of A Mortgage

Note: The term "mortgage" also applies to "deed of trust."

Insuring the Assignment But Not Changing the Effective Date of the Policy

The following items must be fully ascertained:

  • That the mortgage is an insurable mortgage.

  • That the assignment is recorded.

  • That the mortgage is not in default or released.

  • That any modification of the mortgage is shown as an exception in Schedule B of the policy.

  • That the assignment and any prior assignment constitute an uninterrupted chain of ownership from the first mortgagee to the last assignee.

  • That, if there is a chain of assignments, no assignment contains any language indicating that the assignment has been executed only as security for a loan from the assignee to the assignor.

If this is the case, the following exception must be shown in Schedule B:

"Terms and conditions of the assignment described in Schedule A and consequences of the failure to properly perfect the assignee's interest."

That a search has been made for the Federal Tax Liens against each lender who had assigned the mortgage. Such a search should be made in the county where the land is located and also in the county of residence of the assigning lender. It would not be necessary to execute the search if the assigning lender is a bank, savings and loan association, insurance company, or substantial corporate mortgage banker.

That a description of the assignment is made part of Schedule A of the policy.

That the date of the policy is the date and time of the recording of the mortgage

If insurance is furnished through an endorsement, the date of the policy remains unchanged.

Insuring the Assignment and Changing the Effective Date of the Policy

That in addition to the above Items, the following be ascertained or complied with:

  • That the full title examination is made since the date of the original policy (if that is the case). Any findings or matters disclosed by the record searches must be shown as exceptions in Schedule B of the policy. Great care must be exercised in determining whether the mortgage has retained priority over these subsequently recorded matters.

  • That a waiver of defenses be obtained from the original borrower or from the present record owner (depending on the circumstances) acknowledging that the mortgage is still valid and unpaid (this requirement may be waived in many instances).

  • That the effective date of the policy is extended to cover the date of recording the assignment (assuming all necessary searches cover that date).

  • That any change in the ownership of the property is reflected by amending Schedule A of the policy accordingly.

  • That consideration is given (if a prior policy was issued) to the change of the effective date of the policy in relation to any matters deleted in the policy or insured over (extended coverage, indemnities, etc.).

  • If insurance is furnished through an endorsement, the date of the policy is changed to cover the date of recording the assignment.

11.28.5

Amount Of Insurance In A Loan Policy

The loan policy must always be written for the original amount of the mortgage, except under the following circumstances:

  • Insured Requests That the Amount of the Policy Be in Excess of the Amount of the Mortgage

    If the policy is dated as of the date of the recording of the mortgage, the amount of coverage at the request of the insured, may be 125% of the amount of the mortgage. Such a request is sometimes an indication of a graduated payment or a negative amortization mortgage. This should be done by endorsement to the policy.

  • Precomputation of the Interest Over the Term of the Mortgage

    This is a common practice among finance companies in making real estate loans. The interest over the term of the mortgage is precomputated and added to the principal.

  • Mortgage Already of Record is Issued Under a Current Date

    If the loan policy is issued under a current date for a mortgage already of record and after payments have been made thereon, it may be written for the unpaid principal balance due on the mortgage.

  • Collateral Includes Personal Property, Real Property or Both, the Title to Which is not Being Insured - Policy to be Written for the Full Amount of the Mortgage

    If the collateral includes personal property or other real property, or both, the title to which is not being insured, the policy nevertheless may be written for the face amount of the mortgage, but the following must be inserted at the end of Schedule B of the policy:

    "Note: The indebtedness secured by the (mortgage) (deed of trust) described at No. 4 of Schedule A hereof is further secured by property in addition to that described in No. 5 of said Schedule A, the title to such additional property not being insured hereby. It is agreed between the Company and the Insured herein that the liability of Company hereunder shall be limited to that percentage of the unpaid indebtedness secured by said mortgage (deed of trust) at the time of any loss hereunder which is equivalent to the ratio which the value of the property described in said Schedule A bears, at the date hereof, to the value of all collateral for said indebtedness."

  • Collateral Includes Personal Property, Real Property or Both, the Title to Which is not Being Insured, the Policy may be Written for an Amount Less Than the Amount of the Mortgage

    If the collateral includes personal property or other real property, or both, as above set forth, the title to which is not being insured, the policy may be written for an amount less than the amount of the mortgage, if the mortgagee so requests and represents that the amount requested is the fair proportion of the security afforded by the property insured to all of the collateral for the loan. In this event, the following must be inserted at the end of Schedule B of the 1970 loan policy.

    "Note: In consideration of the issuance of this policy at the request of the insured for an amount less than the principal obligation secured by the (mortgage) (deed of trust) referred to in Schedule A, the insured accepts this policy upon the condition that the amount of said policy shall be reduced upon payment made on said indebtedness by the same proportion that the amount of the policy bears to the amount of the principal obligation actually secured by said mortgage at the date of the recording thereof and stated in said mortgage to be $ __________."

    No such exception is necessary in a 1987 or later policy.

11.28.6

ALTA Master Residential Loan Policies

Purposes of the ALTA Master Residential Loan Policy

The main purposes of the ALTA master residential loan policy are:

  • To reduce production expenses.
  • To expedite the issuance of title insurance policies.
  • To accelerate the delivery of closing documents.
  • To grant some expanded coverage to the mortgagee.
  • To reduce the reviewing time of the policy.
  • To standardize the title exceptions.
  • To facilitate the closing of real estate transactions.
  • To save time and space.

Necessary Conditions for the Issuance of an ALTA Master Residential Loan Policy

An ALTA master residential loan policy can be issued to a lender only if all of the following elements or conditions are concurrent:

  • A formal agreement with the lender in regard to the issuance and coverage of the ALTA master residential loan policy and the subsequent policy certificates.
  • The lender's approval or acceptability (in some cases).
  • A properly issued ALTA master residential loan policy in the lender's name.

Necessary Conditions for the Issuance of an ALTA Residential Loan Certificate

An ALTA residential loan certificate (ALTA master policy certificate) can be issued to a lender if all the following elements or conditions are concurrent:

  • The prior issuance to the same lender of an ALTA master residential loan policy.
  • A fee simple ownership.
  • One-to-four family dwellings.
  • The issuance of a first mortgage.

Contents of the ALTA Master Residential Loan Policy

An ALTA master residential loan policy is a 1990 or later ALTA loan policy that is issued to the lender. Only one policy is issued to the lender. It is issued with the ALTA loan policy cover, a special Schedule A, and a special Schedule B. The following endorsements are added by checking the applicable boxes on each Residential Loan Certificate:

  • ALTA 4 Condominium
  • ALTA 5 Planned Unit Development
  • ALTA 6 Variable Rate
  • ALTA 6.2 Variable Rate-Negative Amortization
  • ALTA 7 Manufactured Housing
  • ALTA 8.1 Environmental Protection Lien

All the policies are issued exclusively from the National Legal Department, and are identical except for three items: the policy number, the date of the policy and the name of the insured.

Contents of the ALTA Residential Loan Certificate

The ALTA residential loan certificate consists of a single page, printed on both sides. A separate certificate must be issued to a lender anytime a mortgage is to be insured under the ALTA master residential loan policy.

All the proper and customary title insurance procedures pertaining to the issuance of a title insurance policy must be followed and strictly complied with in the issuance of the certificate: searching, examination, commitment issuance, closing and escrow instructions and deletion of the general exceptions.

The following information must be inserted in the certificate:

  • The Amount of Insurance
  • The Premium
  • File Number
  • Mortgage Amount
  • Certificate Number
  • Loan Number
  • Mortgage Date
  • Date of Certificate or the Date of Recording of the insured mortgage, whichever is later.
  • Name of the Insured
  • Name of the Borrower(s)
  • Property Address
  • County and State
  • If an Addendum is attached, an "X" must be placed in the box next to the words "Addendum Attached." If no addendum is attached, "X" must be placed in the box next to the words "No Addendum Attached."
  • An "X" must be placed in the box next to the endorsements that apply to the transaction.

The certificate is issued by a Stewart Office or Agency, not by the National Legal Department.

The issuer of the certificate must possess a thorough understanding of the meaning and liability extent of the "exceptions from coverage and affirmative assurances" contained on the reverse side of the certificate in order to be able to determine:

  • Whether it is possible to offer the affirmative coverage stated in the above noted items.
  • Whether it is necessary to issue a ALTA loan policy.

Addendum to the ALTA Residential Loan Certificates

The addendum is used to show certain matters or items that are not covered by the general exceptions in items numbered 1 through 5 on the reverse side of the certificate and that cannot be ignored when insuring a mortgage. It is expected that the addendum will be used only in rare circumstances.

Mechanic's Lien Consideration

It must be emphasized that neither the Schedule B of the ALTA master residential loan policy nor the Schedule B of the ALTA residential loan certificate contains any exception to possible mechanic's liens affecting the party.

Because of this omission, it is imperative to ascertain the absolute jurisdictional priority of the insured mortgage over "any lien, or right to a lien, for services, labor, or material heretofore or hereafter furnished, imposed by the law and not shown by the public records."

Unless the priority can be fully established, it will become necessary to show a proper exception in the addendum or use a loan policy and make the exception part of its Schedule B.

11.28.7

Comparison Of The ALTA Loan Policies

The common ALTA loan policies in use are the 10-17-70 Loan Policy, the 10-17-84 Loan Policy, the 6-1-87 Loan Policy, the 10-21-87 Loan Policy, the 4-6-90 Loan Policy and the 10-17-92 Loan Policy. The key differences in these forms are:

  • 1970 Loan Policy:

    Excepts to usury and consumer credit protection in insuring provisions; police power exclusion may extend to record matters; policy contains no guidelines on loss determination.

  • 1984 Loan Policy:

    Modifies 1970 Policy to clarify the police power exclusions as to environmental matters unless appearing in land records.

  • 1987 Loan Policy:

    Clarifies the police power exclusion (limits to unrecorded defects); limits eminent domain exclusion where condemnation is binding on a bona fide purchaser, clarifies the "public records" definition, adds an "unmarketability of title" definition; extends amount of insurance to costs to prevent deterioration of improvements; clarifies insurer authority to select counsel; clarifies duty of cooperation, clarifies proof of loss form; provides guidelines as to limits of loss; clarifies subrogation provisions; contains arbitration provisions (mandatory if policy does not exceed $1,000,000 and if the insured or insurer requests arbitration). The 10-21-87 Loan Policy modifies the noncumulative liability provisions of the 6-1-87 form.

  • 1990 Loan Policy:

    Modifies the 10-21-87 Loan Policy by addition of a creditors' rights exclusion. This exclusion applies if the creditors' rights issue arises out of the insured transaction.

  • 1992 Loan Policy:

    Modifies the 1990 Loan Policy by clarifying and limiting the creditors' rights exclusion.