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.
(A). Do not delete the general mechanic's liens exception from the Loan Policy during construction without underwriter approval.
(B). Determine that Construction Mortgage complies with Wis. Stat. Section 706.11, and use PDCX08 and secure Senior Underwriter approval.
(C). Other forms of coverage, including an acceptable Down Date Endorsement, are described in paragraph E below.
(D). 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.
B. Construction Loan Mortgage by Certain Lenders
Wisconsin law provides that a construction mortgage will have priority over construction liens if recorded before the construction liens are recorded and if the requirements of Wisconsin Stat. Section 706.11 are met. Wisconsin law requires that (1) the mortgage must be executed to a specified lender, such as a state or national bank, or a state or federally chartered credit union; and (2) the construction mortgage clearly must state on the first page of the mortgage that it is a construction mortgage, and the advance must be made to enable completion of the contemplated improvements on the land.
Where the construction mortgage appears to comply with this law, contact a senior underwriter to obtain approval to rely on the statute. If approval is obtained, the Loan Policy may be issued subject to Pending Disbursement Clause PDCX08.
PDCX08(Exhibit 2 below) 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
C. Mechanic's Liens Documentation if No Priority or Loss of Priority/Lost Priority
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 ("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 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 (Exhibit 1 below):
Approval: An underwriter must approve issuance of the Loan Policy.
You must retain these documents and approval in your file.
D. 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.
E. 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. For example, if you are requested to provide CLTA 122 or 122.2 Obligatory Advance Endorsement, you must delete Paragraph 6 from the CLTA 122 and 122.2 Endorsements by striking out the text on the endorsement (e.g., "(6) Lack of priority of the lien of the insured mortgage over any statutory lien for services, labor or material arising out of the work or improvement under construction or completed at the date hereof.") or deleting it by numbered exception on Schedule B.
You may not issue a Future Advance/Revolving Credit Endorsement (such as ALTA Endorsement 14-06, 14.1-06, or 14.2-06, or CLTA Endorsement 111.10 or 111.11) 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.
If you have questions relating to this bulletin or any of the referenced bulletins, please contact Stewart Legal Services or your local underwriting personnel.
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