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). Include our Pending Disbursement Clause as described in paragraph B below if the Loan Policy is issued during construction.
(C). Other forms of coverage, including an acceptable Down Date Endorsement, are described in paragraph C below.
(D). Any Future Advance Endorsement must contain a mechanic's liens exception as described in paragraph D 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. Pending Disbursement Clauses/Endorsement
You must use the following pending disbursement clause, PDCX12 MA STGC, in all Loan Policies issued prior to and during construction. You may not modify this clause and an Underwriter must approve the clause. You also should determine that the mortgage complies with state law for future advances.
Pending disbursements of the full proceeds of the loan secured by the mortgage covered by the policy, this policy insures only to the extent of the amount actually disbursed, but increases as each disbursement is made in good faith and without any actual knowledge of any defects in, or objections to the title, up to the face amount of these policy. At the time of each disbursement of the proceeds of the loan, the title must be continued down to such time for possible liens, or objections intervening between the date of this policy and the date of such disbursement. Each title continuation must be evidenced by an endorsement to the policy, which endorsement will set forth all matters of record since the date of the preceding endorsement, but said endorsement will exclude coverage for matters of survey. This policy does not guarantee the completion of the improvements nor the sufficiency of funds for the completion thereof.
PDCX12 MA STGC 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 an endorsement issued, and no liens must be of record.
C. 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 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.
D. Future and Future Advance/Revolving Credit Endorsements
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 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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