This Bulletin replaces CA2021003 and SLS2018002 and SLS2020009 for California only.
Transactions Involving Non-Institutional Lenders - Fraud, Due Diligence, and General Requirements
Stewart Title Guaranty Company (Company or STG) continues to experience high claims involving non-institutional lender transactions, more commonly referred to as "hard money lender transactions". Generally speaking, insuring non-institutional loans under an ALTA Loan Policy with Regional Exceptions (Standard Coverage) or under a CLTA Standard Coverage Loan Policy is an acceptable risk, except where certain circumstances exist, for example, if the number of beneficiaries exceeds four, if the policy coverage amount requested exceeds the loan amount, if extended coverage is requested, or when any portion of the funds are used for construction, remodeling, or rehabilitation. Another factor that creates a higher risk with hard money lender transactions is that many of these lenders conduct very minimal due diligence on the borrower or on the property. Essentially the hard money lender relies on the perceived value of the property and the coverage provided in the title insurance policy. As a result, hard money lender transactions are significant targets for fraud. Thus, a deeper inquiry into the circumstances surrounding the transaction is necessary. Below are some common fraud factors in non-institutional lender transactions and the due diligence steps that shall be followed to avoid these fraud claims.
NOTE: Non-institutional lenders typically do not follow the Bank Secrecy Act (BSA) and do not appear on the Federal Financial Institutions Examination Council’s website (FFIEC.gov). For purposes of this bulletin, non-institutional lenders include, but are not limited to, private lender or broker loans, private individual loans, multiple beneficiary loans, and loans that include pension plans or real estate investment trusts (REIT). Conversely, the Company considers an institutional lender to include any lender that: (1) is required to follow the BSA; (2) appears on the FFIEC.gov website; and/or (3) is wholly owned by one of these lenders. For purposes of this bulletin, institutional lenders include, but are not limited to, large lender banks, savings banks, savings associations, credit unions, governmental agencies, life insurance companies and seller carry back loans in sale transactions with bona fide purchasers.
Common Fraud Factors in Transactions Involving Non-Institutional Lenders
The following are some common factors that the Company's claims department has identified in handling fraud claims in non-institutional lender transactions:
- Documents are frequently signed with loan broker or lender's in-house notaries.
- Corporate/LLC organizational documents are sloppy, missing information and often poorly drafted or, there are recent changes to formation documents on the Secretary of State web site.
- There is little or no direct contact with sellers and/or buyers/borrowers and these parties are often handling transactions fully on-line or are "unavailable," "out-of-state," or “out of the country.”
- Communication with sellers and/or buyers/borrowers is often with, or through, a third party.
- Often the deal comes through a “new” client and/or is a property located out of your typical geographic area.
- There is extreme pressure as a “rush transaction” requiring an immediate close.
- A large amount of cash is to be paid to the seller/borrower (cash-out transaction).
- Independent escrow is instructed to sends funds outside of the state and/or country and often instructed to disburse funds to parties other than those in title, i.e., directly to the seller/borrower.
- Payoff demands come from, or through, third parties other than directly from the named beneficiary(ies) and/or lenders.
- The property is often free and clear and/or there are fraudulent reconveyances of record.
- The property is often vacant land and/or otherwise non-owner occupied.
NOTE: To prevent title claims, Company Bulletins regarding payoff demands, reconveyances, and Thank You Letters, among others, should be reviewed and followed.
Due Diligence Steps to Avoid Fraud Claims in Transactions Involving Non-Institutional Lenders
- All names involved in the transaction including seller/borrower, buyer, lender, etc. should be checked in the Company Special Alerts database.
- Ensure that loan proceeds are payable to the seller/borrower only, and not to a third party unless:
- being used to pay off existing encumbrances;
- being paid to contractors/suppliers for work on the property; or
- being paid to another escrow or title company in connection with the seller’s/borrower’s purchase of another property after securing evidence that seller/borrower is the actual purchaser.
- Check that all borrower's signatures match all prior documentation, where applicable, or other available documentation such as driver’s license, loan application, etc.;
- Don't accept signatures under a Power of Attorney without prior written underwriter approval;
- Only use your own notary, a notary known to you, or a notary from a trusted escrow company. Do not use any other notary, for example, the lender's notary or the loan broker's notary;
- Where seller/borrower is receiving $25,000 or more in sales or loan proceeds, require two forms of identification that include a photograph but at least one form must be either a driver’s license and/or government issued passport; and
- If available, run borrowers’ names on Lexis Nexis to help confirm identity and validity.
If any results from the above due diligence steps raise concern, then:
- Contact the seller/borrower directly through a previously verified number (when available) and ask questions about the real property that only the actual owner would know. For example, how old is the home? Is property vacant? If yes, what is the mailing address on the tax bill? Are you obtaining a loan secured by the property? Do you have existing debts against the property?
- Confirm that the lender and/or broker performed an actual walkthrough of the property and, if so, who granted access;
- Check online for photos, etc. that may be available of seller/borrower or his/her representatives to see if consistent with identification provided; and
- Review the transaction with, and obtain prior written approval from, your Company Underwriter.
Requirements for Transactions Involving Non-Institutional Lenders
STG Underwriter approval is not required where all the following exist:
- The loan amount is less than $700,000.00; and
- The transaction does not involve an extra hazardous risk which requires STG underwriting approval regardless of the amount of insurance. For example, Indian lands, current ownership through Sheriff’s sale, tax sale or foreclosure, etc.; see Request for Approval to Issue Overlimits (Large) Policy or Extra Hazardous Coverage form, Company Bulletin SLS2014002 and Virtual Underwriter Manual Section 5.36; and
- You’ve confirmed that the Loan-to-Value of the property does not exceed 80%. You may confirm this based upon such things as the value established by the county assessor, a recent appraisal, or a prior, recent sale of the property; and
- The insured policy amount does not exceed the lesser of:
- 1) the purchase price; or
- 2) the fair market value of the property; or
- 3) 125% of the loan amount; and
- The number of the beneficiaries to be insured and/or identified in the security instrument does not exceed four (4) and you’re not aware of a proposed assignment or amendment where the insured beneficiaries will exceed four (4); and
- Upon disbursement, all funds are paid directly to the borrower or, directly to a third-party lienholder to satisfy a valid lien against the property; and
- After loan disbursement, the net amount the borrower is receiving is less than $25,000; and
- The due diligence steps above are followed; and
- The policy to be issued is either:
- a standard coverage policy containing a mechanic's lien exception - an ALTA Loan Policy with Western Regional Exceptions or a CLTA Standard Coverage Loan Policy; or
- an ALTA Extended Loan Policy where all of the following requirements are met:
- The property is a 1-4 family residence (including a condominium or planned unit development); and
- No portion of the loan funds will be used for construction, rehabilitation, or remodeling; and
- The loan funds are not being used to pay off a construction loan; and
- A general survey exception is included in Schedule B because the legal description is anything other than the entirety of a single lot in a subdivision.
If your transaction falls outside the above guidelines, prior written approval from a STG underwriter is required. Please submit your STG underwriting request by completing a Request for Approval to Issue Overlimits (Large) Policy or Extra Hazardous Coverage form and sending it through email to: firstname.lastname@example.org.
Any non-institutional lender transaction where the loan amount is equal to or greater than $700,000.00 automatically requires STG Underwriting Approval and specially requires the approval of a STG Associate Senior Underwriter or STG Senior Underwriter. Please follow the same submission process described in the preceding paragraph.
General Requirements for Non-Institutional Lender Transactions Involving Construction Loans ornTransactions With 5 or More Beneficiaries (Multiple Beneficiaries)
STG underwriter approval is always required where any of the following exist:
- The transaction involves property which has been the subject of construction, rehabilitation or remodeling that is still within the statutory lien period; or
- Any portion of the loan funds is used for construction, rehabilitation, or remodeling then the transaction is considered a construction loan. The Company requires adherence to the following guidelines, in addition to the Company’s guidelines for general construction loans:
- "Good Priority" transactions under applicable state law are subject to incremental coverage requirements, i.e., pending disbursement clauses or the combination of the ALTA 32 series and ALTA 33 endorsements, unless the lender accepts a mechanic's lien exception on its loan policy;
- "Broken Priority" transactions must always include a mechanic's lien exception;
- Loan policy coverage cannot exceed the loan amount; 125% coverage is not available.
- Compliance with STG Bulletin MU2010008 and Virtual Underwriter Manual Section 12.12 et seq.; or
- The number of the beneficiaries listed in the security instrument to be insured is 5 or more, the Company requires adherence to the following guidelines:
- Prior to submission to STG underwriting for approval, you must include the following Multi-Beneficiary Exception in Schedule B:
- Any impairment, loss or failure of title to the beneficial interest of the insured in the mortgage insured by this policy resulting from: a. Lack of possession of the original promissory note secured by the insured mortgage; or
- b. The absence from the original promissory note of a proper endorsement to the insured assignee;
- c. Any claim, allegation or determination that the beneficial interest insured herein, or the underlying transaction involves the sale of a Security and/or is in violation of State or Federal Securities Laws."
- Compliance with STG Bulletins CA000008 and SLS2009014
For non-institutional lender transactions involving construction loans or transactions with 5 or more beneficiaries (multiple beneficiaries), prior written approval from a STG underwriter is required. Please submit your STG underwriting request by completing a Request for Approval to Issue Overlimits (Large) Policy or Extra Hazardous Coverage form and sending it through email to: email@example.com.
If you have any questions relating to this or other bulletins, please contact a Stewart Title Guaranty Company underwriter.
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