Wednesday, June 04, 2008

removing exceptions from a title commitment

I had a credit union ask me to remove standard exceptions from Schedule B2 in a title commitment. This is my response and I thought I'd share it with you.

The title insurance commitment is like a mortgage loan commitment. The marking up by the title agent is like the mortgage loan underwriter clearing conditions. Marking up takes place at the time of closing as a final check list by the title agent that all issues have been complied with and then final instructions are given to staff for preparation of the policies. Exceptions are not removed form commitments. They are removed from policies. The following notes demonstrate how the Schedule B2 of the title commitment for the redacted file will be marked up at closing:
1. out
2. 300
4. out
6. 100
7. limit loan
11. 100
14. 300
The items not marked stay as is in the loan policy. Items marked "out" will be removed. NYDP means "not yet due and payable" and that language will be added in the policy. Endorsement 300 is the PA survey endorsement. Items marked 300 will be removed from the loan policy by way of the language in the endorsement. Endorsement 100 is the PA restrictions & covenants endorsement. Items marked 100 will be removed from the loan policy by way of the language in the endorsement. "Limit loan" on #7 means language will be added to the loan policy which limits the exception to under surface operations.


Dave Wirsching said...

During the recent "boom" we used to get requests all the time from lenders to remove items from commitments.

We provided a similar explaination, and did NOT modify the commitment.

I asked loan processors why they were asking. Turns out, our esteemed colleagues were regularly removing items, like mortgages, requirements and exceptions from commitments.

Claims counsel must be pulling their hair out when they review the file.

Diane Cipa said...

I hope the experience will cause a new appreciation for expertise and training. We need to do a better job, as an industry, teaching correct methods and supporting those who do good.

Anonymous said...

It seems a very large portion of loan processors and underwriters all received the same training from a handful of companies (at least in my markets). This "required" them to get clean commitments, not a copy of "marked-up title." In my investigations, nobody ever supplied this requirement in a written guideline, but it ceratainly is/was the nearly uniform practice. In fact, the guidelines I have found all specify "marked-up title."

That said, nobody has ever thanked me for pointing this out. Now, I'm no fan of CBAs, but one virtue of that model is that title can dig in its heels and force sounder practices without risking business relationships. This appears to be true in that most CBA title operations are actually more conservative than independent agents.

Title agents compete on cost and service, but those things are often less important than the real competition that every title agent learns about very quickly - competition in taking on risk for itself and its underwriters.

Just this week, I "lost" a deal to another company that would close a deal where the seller/builder had filed for BK the day before. I'm not sure how exactly this company intends to fix the deed it gave to its buyer/customer without a BK court order, and I don't think I would would want to be the BK attorney trying to get post facto approval.

It's hard not to see everybody (except possibly the buyer) as a party to fraud here, and a particularly egregious variety of fraud against the BK court. This is one where the "I told you so" seems so obvious, but we will see ...

Needless to say, these practices (the title company said its search didn't turn up the BK, even though the seller disclosed) go way beyond the original topic here.

Diane Cipa said...

Anon: I always wonder in a situation like that whether the title agent operating outside of underwriting guidelines and prudence is doing so out of ignorance or willful negligence.

I would not hesitate to contact the borrower and lender and explain the risk. Though they have title insurance, going through a rescission if the court does not approve the sale, and living through a title claim is perhaps not something they would choose, given all the facts.

I would never allow a loan originator and real estate broker and seller - all of whom have their own interests in mind and may not fully understand the potential consequences - guide the consumer into the pit of risk.