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September 9, 2015

Best Practices: The Value of Obtaining a Pro Forma Title Policy

by Katie O'Brien

Title insurance serves several important functions for lenders. Primarily, it insures that the lien created by the mortgage, deed of trust or security deed is in the proper lien position. It also insures that title to the insured real estate is in the name of the borrower or guarantor, as applicable, that there is access to the real estate and that title is marketable.

It is standard practice for a lender to obtain a lender’s title policy (also called a loan policy) when the primary collateral securing its loan is commercial real estate. Because title insurance serves an important function in real estate transactions, it is important that a lender obtains a loan policy that meets the lender’s requirements and protects the lender from certain title issues. Most lenders will order a title commitment for a loan policy and upon receipt, will review the commitment as well as copies of all recorded documents related to the exceptions which are referenced in the commitment. The exceptions in the title commitment are those items that, unless removed from the final title policy, will be carved out from the lender’s coverage, meaning the loan policy will not insure a lender for those matters which relate to the exceptions in the policy. Many lenders should take additional steps after reviewing the title work – they should discuss with the title agent which exceptions can be removed from the loan policy, what endorsements can be issued with the loan policy, whether a survey is needed to remove the general survey exception and what documentation is needed to provide mechanics lien coverage to the lender.

One important step that sometimes gets overlooked in the whirlwind leading up to closing is obtaining a pro forma title policy or a “marked-up” title commitment. A pro forma policy is a sample policy which shows a lender what its actual loan policy will look like once issued after closing. A pro forma policy will set forth the insured lender’s name as it will appear on the loan policy, the amount of title insurance to be issued, the date of the policy (e.g. “the date and time of recording of the insured Mortgage/Deed of Trust/Security Deed”), the title holder or owner of the real estate, exceptions that will appear on the loan policy, any subordinate matters that will appear in the loan policy and endorsements which will be issued with the loan policy. A pro forma policy should not contain any of the Schedule B-I requirements which appeared in the commitment as all of those requirements should be satisfied at or before closing.

In some states where table funding closings are more common than escrow closings, title agents will often issue a marked-up title commitment at closing in lieu of a pro forma policy. The marked-up title commitment serves the same function as a pro forma policy and is exactly what it sounds like – the title agent “marks up” the title commitment by writing on the commitment what requirements have been satisfied, what exceptions will be removed from the policy and what endorsements will be issued as part of the policy.

Because a pro forma policy or marked-up title commitment are often not provided by the title agent until the day of closing or a day or two prior to closing, it is easy to overlook this valuable item. But it is important to obtain a pro forma policy or marked-up title commitment prior to disbursing any loan funds. Without this, a lender may not realize that a particular exception will appear on the loan policy or that title was not able to issue a particular endorsement which is necessary to insure over an encroachment, for example. If these items are not discovered until the loan policy is issued (which is sometimes weeks or months after closing), a lender has little leverage to get the borrower or the title agent to cooperate to satisfy the lender’s title requirements. A pro forma policy is also a good resource to compare against the final title policy received by the lender, especially if the post closing review of the loan policy will be performed by someone at the bank who may not be familiar with the file. If the loan policy contains discrepancies from the pro forma policy, a title agent should be willing to modify the loan policy to match what was agreed on in the pro forma policy. Obtaining a pro forma policy or marked-up title commitment at closing will ensure that a lender will receive the proper title coverage and can prevent a lot of headaches post closing.

For more information, please contact Katie at 267-470-1207 or at kobrien@starfieldsmith.com.