Best Practices: The Basics of Title Insurance and Title Endorsements

Since the SBA E-Tran Terms and Conditions no longer contains specific requirements for title insurance, lenders should use prudent lending standards and generally accepted principles of commercial lending as a guide to determine whether title insurance should be obtained on their SBA-guaranteed loans. SBA generally expects lenders to obtain a loan policy of title insurance for real property when SBA loan proceeds are being used to purchase the real property, finance construction on the real property, or refinance a loan secured by the real property.

Which forms should lenders request for title commitment, loan policy, and endorsements?

• The American Land Title Association (“ALTA”) is the national trade association for the title insurance industry.
• Most states have adopted the 2021 ALTA title insurance forms for use.
• Some states have adopted modified versions of the 2021 ALTA forms (i.e. Florida and Pennsylvania).
• Some states have adopted their own state promulgated forms (i.e. Texas and California)

What are the benefits of title insurance?

• It is risk eliminating and covers past (not future) events;
• It is a snapshot of the state of title at the time of recording of the lien instrument;
• It insures against unmarketable title or loss resulting from title defects or undisclosed liens;
• It insures the proper lien position for the insured lender;
• It insures that the lien instrument has been executed in accordance with the law and is a valid lien;
• It insures against title company error (not lender error); and
• The insured lender pays one premium for coverage.

What are the loan policy coverage limits?

• A claim for title insurance will be limited to the lesser value of:
  • the fair market value of the insured real property;
  • the face amount of the policy; or
  • actual loss sustained by the insured.

A lender may request title endorsements to enhance the coverage provided by a loan policy (typically for an additional nominal cost).  The following is a summary of common title endorsements:

• ALTA 4.1 (Condominium): Provides the insured various affirmative coverages peculiar to condominiums, such as the valid creation of the condominium.
• ALTA 6.0 (Variable Rate): Assures the insured that its priority will be maintained despite the fact that certain changes in the loan term may occur (eg. Interest Rate).
• ALTA 8.2 (Environmental Protection Lien): Provides for affirmative coverage against loss or damage by reason of a lack of priority of the insured lien instrument over any environmental protection lien that is recorded as of the date of the policy.
• ALTA 9.06 (Restrictions, Encroachments, and Minerals): Provides affirmative coverages, most of which concern violations of restrictions and encroachments.
• ALTA 11.0 (Mortgage Modification): Provides assurance that a modification of mortgage does not result in loss of priority, invalidity, or unenforceability of the insured mortgage. This endorsement may only be used for a mortgage modification that does NOT trigger a loss of priority.
• ALTA 13.1 (Leasehold): Defines coverages provided to a lender under a policy insuring a leasehold interest.
• Construction Loan Update (State Specific):  Updates a loan policy as construction loan disbursements are made.

For more information regarding title insurance requirements for SBA 7(a) loans please contact us at info@starfieldsmith.com or (215) 542-7070.