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.