Title insurance serves several important functions for lenders.  Primarily, it insures that the lien created by a mortgage, deed of trust or security deed is valid and enforceable and in the proper lien position.  It also protects lenders by insuring against loss from title defects such as lack of legal access to the property, unmarketable title and undisclosed liens.

Lenders should carefully review the title commitment and copies of all recorded documents related to the Schedule B-II title exceptions.  Further, lenders should work with the title agent to determine which title exceptions the title agent is willing to remove from the title commitment and the final loan policy, as the loan policy will not cover losses related to any matters disclosed in the title exceptions.  Lenders should determine: (i) if the title agent requires a survey to remove the general survey exception; and (ii) the documentation required to provide mechanics lien coverage to the lender if the loan is a construction loan.   Lenders should consider requesting title endorsements to enhance the coverage of the loan policy (see Best Practices: The Basics of Title Insurance and Title Endorsements | Starfield & Smith Attorneys at Law written by my colleague, Kristen Dickey, for a summary of common title endorsements).

In order to determine the exact coverage that the title agent is willing to provide to the lender, it is important for the lender to obtain a pro forma policy or a “marked-up” title commitment from the title agent or title insurance underwriter.  A pro forma policy is a sample title policy which shows the 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, the owner of the real estate, title exceptions and subordinate matters that will appear in the loan policy, and title endorsements which will be issued with the loan policy.  A pro forma policy should not contain any of the Schedule B-I title requirements from the title commitment as all of those requirements should be satisfied at or prior to closing.

In some states where table funding closings are more common than escrow closings, title agents may 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, but the title agent “marks up” the title commitment by writing on the title commitment to show which title requirements have been satisfied, which title exceptions will be removed from the loan policy, and which title endorsements will be issued as part of the loan policy.

It is important to obtain a pro forma policy or marked-up title commitment as early in the closing process as possible in order to: (i) understand the title coverage afforded to the lender; and (ii) have  sufficient time to work through any title issues.  Lenders should not close and disburse loan proceeds until receipt of a pro forma policy or marked-up title commitment that provides the lender with the title coverage it is seeking.  Without a pro forma policy or a marked-up title commitment, a lender may not realize that a particular problematic title exception will appear on the loan policy or that title was not able to issue a particular title endorsement.  If such title matters are not discovered until the loan policy is issued (which is sometimes weeks or months after closing), a lender has very little leverage to get the seller, borrower, or title agent to resolve them at that time.  If the loan policy does not match the pro forma policy, the title agent should be willing to modify the loan policy to remove any discrepancies (particularly if the title agent signed an instruction letter in which the title agent agreed to issue a loan policy to match the pro forma policy or marked-up title commitment).

Obtaining a pro forma policy or marked-up title commitment prior to closing and funding of the loan will ensure that the lender receives an acceptable loan policy which meets the lender’s requirements and can prevent a lot of headaches for the lender post-closing. For more information regarding title insurance practices, please contact us at info@starfieldsmith.com or (215) 542-7070.