NORTH BAY -- Title insurance companies are no longer providing “creditor’s rights” in accordance with the recent recommendations of both the American Land Title Association and the California Land Title Association.
The recommendation that went into effect March 8 was to decertify the creditor’s rights endorsement, which decreased the risk associated with lending by covering the lender in case a creditor came after the property.
Julie Ebert is a partner in the San Francisco office of Sheppard Mullin whose main area of focus is general commercial lending, including real estate and asset-based finance, workouts and bankruptcy, with an emphasis on resort and hospitality transactions.
“It is a product of the economy,” she said. “Title companies are being hit from all over.
“What I think the impact is going to be is that lenders are going to have to consider and be more cautious about how their borrowers are structured.
“From what I can tell right now, this will be across the board at title companies,” she said.
In an article by Robyn Cristo and Aaron Sobaski, associates with Sheppard Mullin, they state, “Owners and lenders will effectively be unable to obtain title insurance policies that provide protection against risks associated with a seller or borrower insolvency or subsequent bankruptcy, most notable fraudulent transfer or preference claims, which could void the insured transfer or mortgage.”
Ms. Ebert said that a major area where this will hit companies is with loan modifications.
“This has come up specifically on loan modifications that they [lenders] are considering right now. Title companies are saying they will not strip it from existing contracts. But with new loans and modifications they will not include the endorsement.”
John Freidemann, a partner at Friedemann Goldberg in Santa Rosa who specializes in banking, said the impact on bankers and how they write loans will be the main issue.
“There will be transactional risk not associated with title insurance on virtually every real estate loan made,” he said. “There will be an increased risk to the lender.”
When a financial institution makes a loan on a property, it requires title insurance. The policy is intended to cover potential losses.
The policies can come into play when a homeowner becomes insolvent and the asset is pulled into a bankruptcy. In addition, if a previous property owner has to file bankruptcy or becomes insolvent, the creditors can force the property out of the new owner's hands and into the bankruptcy estate.
That is when the title insurance typically came into play. But now, for the bank that made the loan, the asset that secured the loan is gone.
Mr. Friedemann said financial institutions are in the business of taking measured amounts of risk, and now the perceived risk will be higher.
Seeing this rising exposure under the old policy, the board of governors at American Land Title Association made the recommendation to decertify the endorsement and the California association followed suit.
“In essence, CLTA acted after ALTA had decertified and withdrawn the ALTA creditors’ rights endorsements,” said Craig Page, executive vice president and counsel for the California Land Title Association. “Since the CLTA endorsements were predicated on the ALTA endorsements and forms, it seemed only appropriate to also withdraw our endorsements in California.”