Tough Times for Lenders : Financial Services Lawyer & Attorney : Winstead Law Firm : Finance, Banking, Bankruptcy

This is the second part of a two-part series laying out a quick checklist covering title insurance issues—and highlighting topics that should be investigated.  This is an important and often overlooked topic.

1. Was UCC insurance obtained (covering attachment, perfection and priority of lender’s security interest in personal property)?  Here are the types of transactions where UCC insurance is important:
   --Factoring credit facilities (where the collateral includes a right to payment or claim covered by a UCC filing).
   --Mezzanine loans (where the collateral is ownership interests in the borrower entity) covered by UCC filings.
   --Asset based credit facilities (for example, where collateral includes inventory and accounts receivable covered by UCC filings).
   --Mixed collateral structures (for example, where collateral includes both real and personal property—such as a hotel or a restaurant).
2. Title insurance polices can contain a long listing of “exclusions” from coverage.  There are items that are not covered by the policy.  These can include the following, each of which can limit the use and value of the collateral: easements; restrictions; use agreements; development agreements.
   --Do these exclusions impact the current use and physical attributes of the collateral?
3. Note that zoning compliance and building code restrictions typically are not included in the basic title insurance coverage.  Therefore:
   --Does the policy contain a zoning endorsement?
   --If “yes,” then what are the terms of the endorsement?
   --Has the current use and physical attributes of the property changed since the issuance of the endorsement?)
   
   Note that a zoning endorsement to a title insurance is a separate and distinct topic from ordinance or law casualty insurance.  Apples and oranges.
    
4. Does the title policy (and endorsements) in the file contain the terms requested at loan closing?
   --For example, if the removal of the “creditors’ rights” exclusion was requested at closing, was it removed (or endorsed “out”) of the policy? A “creditors’ rights exclusion” removes creditors rights issues from coverage of the policy – such as fraudulent preferential transfers.
   
   Note that creditor rights commonly present risks in these types of transactions:
   --Multi-collateral, with separate SPE or “single purpose entity” ownership entities
   --Leverage buyout transactions

If you have questions or a story to share, then post a comment
 

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No surprise at this statement:  When the real estate mortgage nears the ditch, the lien priority of the loan and the status of the title (such as easements, deed restrictions, access rights and lien priority) all come under scrutiny.

One important point of inquiry is the title policy covering the loan.  An “audit” or review of the title policy should be done. 

Here’s a quick (albeit incomplete) list of things that should be investigated (in no order of priority):
 

1. Is there a title policy? (Don’t be shocked if you don’t have a title policy—this is one of those “details” that can get “lost” during the post-closing\servicing process.)
2. If it is a construction loan, was a policy purchased or is a “binder” merely in place? (If a binder, can or should a policy be purchased? Is this possible or even desirable?)
   --What is the current coverage amount?
   --What is the date of the last down-date?
3. Do you need to put the title policy insurer on notice of a possible claim? (Read the title policy for “how” to do this.)
4. Do you have a complete copy of the title policy, the title policy exception documents and the title policy endorsements? (You’ll be amazed at how many loan files fail to contain all of this.)
5. Does the title policy:
   --Continue to cover an affiliate of the lender that takes the title at foreclosure or a transfer 
      in lieu of foreclosure?
   --Correctly describe the insured land?
   --Contain the correct amount?
   --Have the correct title policy form with all endorsements?

The next posting will cover UCC issues, zoning endorsements and creditors rights exclusions.

If you have any questions or some thing to add, please post a comment.
 

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