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

Last Tuesday (Feb 2), the ALTA Board of Governors met to review and discuss the creditor rights issue in light of various recent court rulings.

The outcome is no surprise: they voted (unanimously) to withdraw and de-certify the ALTA 21 endorsement (commonly referred to as creditors' rights coverage).  This change will be effective on March 8th.

Briefly, this endorsement removes creditors rights issues from coverage of the policy – such as fraudulent preferential transfers.

We've addressed the ALTA 21 as part of your file review process (link)

As you might suspect, money is the root of this decision.  The title insurance industry has been experiencing significant losses through this endorsement (although it is not available in all states - for example, it is not available in Texas).  Many underwriters had begun to decline to give this endorsement, or were imposing onerous conditions to issuing the endorsement.  And it was beginning to increase premium rates.

I agree with ALTA's decision.  The financial viability of the company covered by the endorsement is NOT a title record matter that the title insurer can protect itself against through examination.  Indeed, it was a business decision or risk, and of a nature that the lender should independently assess and address.  Why should a lender depend upon another party to assess the financial viability of a party to a transaction?  Isn't the lender ultimately responsible for this underwriting risk? Do we really want lenders to lay-off that assessment to a title company?  And if it is duplicate or "belts and suspenders" to the lender's process and assessment, it is an additional cost that we want to load up on to a transaction?

At least one very, very significant lending client of ours sees it the same way: one of the largest apartment lenders will NO longer require the ALTA 21.

• are other lenders taking this same approach?

No doubt, this approach will be adopted by non-ALTA jurisdictions.

Please post your information, questions or comments below.

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For the next couple of days, I'll be attending the annual meeting of the American College of Mortgage Attorneys (ACMA).  Members of ACMA are a select group of in-house and outside counsel, who are recognized as leaders in commercial real estate finance.

OK, I know:  You're rolling your eyes as your internal big screen pans a view of a room full of (ego laden?) lawyers, sitting in your basic seminar setup, listening to speakers (most by now are far enough up the tech curve to use PowerPoint), and discussing . . . .

Here's where you should wake up to the relevance of it all:  What are the topics that the legal thought-leaders are focusing on?  What has their attention?

I'll admit that some (most?) events like this are grueling for me, but simply because I can't sit still for a stretch of 8 hours.  The content, however, keeps my attention.  And because I think that it might interest you, below is a summary of several of the topics.

A reminder for you:  If you want more information on distressed debt & investments, go to the "Client Resources" tab on our blog homepage.  It contains instructions on how you can access our extranet site, where we have posted 60+ papers, articles and presentations for you to read, download, etc.  It is free.  It is available 24/7.

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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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