When lenders require the purchase of a title policy at loan origination, they do so with an assumption that if ever a problem arises, the policy will cover it. But as default rates increase and fresh examinations abound, many lenders and servicers may get an unpleasant surprise when they find that the title company won't open its magic checkbook and make all the title issues disappear.
Title insurance companies do not write those magic checks primarily because no loss has been suffered by the lender at the time of a borrower's default. Many lenders believe loss occurs when a subsequent title report reveals a potential title issue that cannot be remedied by a foreclosure action.
However, under a loan policy, the title company has no duty to clear title. It is bound by two duties only: to defend and indemnify. There is no duty to resolve claims wherein there is no loss (i.e., actual monetary damages caused by lack of validity, enforceability or priority).
{OPENADS=zone=17}To prove a loss, the lender must prove default and actual loss, as well as prove that the title issue in question caused the actual loss. If a servicer is in the process of foreclosing and enters a total debt bid at the foreclosure sale, under the policy, there is no loss because the lender has satisfied the debt.
Even if a lender successfully proves a default and actual loss resulting from a defect in title, there are exceptions to the standard American Land Title Association title policy that may cause a claim to be denied – the most sweeping of which is the ‘created, suffered, assumed’ exception.
This exception is broad and designed to protect the insurer from defects not known to it, but known and ostensibly undisclosed by the insured. A common example would include defective documents (i.e., the mortgage or deed of trust prepared by the insured lender). An additional pitfall is the practice of providing a legal description to the title agent to facilitate a title search – a practice which has become more prevalent in recent years.
Another source of denials of claims on title policies by title insurance companies stems from the lender's poor closing instructions. Unfortunately, standard general closing instructions are often ambiguous regarding the duties the agent is required to complete to perform the closing. This source of ambiguity is often used as a denial when the loan is originated on the wrong property or in determining whether survey coverage should have been included on the title policy.
{OPENADS=zone=18}Lastly, the lender is often put into a situation where it sends notice of a defect to the title insurance company, but it still receives a denial based on the fact that the claim is not ripe or that the lender has not suffered an actual loss. While this denial may hinder a foreclosure action, putting the title insurance company on notice of the defect protects the lender from a potential future loss as long as the title insurance company is notified if the claim becomes ripe or if there is a potential for actual loss.
Lenders may also face situations where they receive a denial based on the fact that the title insurance company does not believe the claimed title defect is actually a title defect. There are definitely certain items that every title insurance company would deem a title defect, but other claimed title defects are not so black and white regarding whether they are title defects or not.
Shellie Wallace is a partner and supervising attorney of the title claims and resolutions and foreclosure/REO commitment departments of Wilson & Associates PLLC. Maria Neumann is the supervising attorney of the foreclosure commitment and claims department with the firm. They can be reached at (501) 734-4143.