Which Endorsements Are Right for Your Transaction?

2) ALTA 2, Truth in Lending ' This endorsement protects a lender from any losses due to a judicial determination terminating the lenders' interest due to the exercise of a borrower's right of rescission under truth in lending laws.

3) ALTA 6, 6.1 and 6.2, Variable Rate ' ALTA 6 insures against the invalidity, unenforceability, or loss of priority of the lien of the insured mortgage by reason of a provision therein that provides for changes in the interest rate and the loss of priority of the lien of the insured mortgage as security for the unpaid principal balance of the loan, together with interest as changed in accordance with the mortgage. The premise of this endorsement is that without it, a change in the interest rate due to the variable nature of the insured mortgage may give the title company the right to determine a loss in priority. This endorsement does not increase the amount of the policy, and excludes usury, consumer credit protection, and Truth-in-Lending laws. Underwriters will typically require that the insured mortgage specify that the secured note provides for a variable rate of interest. ALTA 6.1 authorizes exceptions to statutes or regulations concerning variable rate loans, and ALTA 6.2 insures against invalidity, loss of priority, or unenforceability of the lien of the insured mortgage by reason of interest on interest (negative amortization) or the addition of unpaid interest to the principal balance.

4) ALTA 11, Modification ' Subsequent to closing, ALTA 11 may be available and insures that in the event of a modification of the insured mortgage, such modification does not result in the invalidity or unenforceability of the insured mortgage, and that the insured mortgage, as modified, has priority over defects, liens, and encumbrances, except those excepted in the policy and prior endorsements.

5) ALTA 12, Aggregation (or Tie-In) Endorsement ' This endorsement is used in transactions involving multiple insured parcels with multiple policies, and provides that notwithstanding the policy amount in any one of the policies, the total liability of the title company for a loss to any one insured parcel is the aggregated amount.

6) ALTA 14, 14.1 and 14.2, Future Advance ' ALTA 14 is used when there is a future advance of funds subsequent to the date of the policy contemplated under the insured mortgage. This endorsement insures the priority of such advances, regardless of whether the lender knows of an intervening lien or other matter, for states in which advances will have priority based upon state law according to priority of any advances, and may be issued in other states if the advances are obligatory under the loan agreement. This endorsement insures against: 1) invalidity or unenforceability of the insured mortgage as security for advances, 2) lack of priority of the lien as security for advances, 3) invalidity or unenforceability of the insured mortgage because of re-advances and repayments, lack of outstanding debt before an advance, and failure to comply with legal requirements for advances, 4) invalidity or unenforceability of the insured mortgage because of adjustment of interest or addition of interest to principal, and 5) loss of priority of the insured mortgage caused by adjustment of interest rates and addition of interest to principal. Advances after bankruptcy, real estate taxes and assessments, federal tax liens filed more than 45 days before the advance, federal or state environmental protection liens, and usury or consumer credit protection or truth in lending law are excluded from coverage. ALTA 14.1 contains an exclusion for lack of priority of any advance made after the insured has knowledge of a lien, encumbrance, or other matter affecting the insured parcel, and ALTA 14.2 is designed for the situation where the insured mortgage secures a reimbursement obligation for future advances by the lender under a letter of credit or surety bond. In the event the owner of the property subject to the insured mortgage is an affiliate of the borrower who is guaranteeing the borrower's loan, a Guarantee endorsement is appropriate in lieu of a Future Advance endorsement. The Guarantee endorsement is substantively similar to the Future Advance endorsement.

7) ALTA 20, First Loss ' This endorsement is used in transactions involving multiple insured parcels and provides coverage on a loss in excess of a stated percentage of the loan policy, even though the lender has other collateral. Without this endorsement, the title company may have the right, in the event there is a defect as to one insured parcel, to take the position that there is still sufficient collateral, so there is no actual loss to the lender. Accordingly, this endorsement entitles lenders to payment on a loss without requiring foreclosure of all properties secured by the mortgage. Typically, underwriters must verify the indebtedness is secured by at least two parcels (but do not require that the loan policy insures all tracts).

8) ALTA 21, Creditors' Rights ' This endorsement insures against avoidance or a court order providing another remedy because of the voidability of the insured mortgage based on the occurrence of a fraudulent transfer from bankruptcy or voidable preference on or before the date of the policy, and is an alternative to an endorsement deleting the creditors' right exclusion in the policy. This endorsement does not insure against a loss if the insured knew that the transfer or mortgage was intended to hinder, delay, or defraud a creditor or if the insured is found not to be a transferee in good faith. Underwriters typically consider the following factors: 1) the purpose of the loan and who received the proceeds, 2) whether there are multiple borrowers or guarantors, 3) the use of the land, 4) outstanding unsecured creditors of the mortgage, 5) is the mortgagor a single purpose entity, 6) are contribution agreements executed by each of the multiple borrowers, 7) will there be an indemnity, 8) do the loan documents include a savings clause, and 9) financial information regarding the mortgagors and guarantors. In limited circumstances, ALTA 21 may be available to an owner.

9) Last Dollar ' This endorsement is used when the insured mortgage secures an amount in excess of the amount of insurance, by protecting the lender from the policy condition providing that any payment of the loan principal reduces the liability limit of the policy dollar for dollar. With this endorsement, the policy amount will not be reduced as a result of payment under the insured mortgage unless and until the payments reduce the total indebtedness secured by the insured mortgage below the amount of the policy. Typically, underwriters will require an explanation as to why the policy is being issued for the lesser amount (e.g., there is other collateral).

As a practical note, in June, ALTA adopted the 2006 ALTA Loan Policy and 2006 Owner's Policy, and updated certain endorsements. Some notable changes in the new policies are: a) the addition of general survey coverage (subject to a general survey exception or exception for items observed on a survey) (this may affect the Survey Endorsement); b) the addition of express insurance over mechanic's and materialmen's liens for construction advances (applies to the 2006 Loan Policy only); c) affirmative insurance against loss caused by matters intervening in the 'gap' period between closing and recording; d) the 'amount of principal disbursed subsequent to Date of Policy' in '1(d)(ii) includes future advances, but the policy does not insure the validity, enforceability, or priority of advances (applies to the 2006 Loan Policy only); e) the term 'Insured' includes 'successors in ownership of the Indebtedness' including 'successors to an Insured by its conversion to another kind of entity' (this may affect the Fairway Endorsement); and f) the addition of an arbitration clause.

The endorsement game can be confusing, especially in a multi-parcel, multi-state transaction. This article is not intended to act as a comprehensive list of all endorsements available, and, accordingly, the best advice is to contact the title company early to request and discuss potential endorsements to understand what is available in the necessary states, and at what cost. The purpose of title endorsements is to mitigate risk by providing additional title insurance, and title companies will provide advice on what endorsements are available to address specific title-related issues.

Lender Only Endorsements

A lender is typically looking for the same protection as a buyer/tenant, because the lender may step into the shoes of the buyer/tenant at some point in the future if foreclosure is necessary. The lender's policy insures that the mortgage is a valid lien and addresses the priority of the mortgage and the basic matters insured in an owner's policy: vesting of title; freedom of defects, liens and encumbrances; marketability; and right to access the land. Lenders have several unique risks, and those risks may be managed by utilizing the following notable endorsements (in addition to many endorsements available to a buyer/tenant):

1) ALTA 1, Assessment ' This endorsement assures the lender that, as of the date of the policy, there are no street improvements that could lead to a lien senior to the lender's mortgage.

2) ALTA 2, Truth in Lending ' This endorsement protects a lender from any losses due to a judicial determination terminating the lenders' interest due to the exercise of a borrower's right of rescission under truth in lending laws.

3) ALTA 6, 6.1 and 6.2, Variable Rate ' ALTA 6 insures against the invalidity, unenforceability, or loss of priority of the lien of the insured mortgage by reason of a provision therein that provides for changes in the interest rate and the loss of priority of the lien of the insured mortgage as security for the unpaid principal balance of the loan, together with interest as changed in accordance with the mortgage. The premise of this endorsement is that without it, a change in the interest rate due to the variable nature of the insured mortgage may give the title company the right to determine a loss in priority. This endorsement does not increase the amount of the policy, and excludes usury, consumer credit protection, and Truth-in-Lending laws. Underwriters will typically require that the insured mortgage specify that the secured note provides for a variable rate of interest. ALTA 6.1 authorizes exceptions to statutes or regulations concerning variable rate loans, and ALTA 6.2 insures against invalidity, loss of priority, or unenforceability of the lien of the insured mortgage by reason of interest on interest (negative amortization) or the addition of unpaid interest to the principal balance.

4) ALTA 11, Modification ' Subsequent to closing, ALTA 11 may be available and insures that in the event of a modification of the insured mortgage, such modification does not result in the invalidity or unenforceability of the insured mortgage, and that the insured mortgage, as modified, has priority over defects, liens, and encumbrances, except those excepted in the policy and prior endorsements.

5) ALTA 12, Aggregation (or Tie-In) Endorsement ' This endorsement is used in transactions involving multiple insured parcels with multiple policies, and provides that notwithstanding the policy amount in any one of the policies, the total liability of the title company for a loss to any one insured parcel is the aggregated amount.

6) ALTA 14, 14.1 and 14.2, Future Advance ' ALTA 14 is used when there is a future advance of funds subsequent to the date of the policy contemplated under the insured mortgage. This endorsement insures the priority of such advances, regardless of whether the lender knows of an intervening lien or other matter, for states in which advances will have priority based upon state law according to priority of any advances, and may be issued in other states if the advances are obligatory under the loan agreement. This endorsement insures against: 1) invalidity or unenforceability of the insured mortgage as security for advances, 2) lack of priority of the lien as security for advances, 3) invalidity or unenforceability of the insured mortgage because of re-advances and repayments, lack of outstanding debt before an advance, and failure to comply with legal requirements for advances, 4) invalidity or unenforceability of the insured mortgage because of adjustment of interest or addition of interest to principal, and 5) loss of priority of the insured mortgage caused by adjustment of interest rates and addition of interest to principal. Advances after bankruptcy, real estate taxes and assessments, federal tax liens filed more than 45 days before the advance, federal or state environmental protection liens, and usury or consumer credit protection or truth in lending law are excluded from coverage. ALTA 14.1 contains an exclusion for lack of priority of any advance made after the insured has knowledge of a lien, encumbrance, or other matter affecting the insured parcel, and ALTA 14.2 is designed for the situation where the insured mortgage secures a reimbursement obligation for future advances by the lender under a letter of credit or surety bond. In the event the owner of the property subject to the insured mortgage is an affiliate of the borrower who is guaranteeing the borrower's loan, a Guarantee endorsement is appropriate in lieu of a Future Advance endorsement. The Guarantee endorsement is substantively similar to the Future Advance endorsement.

7) ALTA 20, First Loss ' This endorsement is used in transactions involving multiple insured parcels and provides coverage on a loss in excess of a stated percentage of the loan policy, even though the lender has other collateral. Without this endorsement, the title company may have the right, in the event there is a defect as to one insured parcel, to take the position that there is still sufficient collateral, so there is no actual loss to the lender. Accordingly, this endorsement entitles lenders to payment on a loss without requiring foreclosure of all properties secured by the mortgage. Typically, underwriters must verify the indebtedness is secured by at least two parcels (but do not require that the loan policy insures all tracts).

8) ALTA 21, Creditors' Rights ' This endorsement insures against avoidance or a court order providing another remedy because of the voidability of the insured mortgage based on the occurrence of a fraudulent transfer from bankruptcy or voidable preference on or before the date of the policy, and is an alternative to an endorsement deleting the creditors' right exclusion in the policy. This endorsement does not insure against a loss if the insured knew that the transfer or mortgage was intended to hinder, delay, or defraud a creditor or if the insured is found not to be a transferee in good faith. Underwriters typically consider the following factors: 1) the purpose of the loan and who received the proceeds, 2) whether there are multiple borrowers or guarantors, 3) the use of the land, 4) outstanding unsecured creditors of the mortgage, 5) is the mortgagor a single purpose entity, 6) are contribution agreements executed by each of the multiple borrowers, 7) will there be an indemnity, 8) do the loan documents include a savings clause, and 9) financial information regarding the mortgagors and guarantors. In limited circumstances, ALTA 21 may be available to an owner.

9) Last Dollar ' This endorsement is used when the insured mortgage secures an amount in excess of the amount of insurance, by protecting the lender from the policy condition providing that any payment of the loan principal reduces the liability limit of the policy dollar for dollar. With this endorsement, the policy amount will not be reduced as a result of payment under the insured mortgage unless and until the payments reduce the total indebtedness secured by the insured mortgage below the amount of the policy. Typically, underwriters will require an explanation as to why the policy is being issued for the lesser amount (e.g., there is other collateral).

As a practical note, in June, ALTA adopted the 2006 ALTA Loan Policy and 2006 Owner's Policy, and updated certain endorsements. Some notable changes in the new policies are: a) the addition of general survey coverage (subject to a general survey exception or exception for items observed on a survey) (this may affect the Survey Endorsement); b) the addition of express insurance over mechanic's and materialmen's liens for construction advances (applies to the 2006 Loan Policy only); c) affirmative insurance against loss caused by matters intervening in the 'gap' period between closing and recording; d) the 'amount of principal disbursed subsequent to Date of Policy' in '1(d)(ii) includes future advances, but the policy does not insure the validity, enforceability, or priority of advances (applies to the 2006 Loan Policy only); e) the term 'Insured' includes 'successors in ownership of the Indebtedness' including 'successors to an Insured by its conversion to another kind of entity' (this may affect the Fairway Endorsement); and f) the addition of an arbitration clause.

The endorsement game can be confusing, especially in a multi-parcel, multi-state transaction. This article is not intended to act as a comprehensive list of all endorsements available, and, accordingly, the best advice is to contact the title company early to request and discuss potential endorsements to understand what is available in the necessary states, and at what cost. The purpose of title endorsements is to mitigate risk by providing additional title insurance, and title companies will provide advice on what endorsements are available to address specific title-related issues.