Written by Matthew B. Gunter, Esq., Attorney, Lightning Docs
The American Land Title Association (ALTA) updated the loan policy and various endorsements, among other things, from their 2006 versions in bits and pieces over the intervening period. These changed in 2021, and the revised policies and endorsements began rolling out in earnest in 2022 and intend to be the only policies available starting in January 2023. The exact timing will depend upon state insurance regulators approving the changes, but one should expect to come across the 2021 policy form very soon.
The 2006 ALTA policy has been the standard policy issued for mortgage lenders. Many law firm clients have reached out requesting a 2006 ALTA policy to have the title company state that only a 2021 ALTA policy is available. Lenders are trying to understand what has changed and what they can do to best protect themselves during this transition.
This article identifies some of the changes, particularly focused on those that matter to private lenders making business-purpose loans. Most of the changes are of no consequence; merely updates to grammar and syntax and to harmonize language throughout the various policies and the endorsements. However, a few changes are of particular interest as coverages are improved, reduced, or clarified in some limited respects.
Changes
E-Signatures and Remote Notary
The loan policy update references electronic signatures and electronic notary or “Remote Online Notarization.” Coverage now reaches documents that were signed electronically or notarized remotely where permissible. (See Covered Risks #2(a)(iii) &(viii), and 9(c)&(h), for example).
Coverage is also clarified to extend to policies and endorsements issued entirely in electronic form. This clarification in the preamble negates the need for an ALTA 39 endorsement, as the language is nearly identical.
Zoning and Regulation
Coverage remains similar but changed under Covered Risk #5. The updates have introduced a new term, “Enforcement Notice,” used in place of any generic notice recorded and a change to the definition of “Public Records.” In this way, the coverage remains the same (covering certain violations or enforcement of zoning, ordinances, permits, and the like) provided such violation or enforcement is described in the Enforcement Notice and only to the extent thereof, and recorded in the Public Records. Public Records is defined to not include “alternate filing systems,” including those pertaining to environmental protection, planning, permitting, zoning, licensing, building, health, public safety, or national security.
Frauds, Forgeries, and Failures
Coverage has improved in theory for the invalidity or unenforceability of the security instrument. Covered Risk #9 previously included conflicting language offering coverage that “includes but is not limited to” the limited “any of the following” list of causes. The language has been altered to remove the latter phrase, which makes it clear that the list of causes of impairment is non-exhaustive and will now embrace a larger universe of causes, the majority of which are related to fraud, forgery, or the failure of proper signing authority or notarization.
Priority
One of the most significant changes is in Covered Risk #10. Here, the coverage is narrower and covers only a portion of what is considered “Indebtedness.” Coverage only extends to the amount of loan principal disbursed as of the date of policy, accrued interest, reasonable expenses of foreclosure, and protective advances made before obtaining title to the property for insurance, real estate taxes, and HOA fees.
As a result of this change, coverage is diminished by default under the policy. However, coverage is brought back to what it otherwise would have been under the 2006 version by obtaining an ALTA 14 endorsement which adds coverage for future disbursements of principal as well as additional portions of the Indebtedness such as advances to protect the secured property itself.
Bankruptcy Court’s Alternative Remedies
Covered Risk #13 covers general invalidity, unenforceability, lack of priority, or avoidance of the lien of the insured security instrument. The 2021 changes have expanded coverage to include the effects of an “alternative remedy.” ALTA commentary suggests that this to at least cover loss resulting from a Bankruptcy Court’s order for the bankruptcy trustee to recover the property or the value of the property. The Court could order an insured lender to repay any payments from a borrower in bankruptcy. The amount is now covered by the policy.
New Exclusion / New Coverage – PACA-PSA Trust
Another of the more significant changes of the 2021 revisions is the new Exclusion #7 to exclude coverage over any claim of a PACA-PSA trust. This trust derives from the Perishable Agricultural Commodities Act and the Packers and Stockyards Act. These federal laws protect growers and producers of certain perishable fruits and vegetables as well as livestock from the risk of non-payment. The laws provide that the buyer of these perishable goods must act as a trustee and hold the goods or proceeds derived from the sale of those goods in trust for the benefit of the grower/producer sellers. Courts have interpreted these laws to extend the trusts to cover all assets acquired or maintained by use of trust proceeds, which includes real estate. Thus, if a PACA-PSA trust exists and a borrower makes payments on the real estate which secures the lender’s loan, then that real estate may be subject to the trust and the grower/producer will have a super-priority claim over the lien of the security instrument.
While this exclusion generally bars any claims for insurance because of a PACA-PSA trust, it is limited by the coverage provided in the new Covered Risk #8. This coverage extends over PACA-PSA trust claims but only if and to the extent, the enforcement of it is described in an “Enforcement Notice.”
Lenders should pay particular attention to this new exclusion and associated limited coverage. A PACA-PSA trust can reach any property, real or personal, as the trust follows where the money goes. Practically, however, this occurrence is more likely when the borrower is engaged in the food industry. For example, if a loan was secured by a restaurant and its equipment and the borrower did not pay its beef supplier, if the borrower used the money earned by the sale of the beef to pay for the restaurant real estate and the equipment, such property could be subject to the trust, and the beef supplier would have a priority claim over the security interest.
New Exclusion – Discrepancy in Area
The new Exclusion #9 does not further exclude coverage but clarifies and sets in stone what has always been excluded – discrepancies in the quantity of the area, square footage, or acreage of the land. For many years practitioners and claimants alike have erroneously believed that Covered Risk #2(c) provided coverage over inaccuracies around a property with its use of the word “variation” in the context of what would be disclosed by a survey. To clarify that such is not the case, Exclusion #9 succinctly describes the lack of coverage for such discrepancies.
Expansion of Who is an Insured
The term “Insured” has been updated to include affiliates of the original named insured under certain circumstances. An affiliate is now an insured when it takes the title from the original named insured by deed or if an affiliate acquires title through foreclosure or a deed-in-lieu.
The term “Affiliate” has now been added to the definitions section of the policy and is defined as “An Entity: i) that is wholly owned by the Insured; ii) that wholly owns the insured; or iii) if that Entity and the Insured are both wholly owned by the same person or Entity.”
Increase of Coverage Limits
The 2006 policy conditions stated in Condition 8(b)(i) that if the title insurer elected to defend the title and failed in its defense, the coverage limits automatically increase by 10%. The 2021 revisions have increased this automatic increase to 15% and are now found in section 8(c)(i).
Choices in Calculating Fair Market Value
The 2021 revisions have changed Condition 8 to refer to “fair market value” in determining the loss and then add two choices of how fair market value is to be determined by either i) the date the Insured acquires title to the property by foreclosure or deed-in-lieu, or ii) the date the security instrument is extinguished or rendered unenforceable. Furthermore, if the title insurer elected to defend the title fails in its defense, the Insured can choose which method of calculating fair market value to use. This can have an enormous effect in the event of large changes in the local real estate market.
ALTA 30 Endorsement – Slight Reduction in Coverage
The revised ALTA 30 Endorsement now includes an extra internal exclusion for losses incurred because of “any Consumer Protection Law.” This now matches the same exclusion (with slightly altered language) that appears in the companion endorsement ALTA 30.1.
ALTA 34.1 Endorsement – NEW
There is now an ALTA 34.1 Endorsement which is very similar to the ALTA 34, which still exists. In this new endorsement, the layout is transforms for insertion of an open-ended description of the “Identified Risk.” Substantively, the insurance provided by this endorsement changes such that the covered loss may occur by the exercise or enforcement of the Identified Risk by an adverse party – as opposed to the coverage in ALTA 34, which requires a final court order to enforce the Identified Risk. Separately, coverage reduces since there is no longer an obligation of the title insurer to pay the costs, attorneys’ fees, and expenses incurred in defense of the title.
In sum, there are only a few changes worth noting that are mostly for the better. Updates for clarity are appreciated as it will hopefully result in fewer disputes with title insurers and, thus, fewer trips to your lawyer’s office. However, we urge all to take a moment to digest these changes, particularly those that reduce coverage. Our seasoned attorneys at Geraci are happy to discuss these topics with you and more should you need further details or plan how you may make changes to your lending strategies.
