When preparing loan documents on behalf of our clients, the firm’s practice is to always require a 2006 ALTA loan policy.
Often, the title company will come back and offer “Standard Coverage”, an ALTA policy with “Western Regional Exceptions,” or a “CLTA” policy which are all effectively the same policy. This article will hopefully inform the reader about the differences between a CLTA and ALTA loan policy for mortgage lenders.
So what are the differences between a CLTA and ALTA policy? The nuances are significant—regardless of whether you’re navigating a commercial real estate transaction as a buyer in a purchase and sale contract; a lender pursuant to a deed of trust; or a tenant operating under a lease. The associated title company should be consulted in the beginning stages of a transaction to review the specific title insurance policies and endorsements available as well as any applicable prerequisites for attaining them.
CLTA “Standard Coverage” Policies
Let’s first take a look at the CLTA policy —also referred to as a “Standard Coverage” policy. The coverage associated with a CLTA policy typically only pertains to issues that can be uncovered by conducting a public records search, insuring that: the insured party owns the interest in the real property as set out in the policy; there are no existing liens, defects, or encumbrances related to the title; the owner has a right of access in and out of the property; and the title is marketable. A CLTA policy also offers protection in the event that the grantor lacked capacity to complete the transaction; the conveyance instrument was improperly recorded; or there was an instance of forgery, fraud, duress, incompetency or impersonation related to the transaction. Obtaining a CLTA loan policy is also important when it comes to protecting the validity and enforceability of insured liens that are usually conveyed via a deed of trust as well as insuring that there are no preexisting liens or encumbrances that have priority over the insured lien.
With the CLTA policy, there is no need to obtain a property survey or inspection, meaning it costs significantly less than an extended coverage policy option. However, there are some limitations associated with the CLTA—namely pertaining to its exceptions from coverage and limited availability. There are six standard exceptions—called the Western Regional Exceptions—that limit the scope of CLTA coverage. Accordingly, CLTA polices do not cover:
- Taxes or assessments that are not shown:
- on the records of the taxing authority; or
- by the public records.
- Defects that are not shown by the public records but are discoverable by:
- an inspection of the land; or
- asking those in possession of the land.
- Easements, liens, or encumbrances that are not shown by the public record.
- Matters a correct survey would disclose that are not shown by the public record.
- Unpatented mining claims, reservations, or exceptions in patents, and water rights.
- Mechanics liens not shown by the public record.
For these reasons, CLTA policies are not offered in all local jurisdictions and are not often utilized in commercial real estate transactions. Generally, CLTA policies are implemented in transactions in which the respective parties are open to assuming more risk and are seeking to save costs—a scenario most commonly seen in small transactions, related-party transactions, transactions that do not use institutional lenders and land trusts or conservation projects where improvements are not planned for.
ALTA Extended Coverage Policies
The ALTA simply extends the scope of the standard coverage policy to include certain issues that are not indicated in the public records by eliminating the aforementioned Western Regional Exceptions that hamstring the CLTA.
In order to obtain an ALTA policy, providers may require a ALTA/NSPS survey, a property inspection conducted in the same timeframe as the closing date, and an owner’s affidavit provided by the seller or the borrower. Title insurance companies typically charge approximately 25% more for an ALTA policy in order to cover the charges associated with analyzing the survey, performing the property inspection, and assuming elevated risk due to covering additional matters beyond a standard coverage policy.
Nearly all mortgage funds and other professional lending institutions mandate that the parties to a real estate transaction obtain ALTA extended coverage plans. In these situations, the buyer should additionally acquire extended coverage for its owner’s policy due to the fact that simultaneous pricing for the loan policy when it is given concurrently with the owner’s policy usually results in the ALTA policy being issued for either a nominal fee or at no additional cost. Conversely, obtaining an ALTA policy on a concurrent basis with a CLTA/ALTA policy is considerably more costly—approximately twenty to sixty cents per $1,000 of coverage.
Other Considerations: Title Insurance Endorsements Options
Title insurance endorsements are additions to a title insurance policy that alter its terms and conditions in order to augment the amount of coverage enjoyed by the insured entity. Title insurance providers generally do not proactively grant title policy endorsements—the insured party’s counsel must expressly request for their issuance. Whereas some types of endorsements can be acquired at little to no cost, others carry a hefty price, for example: zoning endorsements; Subdivision Map Act endorsements; and water rights endorsements. It usually costs more to get an endorsement for a standard coverage policy versus an extended coverage policy.
Both the ALTA and CLTA policies offer several types of endorsements—oftentimes mirroring one another in their form and function. Almost every available CLTA endorsement can be acquired under an ALTA policy; however, several ALTA and CLTA endorsements are not offered for holders of CLTA or standard coverage policies. While the majority approach is to use ALTA endorsements, CLTA endorsements are often utilized in scenarios where a comparable ALTA endorsement doesn’t exist, the CLTA endorsement offers ideal coverage, or the title underwriter specializes in CLTA endorsements.
A prudent lender should always require a 2006 ALTA policy that does not contain Western Regional Exceptions. If a title company is requesting the lender accept a CLTA policy or an ALTA policy with Western Regional Exceptions, there are numerous additional unknown risks that the lender must now accept that a prudent lender should not. Finally, prudent lender’s instructions should identify specifically what endorsements are required related to the risk in the transaction.