When preparing loan documents on behalf of our clients, our firm requires a 2006 ALTA Lender’s Extended title policy.
Often, the title company will come back and offer “Standard Coverage”, or an ALTA policy with “Western Regional Exceptions,” or a “CLTA” policy, which are all effectively the same policy. This article will explain the differences between an ALTA Extended loan policy and a CLTA policy for mortgage lenders. ALTA stands for the American Land Title Association (ALTA), while CLTA stands for the California Land Title Association (CLTA).
CLTA or ALTA Standard Coverage Policies
The CLTA policy is also referred to as a “Standard Coverage” policy, or an ALTA Standard policy. Outside of California, it would most commonly be called an ALTA Standard. The coverage associated with a CLTA policy typically only pertains to issues that can be uncovered by conducting a public records search, insuring that: (1) the insured party owns the interest in the real property as set out in the policy; (2) there are no existing liens, defects, or encumbrances related to the title; (3) the owner has a right of access in and out of the property; and (4) 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 provides coverage when it comes to protecting the validity and enforceability of insured liens that are usually conveyed via a deed of trust, as well as ensuring 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.
- Mechanic’s liens not shown by the public record.
For most lenders, the biggest issue with the Western Regional Exceptions is #6 above, the mechanic’s lien exception. A lender will need to obtain an ALTA Extended policy in order to remove the mechanic’s lien exception, and title will often require a variety of documentation and an affidavit from the borrower in order to provide this coverage.
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 frequently seen in small transactions, related-party transactions, transactions that do not use institutional lenders, and land trusts or conservation projects where no improvements are planned.
ALTA Extended Coverage Policies
The ALTA Extended policy 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 which hamstring the CLTA.
In order to obtain an ALTA Extended policy, title may require an 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 Extended 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. In these situations, the buyer should additionally acquire extended coverage for its owner’s policy. Simultaneous pricing for the loan policy, when it is given concurrently with the owner’s policy, usually results in the ALTA Extended policy being issued for either a nominal fee or at no additional cost. Conversely, obtaining an ALTA Extended 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
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. It usually costs more to get an endorsement for a CLTA policy versus an ALTA Extended policy. Both the ALTA Extended 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 Extended policy; however, several ALTA 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 does not exist, the CLTA endorsement offers ideal coverage, or the title underwriter specializes in CLTA endorsements.
A prudent lender should always require a 2006 ALTA Extended 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 lenders’ instructions should identify specifically what endorsements are required related to the risk in the transaction.