Dirt Lawyers: Make sure you conform(a) with your pro forma policies

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businessman paper magnifying glass

Commercial real estate lawyers are routinely asked to issue pro forma title insurance policies. A friend who routinely acts as lenders’ counsel recently told me he sees lots of pro forma policies coming from borrowers’ counsel, and they are not being handled appropriately. For that reason, I thought I’d list a few reminders for all of us.

What is a pro forma policy? It is a sample policy provided to the customer and customer’s counsel in advance of closing. It outlines the actual language and format the final policy will contain, in the event the transaction actually closes and the policy is actually issued. A pro forma policy is not intended to serve as a promise to issue the final policy. And it is definitely not a substitute for a commitment.

One excellent process is to never send out a pro-forma policy independently. When I was in private practice, I issued a pro forma as an attachment to a letter which said, basically, “A policy in the form attached may be issued when the requirements in Commitment #_____, dated _____ have been satisfied.” My lenders’ counsel friend nails this matter down further by issuing the pro-forma policy as an attachment to the commitment with a note in the requirements section to the effect that upon satisfaction of all applicable requirements, a policy in the form set forth in Exhibit ___ will be issued.

A note to this effect be added to the policy:  “NOTE: This is a Pro Forma Policy. It does not reflect the present state of title and is not a commitment to insure the title or to issue any of the attached endorsements. Any such commitment must be an express written undertaking on appropriate forms.”

The pro-forma policy and all endorsements should be clearly marked “Pro-Forma Specimen” or “Sample” and should not be signed.  Many lawyers have a large “Specimen” stamp to use in these situations. My lenders’ counsel friend told me he actually stamps pro forma policies coming from borrowers’ counsel. Not all lenders’ counsel are that accommodating.

Where the policy date and policy number are requested on the form, supply the note “None”.

These rules are very simple and comply with common sense. A pro-forma policy is not a policy and should be clearly shown in every instance as a sample. Following these very straightforward rules will keep you and your title company out of trouble. And, as always, call you underwriter if you have questions or concerns!

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BBC reports on South Carolina “heirs’ property” saga

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A December 5 article in BBC News Magazine entitled “Gullah Geechee: Descendants of slaves fight for their land”, outlines the struggles of property owners in Jackson Village to save their homes.

Jackson Village is one of three black communities in Plantersville, an unincorporated area of Georgetown County located about six miles north of the Town of Georgetown on Highway 701. The area is described as consisting of neat brick bungalows, set back form the road and protected from Highway 701 by a dense forest.

The BBC article, written by Brian Wheeler, describes 20 homes in Jackson Village being put up for auction because of the failure to pay taxes on a new sewer system. Local authorities apparently required residents to pay for hooking up to the new system because septic tanks were contaminating drinking water and becoming a health hazard. The residents complain that they were forced to pay even if their septic tanks were working well. The cost for each resident is $250 per year for the next 20 years.

Plantersville sign

Photo courtesy of BBC.com

The land is heirs’ property, land that has been passed down through the generations, usually without the benefit of deeds or probated estates. Many heirs’ property owners can trace their roots back to West African slaves who gained property rights during Reconstruction. These owners often allowed their properties to pass through the generations without formalities because they were denied access to the legal system, or because they didn’t understand it or trust it or could not afford it.

Where generations of landowners own property as tenants in common, maintaining ownership can become a risky proposition. All of the heirs own the property, whether or not they ever set foot on it.  Living on the land and paying taxes on it is certainly not a prerequisite.

Many of these properties are in or near valuable coastal areas where developers are eager to gain access.  A developer can buy the interest of one tenant in common to gain the same rights as the tax-paying residents. But distant family members looking for money can also create havoc. Partition actions are instituted, legal fees are incurred, and the result may be that the property is sold quickly and for less than fair market value.

Photo courtesy of Chicago Tribune

Thankfully, our legislature has recognized and addressed this problem. On September 22, Governor Haley signed legislation that honored the memory of Senator Clementa C. Pinkney, a victim of the Mother Emanuel A.M.E. Church mass shooting in Charleston on June 17, 2015. The new law is now known as the Clementa C. Pinckney Uniform Partition of Heirs’ Property Act, and it will become effective January 1, 2017.

The new law requires independent appraisals and open-market sales to ensure heirs receive fair prices. The new act would not prevent sales for the failure to pay taxes as described in the BBC article, but it should make sales begun by developers and distant heirs more impartial and advantageous for all property owners.

The Strange Appearance of Title Insurance Rates on the New Closing Disclosure

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calculator paperIs this what the CFPB intended?

South Carolina closing attorneys are in the throes of their first closings under the new CFPB rules. Title insurance company offices are fielding all kinds of unusual questions as everyone works through their first few sets of documents. And our collective eyes are having difficulty adjusting to the appearance of title insurance rates on the new Closing Disclosure.

Under the filed rates of the title companies in South Carolina, we have a simultaneous issue rate of $100 for a second policy in a transaction. Typically, the owner’s liability amount and premium are higher, so the simultaneous issue rate of $100 is the charge for the loan policy.

The South Carolina Department of Insurance (SCDOI) requires us to disclose the true cost of an owner’s policy over the cost of the loan policy. We have been accustomed to referring to this charge as the “difference plus $100” because we take the difference in the full cost of both policies and add the $100 simultaneous issue fee to arrive at the number the SCDOI requires.

Let’s look at an example:

In a purchase transaction, the sales price is $455,000, and the loan amount is $409,500.  The full premium for the ALTA Homeowner’s policy is $1,290.60, and the full premium for the loan policy is $981.00. In the past, the title and software companies’ rate calculators would have shown:

ALTA Homeowner’s policy rate: $1,290.60 (full premium)
Loan Policy (standard rate): 100.00 (simultaneous issue fee)
$1390.60 (total)

For the SCDOI required disclosure, we would have shown:

ALTA Homeowner’s policy rate: $409.60 (difference plus $100)
Loan Policy (standard rate): 981.00 (full premium amount)
$1390.60 (total)

The total of the two calculations was always consistent.

Now, the CFPB requires that the total cost of the loan policy be disclosed and any simultaneous issue discounts must be shown against the owner’s policy. That’s ok with our South Carolina eyes because we can use our “difference plus $100” calculation to reach the same result.

The problem occurs where there is a reissue credit. While the CFPB never specifically addressed how to handle a reissue credit, the agency was clear that the loan policy premium had to be reflected in full. So most of the title and software companies have decided to take the reissue credit from the owner’s policy premium as well.

In our example, let’s assume that there was a prior ALTA Homeowner’s policy in the amount of $315,000. The reissue credit would be $468.90 (half the full premium for $315,000), so the new total cost would be $921.70 ($1,390.60 – $468.20), and this is where the problem becomes more challenging:

ALTA Homeowner’s policy rate: $ -59.30 ($409.60 minus the credit of $468.90)
Loan Policy (standard rate): 981.00 (simultaneous issue fee)
$921.70 (total)

The total is the same (and correct in our collective view), but notice the negative number as the cost of the owner’s policy.

We have decided in our office to think about it this way. The Closing Disclosure is not a replacement for the HUD-1, and it is not a closing statement. It is simply what it is entitled, a closing disclosure that the CFPB requires for the consumer borrower.

We are going to have to prepare other documents (closing statements, disbursement analyses) that will allow us to properly disburse and to completely disclose each disbursement as required by the SCDOI, not to mention the South Carolina Supreme Court! And our eyes are just going to have to adjust to those negative numbers!

Thanks to Cris Garrick, the IT guru in our office who figured this out and convinced me it’s correct!

Same Sex Marriage Law May Require Tweaks in Title Search Practices

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Males as well as females may change their names.

same sex marriage

On January 1, this blog discussed a South Carolina Department of Revenue Ruling (14-9) that impacts some areas of the real estate practitioner’s world. This Revenue Ruling was issued following the United State Supreme Court 2014 decision, Obergefell v. Hodges, which made same-sex marriage legal in all fifty states.

The most significant changes to our practices from the Revenue Ruling include:

  1. A same-sex legally married couple may be able to qualify their home for the 4% assessment ratio.
  2. If each member of a same-sex legally married couple owns a residence, only one of those residences may qualify for the 4% assessment ratio since as a married couple they may have only one legal residence.
  3. Transfers of property between spouses of a same-sex couple may now be exempted from the assessable transfer of interest rules.
  4. Transfers of real property from one same-sex spouse to the other will now be exempted from the deed recording fee.

Now that dirt lawyers have had a chance to think about how same-sex marriage may otherwise impact our practices, some of us have come to the conclusion that title examiners should now take into consideration name changes for men as well as women. This change in practice may affect every title examination for individuals holding title since 2014.

hello my name isWe have always cautioned that a woman who holds title with two surnames, should be searched under both names. For example, Hillary Rodham Clinton should be searched as Hillary Rodham and Hillary Clinton.

Now consider the name Neil Patrick Harris. Not knowing whether Patrick is a middle name bestowed by parents at birth or a former surname, consider whether he should be checked by both Neil Patrick and Neil Harris.

Undoubtedly, this extra step will lead to many “false positives” with judgments, tax liens and other public record items. As always, the hits that are uncovered should be addressed by paying them at closing or eliminating them with the use of identifying information such as full names, addresses social security numbers, etc. And, when in doubt, get your title insurance underwriter to take the appropriate leap of faith with you.

Remember that buyers should be checked for judgments and tax liens because those matters will attach immediately when property is purchased. And also remember that purchase money mortgages will take priority over tax liens and judgments against buyers.

Unfortunately, it appears that searching titles isn’t getting any easier over time, despite the use of new and improved technology.  It’s public knowledge and common sense that Caitlyn Jenner should be searched as Bruce Jenner. But I have no advice about similar name changes in title examinations. It’s a brave new abstracting world!

Heads Up Residential Dirt Lawyers: Use Engagement Letters!

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August 1 changes will make them even more important.

Lenders will no doubt be more in control of the closing process when the CFPB rules take effect in August. Several major lenders have announced that they will produce and deliver the borrower’s Closing Disclosure, the form that will replace the HUD-1. This form will be delivered to borrowers at least three business days prior to closing. This change may limit the closing attorney’s involvement with clients early in the closing process.

house parachuteResidential real estate lawyers will need to use engagement letters more than ever to establish that important attorney-client relationship, to explain the new closing environment and to quote fees and costs. These matters are too crucial to leave in the hands of lenders!

Also, a major change in the treatment of owner’s title insurance by the CFPB will require that attorneys explain the importance of the one document in the stack of closing papers that protects the purchaser. An engagement letter sent early in the process is the ideal place for this essential explanation. The closing table may be too late!

The CFPB will require that the full premium, not the discounted simultaneous issue premium, must be disclosed for the loan policy on the CD. The owner’s policy premium will be shown in the “Other” section of the CD and will be reflected as “Optional”.  The cost of the owner’s policy will be the total premium discounted by the cost of the loan policy and adding the simultaneous issue premium.  Some lenders may even show the full premium for the owners and loan policies on page two of the CD and a “rebate” for the discount on page 3. Confusing?  Definitely!

Purchasers strapped for funds may be tempted to skip this “optional” charge. Attorneys will need to explain how title insurance protects their clients. Savvy attorneys realize that owner’s title insurance protects them, too. It has even been suggested that it may be malpractice for an attorney not to recommend owner’s title insurance.

In this environment, I’m providing my dirt lawyer friends with a couple of paragraphs that can be edited to explain the importance of owner’s title insurance in engagement letters:

house protection hands“Title insurance protects the ownership of your home. The purchase of a home may be the largest transaction you’ll make during your lifetime. For a relatively low, one-time premium of $____, you can be protected against legal problems over property rights that could cost thousands of dollars, and even result in the loss of your home.

Lender’s title insurance is required for this transaction, but it does not protect your equity. You must purchase owner’s insurance for that valuable protection. We will perform a title examination for you, but the most thorough and competent title examination cannot protect against loss from hidden title defects created by misfiling and misindexing in the public records. Risks not created in the public records, such as fraud and forgery, are also covered by title insurance. Dollar for dollar, an owner’s title insurance policy is one of the most cost effective forms of insurance available to homeowners. I highly recommend that you purchase an owner’s policy and will make it available to you unless you let me know otherwise.”

When the closing process changes, let’s make sure important relationships are established and clients are protected early in the closing process!

Attorney Fakes Title Insurance Documents and Gets Disbarred

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Think you’ve heard it all? Listen to this!

The South Carolina Supreme Court disbarred a lawyer last month for fraudulently producing title insurance commitments and policies.*

By way of background, the vast majority of real disciplinary actionestate lawyers in South Carolina are also licensed as title insurance company agents.  In other parts of the country, lenders receive title insurance documents directly from title companies’ direct operations.  In South Carolina, title companies run agency operations, supporting their networks of agents, almost all of whom are South Carolina licensed attorneys.

Lenders require closing protection letters for closings involving agents.  Stated simply, these letters inform lenders that the insurer may be responsible in the event a closing is handled improperly by the closing attorney.

Title insurance company agents also produce title insurance policies and commitments, following the guidelines of their insurance underwriters, and using software programs designed to support the production of these documents.

Some closing attorneys are not agents but instead act as approved attorneys for title insurance companies. Approved attorneys can obtain closing protection letters from their title companies, but they are not able to issue their own title insurance documents. Instead, they certify title to a title insurance company or to a title company’s agent.

If an attorney cannot provide lenders with closing protection letters, that attorney generally cannot close mortgage loans in South Carolina.

 red card - suitIn 2007, Mr. Davis was canceled as an agent by his title insurance company.**  After that cancelation, he was able to legitimately obtain title insurance commitments and policies through an agent. In 2011, however, Mr. Davis was canceled as an approved attorney.  He didn’t let that fact stop him though. He began to fraudulently produce title insurance documents, making it appear that the title insurance company was issuing closing protection letters, commitments and policies for his closings.  He also collected funds designated as title insurance premiums, but he never paid those premiums to the title insurance company.  He continued to handle closings using fraudulent title insurance documents until his actions were discovered and he was suspended from the practice of law by the South Carolina Supreme Court in 2013. In 2015, Mr. Davis was disbarred.

I suppose I should close by saying don’t do this!  Please!

* In the Matter of Davis, S.C. Supreme Court Opinion 27480 (January 21, 2015)

** In the interest of full disclosure, I work for that company.

Mobile Home Claims Continue

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What do a hurricane, a tornado and a redneck divorce have in common?
Somebody’s fixin’ to lose a mobile home!

Trailer Park Treehouse

That joke may be attributable to Jeff Foxworthy, Lewis Grizzard or some other Southern comedian.  Regardless, a large number of South Carolinians lost mobile homes during the economic downturn, most often as a result of foreclosures rather than the disasters in the joke. Foreclosures uncover title issues that lead to title insurance policy claims. Because our office continues to see mobile home claims on almost a weekly basis, this reminder might be in order for residential real estate practitioners.

When sales and mortgages of real estate including mobile homes are closed, titles to the mobile homes should be retired, and ALTA 7 series endorsements should be issued.

If a title examination reveals a recorded Manufactured Home Affidavit for Retirement of Title Certificate, it is advisable to request from the Department of Motor Vehicles a letter confirming that the title has been placed on the DMV’s list of retired vehicles.

If no Manufactured Home Affidavit has been filed locally, then follow our statutory process to retire the title. The Affidavit requires the owner to:

  • install the home on the real property;
  • remove the wheels, axles and towing hitch;
  • attach proof of ownership (the deed);
  • attach a copy of the certificate of occupancy; and
  • pay the recording fee.

Surrendering the certificate of title to the DMV requires:

  • a filed copy of the Manufactured Home Affidavit from the ROD;trailer duck
  • the original certificate of title with either releases of liens or consents of secured parties;
  • a copy of the most recent tax receipt for the manufactured home; and
  • payment of the DMV fee.

When the title is retired, it is safe to issue an ALTA 7 series endorsement. Your title company will appreciate compliance with these guidelines.

And here’s a practice tip. Our former boss, Nancy Booco, always said, “If it looks like a mobile home, it probably is one.”