On February 3, 2010, the Board of the American Land Title Association (“ALTA”) voted to decertify the existing ALTA Endorsement Form 21-06 (Creditor’s Rights). Almost immediately, two of the largest title insurance underwriters, Fidelity National Title Group (including its subsidiaries Chicago Title, Fidelity National Title, Ticor Title, Lawyers Title, Commonwealth Land Title, Security Union Title & Alamo Title) and First American Title Insurance Company changed their underwriting policies to no longer issue the Form 21-06 or to provide any other coverage for claims arising from bankruptcy or insolvency within the insured transaction. Stewart Title Guaranty is reviewing its underwriting policy in light of the decertification by ALTA. At this time, Old Republic National Title Insurance Company will continue to issue the endorsement, however, it will now charge a financial review fee related to its due diligence prior to issuing the endorsement which is separate from the endorsement’s premium. As was the case prior to the decertification of the endorsement by the ALTA, due to the risk involved for the underwriter, the issuance of the endorsement is not guarantied and should not be expected in all cases.
The Creditor’s Rights endorsement is often requested by lenders to provide coverage for claims arising from the insolvency or bankruptcy of a party in the transaction. It arose when the 1992 form of ALTA policy created a new exclusion from coverage for insolvency or bankruptcy in the chain of title. The 1970 form was silent on the issue. The 2006 policy, in use today, scaled the exclusion back so that it only applied to the current transaction and did not provide exclusions for bankruptcy or insolvency in the chain of title. The current loan policy excludes coverage for “[a]ny claim, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws, that the transaction creating the lien of the Insured Mortgage, is (a) a fraudulent conveyance or fraudulent transfer, or (b) a preferential transfer for any reason not stated in Covered Risk 13(b) of this policy.”
Without the ability to obtain the Creditor’s Rights endorsements, lenders need to perform more of their own due diligence prior to loan closing. Transactions which deserve extra scrutiny are those (i) where less than 100% of the loan proceeds are used to purchase or refinance the property or construct the improvements; (ii) between related parties; (iii) where the consideration does not appear to be market or includes something other than cash consideration; and (iv) where the seller appears to be insolvent or a bankruptcy matter is currently pending. In cases where a lender would have previously requested the Creditor’s Rights endorsement, lenders should consider requiring, as a condition of loan closing, its borrower and borrower’s seller to execute an affidavit addressing the nature of the transaction, their solvency and the flow of funds.