by Clifford L. Morgan
The ALTA® Short Form Residential Loan Policy is an excellent title insurance product that results in considerable work hour savings for both title personnel and the insured lender. It contributes to a much greater level of efficiency for lenders, which ultimately equates to real dollar savings. This is a very simple one page policy that provides much better coverage than the “base” 1992 ALTA® loan policy. For these reasons alone one wonders why lenders have not been charging the gates to obtain this policy for virtually all of their residential one to four family and condominium loans.
This policy first came into being as an ALTA® form at the ATLA convention in 1988. Notwithstanding the fact it was immediately approved by both Fannie Mae and Freddy Mac, it has had varying levels of acceptance in the lender community over the last 15 years. This type of policy is currently available in all 50 states and the District of Columbia. It is used more widely today than before, but greater use is foreseeable.
It is possible such slow acceptance is due in large part to the title industry failure to do a better job of educating itself and lenders as to the policy’s benefits. While it may be true this policy form was introduced ahead of its time, its time has come. The short form policy is perfect for fulfilling lenders needs in the current refinance market when shortened delivery times and increased efficiencies in process mean everything.
The Short Form policy is an abbreviated short form version loan policy, incorporating by reference all the provisions of the 1992 ALTA® loan policy. Additional coverages have also been added. Nine ALTA® endorsement coverages most commonly required by residential lenders Fannie Mae and Freddy Mac are incorporated by reference. These endorsement coverages are self effectuating without checking a box. While it is possible for an insurer to print this policy in such a way to require checking a box in order to incorporate specific endorsements, that is not the most desired method. The ALTA® endorsements incorporated by reference include the Form 4 and 4.1 (Condominium), 5 and 5.1 (Planned Unit Development), 6 (Variable Rate), 6.2 (Variable Rate Negative Amortization), 7 (Manufactured Housing), 8.1 (Environmental Protection Lien), and 9 (Restrictions, Encroachment and Easements). Regardless of whether the endorsements are automatic or activated by checking a box, there is no need to attach the endorsements. This is a very important benefit.
Blanket generic preprinted exceptions are taken in Schedule B. These exceptions relate to taxes, covenants, conditions and restrictions, easements, and mineral rights. These types of exceptions are generally accepted by lenders and the secondary mortgage market. The policy then provides special coverage relating to most of those exceptions and in addition provides excellent affirmative survey coverage. This is not done by the 1992 ALTA® loan policy usually issued to lenders.
Any title defect, lien, or encumbrance that does not fall within any of the generic exceptions and is not cleared in the settlement process can be shown as an additional exception to coverage by attaching an addendum specifically designed by ALTA® for this purpose. Rarely is it necessary to take additional exceptions when dealing with residential properties.
Let’s look more closely at some of the significant benefits of this type of policy.
Standardization. As the name of the product suggests, this policy is specifically designed for one to four family and condominium residential improved properties. The preprinted language and product underwriting was formulated by ALTA® for this type of transaction. This provides greater flexibility in offering better coverage as part of the standard policy provisions.
This is true as to insuring clauses, exceptions to coverage, and incorporated endorsements. The fact that all this is preprinted means the insured lender will always see the same language and need not worry about varying levels of coverage because of differences in language.
With more and more lenders centralizing their loan processes they want to see standardized products. This makes their life easier and their processes faster.
Speed to Delivery. The Short Form policy takes very little time to prepare, relatively speaking, and was designed to be issued at the closing. The legal description and specific title exceptions need not be typed or keyed. Endorsements don’t have to be located, generated, and attached. There is no need to wait for confirmation of recording of the insured mortgage or to obtain recording information. The policy automatically covers any gap between the time of closing and date of recording. Again, something other policies don’t do.
Reduced Post closing Review Time. Lenders pay employees to review title policies when they arrive. They spend a considerable amount of time making sure legal descriptions and other policy components match up. They check to see that appropriate endorsements have been attached and that the title exceptions taken match their instructions. The form of this policy significantly reduces the need for much of that.
The lion’s share of this product is preprinted. Therefore the need for proofreading is very limited. The legal description automatically matches the legal used in the mortgage, because this policy by its preprinted terms adopts the legal description of the insured mortgage. This further reduces room for error and the need for proof reading. When a lender orders the Short Form policy, the title exceptions virtually always match instructions because preprinted standardized language is used. The lender doesn’t need to check the exceptions taken in the policy against this closing instructions.
There are only 13 very limited items of information that must be inserted in this policy. The information deals with such things as the amount of insurance, loan number, borrower’s name, property address, etc. In nearly all cases the endorsements required by lenders are automatically included in the policy. There are, therefore, no endorsements to attach. This further eliminates room for mistakes and reduces post closing review time. Real savings for lenders performing post closing review.
Cost Reduction. Since lenders don’t need to spend nearly as much time in proofreading, checking for missing endorsements, matching title exceptions to instructions, and following up for corrections and missing items, there are actual cost savings to be realized in reduced personnel time, phone calls, and waiting. Greater efficiency translates into significant savings.
Error Resistant. This policy goes a long way in providing the lender with a finished product that is accurate and includes the coverage lenders desire. One of the biggest challenges the title industry has faced is to reduce room for mistakes in issuing policies. It is beneficial to neither the title industry nor lenders when policies are issued with typographical errors and missing endorsements. The Short Form policy can provide a lender everything it has requested—the first time.
The Short Form policy is a great product. It is up to us in the title industry to educate our customers on how our products can better serve their needs. In the process we will also help ourselves.
Cliff Morgan is senior vice president, underwriting/new product development, for First American Title Insurance Company in Santa Ana, CA. He is chair of the ALTA® Title Insurance Forms Committee and a member of the ALTA® Committee on Indian Land Claims. He can be reached at 714 647 4405 or email@example.com.