Volume 6 Number 1

 

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Title Tips by Tute

Volume 6, Number 1

Dear Readers: 

    Tute's record keeping, or lack thereof, leads to a small uncertainty as to the placement of this missive.  According to Tute's internal filing, it didn't exist.  According to a paper copy of the publication, it, this letter and what is noted as Volume 5, Number 2, appeared together in Volume 6, Number 1.  Tute blames this discrepancy on bad sectors on a hard drive - which is why a paper version was required - continuing to number columns as if there were going to be four editions per year (and possibly working on a calendar year while the Association worked on a fiscal year) - and never knowing if there will be two, three or four editions per year.  As is the case with all errors on this site, the blame is entirely attributable to me, the credit for the wonderful question goes to the reader, and the vehicle is courtesy of the Association.  

                                                                Tute 

Dear Tute:

    I have been researching a legal question for sometime and seem to be going in circles. I would really appreciate your help and wisdom in this area. I would like to know if a title company/agent can charge a title commitment fee on a second mortgage either if closed at the same time as a first mortgage, or if closed some time after the closing of the initial mortgage? Also, under what authority is this possible or not possible?

                                                    - A.H.



Dear A.H.:

    The title insurance policy is a contract of insurance. The title commitment is also a contract, preliminary to the policy. In essence, it states that the company will agree to insure the title to property described in the commitment with only the exceptions shown in the commitment, if certain actions are taken. Most commitments are effective for six months, and that is where the commitment fee comes in. It is the consideration paid by the proposed insured to "bind" the title insurer for that period of time. Such binding is necessary because most real estate transactions involve continuing investigations and activity up until the time of closing. Waiting until after closing to examine title would, in the worst case scenario, be too late. In simple contract terms, the company agrees to be held to a specific course of action in exchange for receiving a fee. At the policy stage, the company agrees to insure against loss or damage from the covered risks in exchange for the premium. The commitment fee provides the mutuality of obligation that is necessary to sustain a contract.

    As a matter of practice, each lender in your question is secured by a different deed of trust. Each policy will insure a different priority. The requirements for the two commitments would not be the same. The exceptions would not be identical. There may be other transactional considerations that would lead to the use of separate commitments.

    The ALTA title insurance commitment form appears to allow the insurer to commit to up to three transactions at one time, as it has blanks for an owner's commitment, a lender's commitment, and an "other." To the extent that the transaction is "simultaneous" and is for the same customer (buyer/borrower), it would make sense to charge only one commitment fee.

    If the second transaction closes simultaneously, but creates additional liability for the company, that policy would require payment of a separate premium. Take for example, an owner's policy for $100,000, and a simultaneous purchase money loan policy for $90,000. These create parallel liabilities.

    In the event of the borrower's default and a total failure of title, the insurer would have to pay the $100,000 only once, $90,000 of it to the lender, and the balance to owner. If, on the same transaction, the company insured a second deed of trust in the amount of $40,000, its outstanding liability would be at least $130,000. If, on the same transaction, the company insured a leasehold tenant and a leasehold lender, then there would be two owners to be compensated, two lenders (or three if you're keeping count).

    That means that the company would enter into contracts with possibly five prospective insureds. As each has a different interest to be insured, and different requirements to get there, it might be possible to collect five commitment fees, but two or three seems more reasonable. Remember the old saying, "pigs get fat, but hogs go to slaughter" and don't be too greedy.

    There was a considerable stink several years back on the question of "silent seconds" and how they violated lender instructions. If you are also involved in the settlement of these transactions, please be sure that these second mortgages do not violate the first lender's instructions.

    The primary statute for title agents regarding fees and premium is 38.2-4608. It says:

38.2-4608. Title insurance rates.-

A. Title insurance risk rates shall be reasonable and adequate for the class of risks to which they apply. Risk rates shall not be unfairly discriminatory between risks involving essentially the same hazards and expense elements. The rates may be fixed in an amount sufficient to furnish a reasonable margin for profit after provision for (i) probable losses as indicated by experience within and without this Commonwealth, (ii) exposure to loss under policies, (iii) allocations to reserves, (iv) costs of participating insurance, (v) operating costs, and (vi) other items of expense fairly attributable to the operation of a title insurance business.

B. Policies may be grouped into classes for the establishment of rates. A title insurance policy that is unusually hazardous to the title insurance company because of an alleged defect or irregularity in the title insured or because of uncertainty regarding the proper interpretation or application of the law involved, may be classified separately according to the facts of each case.

C. Title insurance risk rates shall not include charges for abstracting, record searching, certificates regarding the record title, escrow services, closing services, and other related services that may be offered or furnished, or the cost and expenses of examinations of titles.

D. Any title insurance company may issue, publish, and use price schedules for title insurance and for any separate or related services, or schedules setting forth one price covering the risk rate and the charges for any separate or related services.


Note that 38.2-1812.2 requires all insurance agents to keep available in their office a schedule of all their fees and documentation for services rendered , but then exempts certain fees charged by title agents and described in  38.2-4608(c). To the extent that you may charge fees other than the premium, you should keep these two rules in mind.

I hope this helps.


                                                                - Tute 

 

 

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