Lately, there’s been a buzz around the new Fannie Mae and Freddie Mac selling guidelines that allow an attorney opinion letter (“AOL”) to replace title insurance (a “Loan Policy”), sparking debates over the benefits and coverage of each option.
One cannot make a direct comparison between the two because they are two different products, and the format or content of an AOL may widely differ from one to the other. However, the two products are intended to have the same bottom line of protecting the residential mortgage lender from a defective title. This article provides a high-level look at the coverages and costs of each in Texas.
The form of Loan Policy, the preliminary title commitment, and the activities which a Texas title company can engage are strictly regulated by the Texas Department of Insurance (“TDI”) under the Basic Manual for Rules, Rates, and Forms for the Writing of Title Insurance in the State of Texas (the “Regulations”). Although regulated as to broadness, title companies may insert such special exceptions to the Loan Policy “as shall develop from the examination of the title under consideration.” But such special exceptions “shall in all cases specifically describe the particular item(s) excepted to, and shall not be general in its terms.” (See Procedural Rule P-5 of the Regulations). So, title companies have discretion in including special exceptions to titles, but they cannot modify the policy form.
Conversely, AOLs are unregulated as to form and content. Fannie Mae has set forth its criteria for AOLs in its Selling Guide / Part B: Origination Through Closing / Subpart B7: Insurance / Chapter B7-2: Title Insurance / B7-2-06, Attorney Title Opinion Letter Requirements (and I refer the reader to that section for more details). But of importance, such criteria include that the attorney title opinion letter must: “… provide the following statement: We [I] agree to indemnify you and your successors in interest in the [mortgage] [deed of trust] opined hereto, to the full extent of all losses attributable to a breach of our [my] duty to exercise reasonable care and skill in the examination of the title and giving of this opinion ….” (the “Indemnity Paragraph”).
The premium (“Premium”) for a Loan Policy is set by the TDI on a promulgated schedule. Pursuant to Texas law, the Premium covers the charge for: “(A) title examination and closing the transaction, regardless of whether the examination or closing is performed by an attorney; and (B) issuing the policy.” Tex. Ins. Code Ann. § 2501.003. So, the Premium is an all-inclusive premium covering services beyond just the price of the insurance coverage. There is no separate charge for the title search, abstract of title, title examination, or title commitment. They are all rolled into the promulgated Premium. However, it is important to note that under the Regulations, if a title company is simultaneously issuing an Owner Policy of Title Insurance in the same transaction where they are issuing a Loan Policy, the Premium for the Loan Policy is $100.00.
The cost of an AOL is negotiated between the attorney providing the AOL and the recipient of the AOL. In order for the attorney to examine the title to render the AOL, the attorney must either make a search of the applicable real property records or obtain a title search and abstract of the title from a third party. So, the attorney’s fee may or may not include the added costs of the title search and an abstract of the title.
Title companies cannot do business or issue title policies unless they are first licensed by the TDI. To simply write an AOL, an attorney must be a licensed attorney in Texas. However, if the AOL includes the Indemnity Paragraph as required by Fannie Mae, that may constitute writing title insurance in Texas requiring a license from the TDI. See: Tex. Ins. Code Ann. § 2501.003.
The Loan Policy protects the insured lender from title defects reflected by the public real property records (and not excepted to in the Loan Policy) and it also protects the insured lender from forgery, fraud, undue influence, duress, incompetency, incapacity or impersonation, and failure of any person or entity to have authorized a transfer or conveyance; all of which are difficult if not impossible to ascertain from an examination of the title. Generally, an AOL will not protect the lender against such off-record matters.
Fannie Mae also requires that the attorney providing the AOL must “… be insured against malpractice in rendering opinions of title in an amount commonly prevailing in the jurisdiction, taking into account the volume of opinions rendered by the attorney.”
That raises another distinction between the two products. The Loan Policy is an insurance policy itself with the insuring title company having direct liability to the insured under the Loan Policy. Albeit a Loan Policy is an indemnity policy, it nevertheless obligates the insuring title company to provide a defense to the insured in the event a title claim arises (or pay the insured the full amount of the insurance under the Loan Policy). The cost of such defense borne by the title company is outside of the insurance limits of the Loan Policy. Most AOLs do not obligate the issuing attorney to provide a defense. Under some AOL products, the underlying malpractice or errors and omissions insurance may allow the lender to make a claim directly to the underlying insurer and it may call for providing a defense to the lender, but the cost of such defense may reduce the overall coverage under the attorney’s insurance policy.
Other issues to address are the Texas statutes of limitations for malpractice, negligence, and breach of contract. Under an AOL, the ability of the lender to seek redress from the issuing attorney may be barred two or four years from the time the lender knew or should have known of the title defect. As to title defects reflected by the public record, the limitations period commences upon the date of delivery of the AOL to the lender.
A Loan Policy remains in force for as long as the indebtedness secured by the insured lien remains outstanding and the coverage of the policy “shall continue in force as of Date of Policy in favor of an Insured after acquisition of the Title by an Insured or after conveyance by an Insured, but only so long as the Insured retains an estate or interest in the Land, or holds an obligation secured by a purchase money Mortgage given by a purchaser from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title.” No statute of limitation restricts that duration.
Each lender will have to determine which product is best for them while keeping in mind that under the Fannie Mae guidelines and for the life of the loan “ … Lenders continue to be responsible for all warranties related to title, marketability, and lien position ….” (See: Selling Guide / Part A: Chapter A2-2, Contractual Representations and Warranties/A2-2-07, Life-of-Loan Representations and Warranties (08/02/2023) /Life-of-Loan Exclusions: Clear Title/First-Lien Enforceability.) To make that decision, lenders need to understand the differences between the two products, the protections afforded under each, and the duration of the protections.
Jay Beitel is a principal at Polunsky Beitel Green, a Texas-based mortgage law firm.
Questions about this memo can be addressed to Jay at jay.beitel@mortgagelaw.com. Please note that our firm is available for all services and issues relating to residential mortgage lending. Our team can be accessed through www.mortgagelaw.com/our-team.