Tuesday, July 15, 2008

Anti-predatory lending database

Since July 1, real estate transactions in Cook County have been subjected to a little added bureaucracy thanks to the Illinois General assembly. On that date, the predatory lending database program commenced. This new law (which is actually an older law redux) requires a certificate to be attached to every mortgage presented for recording. The certificate must either state that the mortgage is in compliance with the program or that it is exempt from the program. Without either an exemption certificate or a compliance certificate, the mortgage is not recordable.

The stated purpose of this program is to reduce instances of predatory lending through increased awareness by borrowers of loan terms. Perhaps this explains why the law was added to the Residential Real Property Disclosure Act and not the Mortgage Act or the Residential Mortgage License Act.

As stated, a mortgage must have a certificate attached to be recordable. Whether the exemption certificate is appropriate or whether the compliance certificate is required depends on when the application was taken, who originated the loan, the type of loan, and the type of property. The following factors would permit the use of a certificate of exemption:

  • The application was taken prior to July 1, 2008.
  • The loan was originated by an exempt entity. An exempt entity is one that is not required to be licensed under the Residential Mortgage License Act.
  • Commercial, vacant, or mixed use property.
  • Property containing more than 4 residential dwelling units.
  • Investment property (non-owner occupied).
  • Government property.
  • The loan is a reverse mortgage; or a home equity line of credit not made with a new first mortgage.

All other mortgages will require a certificate of compliance.

So far, there has been little or no experience with the production of compliance certificates simply because of the recent inception date for the program. The closers at Prairie Title report that the process of generating exemption certificates is quite straight forward; and has not been time-consuming. Of course, as more compliance certificates are required, the database will certainly become increasingly burdened. This may result in significantly more time needed to complete closings. Data requirements for compliance certificates are far more extensive.

Because of the increased duties and potential liability imposed on settlement agents, many are charging additional fees or increasing their closing fee for Cook County transaction. Although this may be justified, Prairie Title has decided against assessing any extra costs upon the parties to the transaction at this time. We believe that to fairly determine the impact on our processes and procedures, we need the experience of working under this new program for a while. It is our hope that the database will work so flawlessly and efficiently that no additional charges will ever be necessary. Nonetheless, by working with the program for a while, we will be confident that our fees will be appropriately reflective of the burdens and responsibilities imposed upon us by this new law.

Wednesday, July 9, 2008

F. Y. I. on the J. L. P.

Many lenders are opting for the Junior Loan Policy (“JLP”) as opposed to the standard ALTA loan policy for their second mortgages and home equity lines of credit (“HELOC”). The principal reason is cost. In competing for borrowers, junior lenders regularly assume all costs associated with these loans. A JLP is significantly cheaper than a standard ALTA loan policy; and, hence, its popularity.

Not surprisingly, however, with the lower cost comes reduced coverage. Care should be taken in deciding in favor of a JLP and lenders should be aware of the limitations on title insurance protection associated with this policy. While certainly appropriate for most junior loans, the expectations of many insured’s may be higher than the coverage actually delivered.

The basic insuring provisions of the JLP provide coverage for loss or damage sustained by reason of only the following:

  • The grantee on the policy is not the same person as the grantee on the last recorded document purporting to vest title;
  • The land described in the policy is not the same as that described in that same document;
  • Any monetary lien recorded in the public records before the date of the policy which affects title;
  • Ad valorem taxes or assessments imposed by governmental taxing body constituting a lien on the property and which appear on the official public record of where the land is located.

The JLP also provides coverage over costs of defense, but only to the extent that the insurer does not exercise options under the policy to pay or settle thereby terminating its obligation to defend.

It is most important to note that a JLP does NOT insure that the subject mortgage constitutes a valid lien on the property. The first “exclusion from coverage” on the policy itself states: “Any invalidity, unenforceability or ineffectiveness of the insured’s mortgage.”

This means that the lender is on its own with respect to the documentation it utilizes to create its lien. It should quickly be added, however, that given the extent of standardization in such documents, any concern over validity of the lien is not great. Nonetheless, no coverage exists, even for the very rare instance.

In conclusion, the JLP is a very economical alternative to a full ALTA loan policy for seconds and HELOCS. However, lenders must be aware of the limitations on the coverage provided which underlie the low cost.