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.