From our friends at PPDocs.
March 19, 2020
Clients and Friends,
Re: Texas Title Insurance “Gap” Coverage
In the past couple of days, we have had several clients ask about a new exception that may be appearing in title commitments as a result of the COVID-19 crisis. The exception some lenders may see in Schedule B or C of the title commitment is the following (or something with similar wording):
“The Company reserves the right to make exceptions and requirements prior to and following closing for issuance of a title policy(ies) based upon the specifics of the transaction, the review of the closing documents, and changes in recording and title searching capabilities resulting from the consequences of the COVID-19 pandemic and business and government office closures.”
This exception relates to “gap” coverage, which is typically covered by the mortgage title policy. The period between the time when the borrower(s) sign their loan documents and the actual filing of the deed of trust is commonly referred to as the “gap” period. Even though Texas title insurance rules require the mortgagee title policy to be dated no earlier than the date of the deed of trust, rather than the date of recording or funding (see TDI Bulletin No. 152-July 01, 1980: https://www.tdi.texas.gov/bulletins/1995earlier/152.html ), our current Texas title insurance policy (Form T-2: https://www.tdi.texas.gov/title/documents/form_t-02.pdf ) provides coverage for that “gap” period in Paragraph 14 (emphasis added):
14. Any defect in or lien or encumbrance on the Title or other matter included in Covered Risks 1-13 that has been created or attached or has been filed of recorded in the Public Records subsequent to Date of Policy and prior to the recording of the insured Mortgage in the Public Records.
The Title Company will also pay the costs, attorney fees and expenses incurred in the defense of any matter insured against by this Policy, but only to the extent provided in the Conditions.
Although not contained in the actual policy itself the Texas Short Form Residential Loan Policy of Title Insurance (Form T-2R: https://www.tdi.texas.gov/title/documents/form_t-02r.pdf ) has the same gap coverage protections because it incorporates the provisions of the longer T2 mortgagee title policy:
…HEREBY INSURES THE INSURED IN ACCORDANCE WITH AND SUBJECT TO THE TERMS, EXCLUSIONS, AND CONDITIONS SET FORTH IN THE LOAN POLICY OF TITLE INSURANCE (FORM T-2) PRESCRIBED BY THE TEXAS COMMISSIONER OF INSURANCE AND IN EFFECT AT DATE OF POLICY, ALL OF WHICH ARE INCORPORATED HEREIN.
Typically, the “gap” period the title company is insuring is only a few days. Accordingly, the risk is considered acceptable and insurable. If recording offices start closing due to the Coronavirus pandemic, however, that previous relatively short period of exposure may become longer and the associated risk not acceptable to title insurers. In an effort to shift that risk from the title company to the lender, title companies may request to start adding the above-exception to lender coverage in their mortgagee commitments/policies.
It will be a business decision for the lender whether to accept this exception in the mortgagee title policy, but the risk could be considerable. The above exception is very broad. In our view, the FNMA and FHMLC Selling Guides do not permit this type of exception in the mortgagee title policy. Although we do not yet know, we doubt it would be acceptable to most other investors either.
Accordingly, we recommend our clients carefully review title commitments they receive going forward to ensure that the above exception or something similar is not included in Schedule B or C. If a client does see this exception in their title commitment on a secondary market loan, we strongly recommend obtaining investor approval before proceeding. For portfolio loans, it will be a business/risk decision whether to accept this exception in the mortgagee title policy.