Fast Fading Creditors’ Rights Coverage
The American Land Title Association (“ALTA”) Board of Governors decided, by unanimous vote, to withdraw and decertify the creditors’ rights endorsement (ALTA Form 21-06) for owner’s and lender’s title insurance policies, effective March 8, 2010. The creditors’ rights endorsement insures against loss or damage arising from “the voidability of any estate, interest, or Insured Mortgage because of the occurrence on or before [the] Date of Policy of a fraudulent transfer or a preference under federal bankruptcy, state insolvency, or similar creditors’ rights laws.” The ALTA 2006 form of owner’s and lender’s title insurance policies (the “ALTA 2006 Policies”) insure against, among other things, loss or damage arising from fraudulent or preferential transfers in all prior transfers except the actual transfer insured by such policies (the “Insured Transfer”), and the creditors’ rights endorsement fills the gap in such coverage by insuring against loss or damage caused if the Insured Transfer itself is challenged as a fraudulent transfer or preference.
The decision of the ALTA Board of Governors to withdraw and decertify the creditors’ rights endorsement does not modify the coverage under the ALTA 2006 Policies for loss or damage arising from prior transfers. However, the decision calls into question the availability of affirmative creditors’ rights coverage for the Insured Transfer. Although title companies may continue to provide affirmative creditors’ rights coverage for the Insured Transfer in the form of an endorsement acceptable to the title companies, several of the major title companies have announced that they will not issue creditors’ rights coverage for the Insured Transfer under any circumstances. Others remain willing to do so, but only on a case by case basis, with each case carefully scrutinized and subject to tough due diligence that generally will require, among other things, an appraisal.
Likely as a result of the ALTA decision, Fannie Mae announced last week that it will no longer require creditors’ rights endorsements in its policies. As a major player in the secondary mortgage market, Fannie Mae’s decision will relieve some of the pressure that the title companies will face over the next several months to continue providing some form of creditors’ rights coverage.
If you have any questions concerning this Legal Update, please feel free to contact any member of our Real Estate Group in Chicago at:
Pircher, Nichols & Meeks
900 North Michigan Avenue
Chicago, Illinois 60611
The PN&M Legal Update is published as a service to our clients and friends. It is intended to provide general information and should not be acted upon without first obtaining professional advice appropriately tailored to your individual needs.