June 2009 Vol. 2, No. 6

Procedural Update

Mortgagee Construction Policies

ATG members are frequently asked to insure construction loans. ATG prefers that members use the ALTA Mortgagee Policy - Construction (MPC) to insure mortgages where the proceeds are used to fund construction or improvements. The following is an explanation of ATG's requirements to issue MPC policies. The MPC provides coverage to lenders for problems that can occur during construction. The MPC jacket provides the same coverage as a Mortgagee Policy (MPA) jacket, with the exception that mechanics' liens and later disbursements of funds are not covered under the policy. When the mortgage and note are signed and recorded, you immediately issue the MPC policy to the lender.

To provide coverage for mechanics' liens and later disbursements, at each disbursement of funds for the construction add a Construction Loan Disbursement Endorsement to the MPC policy. This endorsement extends the effective date of the policy and adds coverage for mechanics' liens and the later disbursement up to the amount and date of the later disbursement. Subsequent such endorsements may be issued as the construction project proceeds and construction escrow funds are disbursed. The result is a policy that provides very specific coverage to lenders, and that requires time, attention to detail, and expertise on your part. There are certain threshold requirements you must meet to issue an ATG MPC:

  1. ATG allows access to MPC jackets only to those members who are on an Approved List of members who have experience in construction matters. To become approved, please call the Underwriting Department. We will explain the required procedures and send a construction loan packet of forms to begin the approval process. Then we will co-examine every step of your first project.
  2. The member attorney and staff must have well-defined procedures to review general contractors' sworn statements, lien waivers, and the other documents involved. The construction loan packet and the Underwriting Department's approval process will instruct your office in these procedures.
  3. No ATG member has authority to run construction escrows, unless the following conditions are met: (1) the member has received underwriter approval for the escrow, in writing, and (2) the member uses ATG forms. Members who violate this rule are strictly liable to ATG for all loss or damage suffered by ATG from the establishment or administration of the escrow, including mechanics' lien claims. See ATG Regulation No. 5 (Illinois/Indiana or Wisconsin) in your Member Handbook for reference to the rule.
  4. In addition, if your proposed MPC equals or exceeds $3 million in insurance, you must obtain both ATG and reinsurance approval in writing to issue your commitment. If you have such a project, be sure to call the Underwriting Department before issuing your commitment to receive instructions on how to obtain approval.

At the beginning of the project, you must gather a number of documents from the parties to set up the insurance, and the escrow, if applicable. The commitment and the MPC will show the full amount of the construction loan as the amount of insurance. At the time of the first draw and for each subsequent draw, you will amend the policy by issuing a construction loan disbursement endorsement. The endorsement brings the policy coverage up to the date of the last disbursement and the amount of the last disbursement. To issue it, you must conduct a date down title search, obtain a certificate from the architect or engineer that the work is in place, establish that the loan is in balance, and obtain and review contractors' and subcontractors' sworn statements and lien waivers.

Members must follow these procedures at each draw with the exception that an additional surveyor's certificate must be obtained any time there is further foundation work and prior to the final draw. Upon satisfaction of the above requirements, you may prepare and deliver the disbursement endorsement to the lender.

At the time of the final draw, you must obtain some final assurances, similar to those collected for each draw. Upon delivery of the final disbursement endorsement, the lender has the option of converting the MPC to an ALTA Loan Policy (MPA) if the same lender is providing the end loan. An MPA replacement policy can be issued to the construction lender for the same premium as for a concurrent policy as long as the MPA is in an amount less than or equal to the MPC.

If you have any questions regarding these requirements, or problems arise during the construction project, please do not hesitate to contact theATG Underwriting Department,legal@atgf.com, 217.403.0020, or 312.752.1990.

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[Last update: 5-27-10; original date: 6-17-09]