The Creditor's Rights Endorsement is Going, Going, Gone!

Effective March 8, 2010, the American Land Title Association (ALTA) with its ALTA Form 21-06 Creditor's Rights Endorsement. Major title companies such as Fidelity National Title Group, Chicago Title, First American and Lawyer's Title, among others, have followed suit. Several state Departments of Insurance are also rejecting any policy form that provides this type of coverage and the California Land Title Association has also decertified its comparable endorsement.

Furthermore, title companies will no longer be willing to delete the creditor's rights exclusion from their policies or otherwise modify their policies to dilute this exclusion.

Buyers and lenders, especially lenders, liked to request this endorsement to protect against losses they might incur if, prior to the transfer date, there was a fraudulent transfer or other voidable preference under the federal bankruptcy laws, state insolvency laws or other similar laws affecting creditor's rights. By providing this endorsement, the title company would bear the burden of defending the insured party against a creditor's claim trying to void the transfer, including attorney's fees and other costs of defense.

A transfer of property will typically be upheld despite a creditor's attempt to set it aside if fair value was paid. However, in today's unstable real estate market, who can say what is fair value? The numbers are all over the place.

What this means for a buyer or lender is to not skimp on the due diligence. Check out the stability of the seller, how much risk is there of a bankruptcy filing or receivership? What evidence does the buyer have to document that the purchase price was appropriate and fair. Buyers, are you tempted to take advantage of a troubled seller and get a real bargain? Think twice about doing so, it could come back to bite you and the consequences are severe; you lose out on title to the property.

There may be a handful of title companies that elect to still provide the coverage, but the underwriting standards will be stringent and the premium cost will be high.