19.4.7.4 Title Policy Requirements

• A. Schedule A. Schedule A details the coverage provided by the Title Policy.

1. Effective Date. The Title Policy effective date must be the same as the date of HUD’s endorsement of the Note , with end of business day (e.g., 5pm) time of day included where permitted by state and local law. Relatedly, when Project Loan Documents are recorded on the date of HUD’s endorsement of the Note the Title Policy effective date must include a time of day that is at least one minute after the recording of the last recorded Loan Document.

2. Policy Amount. The amount of the title insurance coverage, shown in Schedule A, must be the full amount of the FHA-insured Loan.

Note: For new construction and substantial rehabilitation loans, HUD requires that the Title Policy insure the full amount of the FHA-insured Loan (e.g ., the amount of the Note ); pending disbursement endorsements are permitted if the endorsements are consistent with the requirements of this Section. HUD insures all 223(f) transactions in full at the time of endorsement, thus pending disbursement endorsements are not permitted for 223(f) Title Policies.

3. Named Insureds. Schedule A, number 1 lists the insureds for the Title Policy. Lender “and/or the Secretary of Housing and Urban Development, and their successors and/or assigns, as their interests may appear” must be the named insureds on the Title Policy. No other parties, e.g . , subordinate Lenders, may be named insureds.

4. Estate or Interest in the Land. Schedule A, number 2 identifies the type of estate encumbered by the Security Instrument . The identified estate must be consistent with the Firm Commitment. By statute, Borrower’s estate or interest in the Land must be fee simple or an eligible leasehold. In addition, the Borrower’s statutorily required interest, Schedule A, number 2 must also reference any appurtenant right, including beneficial easements. In such instances, Borrower’s appurtenant right must be distinguished from Borrower’s statutorily required interest (e.g . , “fee simple as to [Borrower’s fee simple or leasehold estate] and easement as to [beneficial easement]”).

5. Vested Title Holder. Schedule A, number 3 identifies the entity that holds title to the Land. Generally, Borrower must be identified as the only vested title holder in Schedule A, number 3. If the Firm Commitment evidences HUD’s approval of an alternative (e.g . , air rights, bifurcated ownership, or public entity held fee subject or joined to the Security Instrument ), the vested title holder in Schedule A, number 3, must be consistent with the Firm Commitment .

6. Insured Mortgage. Schedule A, number 4 describes the instrument(s) that create the mortgage insured in the Title Policy. Both the Security Instrument and the Regulatory Agreement , because it is incorporated into the Security Instrument , must be shown in Schedule A, number 4. The reference to the Regulatory Agreement must state that the Regulatory Agreement is incorporated by reference in the Security Instrument (other legally equivalent phrasing may be used, subject to HUD Closing Attorney approval).

7. Legal Description. The legal description of the Land used in the Title Policy must exactly match the legal description in the Firm Commitment, on the Survey, and in other closing documents except for

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minor stylistic differences or immaterial reference language. Appurtenant interests shown in Schedule A, number 2 may be listed as separate tracts, parts, or other legal equivalent.

• B. Schedule B. Schedule B provides coverage of Exceptions.

1. Standard Exceptions. The Title Policy must not include standard exceptions on Schedule B, unless a standard exception cannot be deleted under applicable state law. Lender and Lender’s Counsel are responsible for requesting deletion of standard exceptions from the Title Policy. Affirmative coverage over these matters is not permitted unless such coverage is the only available mitigation under applicable state law. Standard exceptions, sometimes called general exceptions, include, but are not limited to:

Rights or claims of parties in possession not shown by the Public Records;

• Easements, or claims of easements, not shown by the Public Records;

• Encroachments, overlaps, boundary line disputes, or other matters which would be disclosed by an accurate survey or inspection of the Land;

• General exception for matters shown on survey, or that would be shown on survey;

• Any lien, or right to a lien, for services, labor, or material heretofore or hereafter furnished, imposed by law and not shown by the Public Records (aka mechanic’s liens); and

  • Taxes or special assessments which are not shown as existing liens in the Public Records.

2. Senior Record Exceptions. Schedule B must list items identified by title in the land records. In most jurisdictions, title matters senior to the FHA-insured mortgage are shown on a Schedule B-I. Senior record exceptions must either be approved by the HUD Closing Attorney (in consultation with RC Director pursuant to the criteria in Section 19.4.7.2 above), or extinguished and removed, affirmatively insured over, or otherwise mitigated to the satisfaction of the HUD Closing Attorney and RC Director, as appropriate. No monetary liens may supersede the FHA-insured mortgage, except supplemental loans insured under Section 241, which will be subordinate, and real estate taxes and assessments for current year that are not yet due and payable.

3. Project Survey Exception. While the general title exception for survey matters is prohibited (see Section 19.4.7.2.A, above), minor survey matters expressly noted by the surveyor (e.g . a specific fence encroachment not affecting Borrower’s use of or liability for the Land) may be listed as exceptions from coverage in Schedule B, subject to RC Director approval, which may require affirmative coverage if available under state law.

4. Subordinate Record Exceptions. In most jurisdictions, matters subordinate to the Security Instrument are shown on a Schedule B-II.

   • The UCC-1 Financing Statement recorded as a fixture filing in the real estate records of the Property jurisdiction must be shown in Schedule B as subordinate to the Security Instrument .

Note: HUD does not require that the UCC-1 Financing Statement filed with the Secretary of State, or legal equivalent, in the Borrower’s organizational jurisdiction be shown on Schedule B.

• If the Firm Commitment authorizes secondary financing, either from a governmental or private source, secured by a subordinate lien on the Project, such lien(s) must be shown in Schedule B as subordinate to the Security Instrument.

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5. Record Exceptions that Appear to Violate Federal Law or the Regulatory Agreement. Exceptions that appear to violate Federal law or the Regulatory Agreement, in whole or in part, must be extinguished as a matter of record and removed from the Title Policy, except where determined by the RC Director to be impossible or impracticable. If removal is impossible or impracticable, the HUD Closing Attorney will request that the Title Policy or the title company state that the conflicting provisions are unenforceable.

C. Affirmative Coverage (Endorsements) and Deletions to the Title Policy. The Title Policy must include the affirmative coverage (coverage added to the standard policy) and deletions listed below, and any other coverage required by the RC Director and the HUD Closing Attorney, except where prohibited by applicable state law.

1. Affirmative Coverage, Endorsements. Affirmative coverage extends the insurance provided through the Title Policy by covering additional risks of loss or damage. Affirmative coverage is added to the Title Policy by annotation (e.g., notation of additional coverage directly on a schedule), or through the title company’s issuance of standard form endorsements. The affirmative coverage listed below is generally required. When a specific ALTA endorsement number is listed but not available in the Project jurisdiction, the HUD Closing Attorney may accept a state approved endorsement bearing a different form number, or alternative affirmative coverage, provided that the coverage is substantially similar. The RC Director, HUD Closing Attorney, and Lender are each permitted to require additional affirmative coverage not required by this section based on the specific characteristics of the transaction.

   • Comprehensive Coverage over Restrictions, Encroachments, and Minerals. ALTA Endorsements 9, 9-06, 9.7-06, 9.10-06 (also known as the Series 9, Comprehensive Endorsement, or Comp 9 ), as applicable, to provide affirmative coverage related to mortgage divestment, and violations of restrictions, encroachments, and minerals. In many jurisdictions, the comprehensive ALTA 9-06 is intended for use with improved residential property but may also be issued for unimproved property (e.g., new construction on vacant land). Other jurisdictions have authorized issuance of a series 9 endorsement specifically for unimproved property.

Note: Most of the ALTA series 9 endorsements specifically exclude certain Schedule B matters. For that reason, other affirmative coverage (notation or other endorsement) will be required to extend coverage over such items in Schedule B, as determined necessary by the RC Director and HUD Closing Attorney.

• Private Rights. ALTA Endorsement 9.6.-06 – Loan Policy, to provide affirmative coverage against loss or damage resulting from options to purchase, rights of first refusal, rights of prior approval, and other private charges or assessments.

• Deletion of Arbitration. The Title Policy must provide affirmative coverage that deletes Condition 13 of the ALTA jacket policy (arbitration). There is no published ALTA form number for this endorsement.

• Zoning. ALTA Endorsements 3.1-06 (completed structure/improved land), or 3.2-06 (construction/unimproved land), as applicable, when Lender elects to use a zoning endorsement as the requisite evidence of zoning compliance. See Instructions to Opinion of Borrower's Counsel (form HUD-91725M-INST). When the ALTA 3.2-06 is used, the plans and specifications

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reference must be consistent with the Firm Commitment and the Building Loan Agreement ( i.e. , the referenced plans and specs must be consistent with the HUD-approved version).

• Environmental Protection Lien. ALTA Endorsement 8.1-06, to provide coverage related to lien priority of the Security Instrument vis-à-vis environmental protection liens as defined in the endorsement. “None” should be inserted after the colon (:) in the endorsement paragraph (b). If any environmental protection liens are listed by title in paragraph (b), the HUD Closing Attorney must consult with the assigned HUD Environmental Officer.

Note: ALTA Endorsement 8.2-06 is not an acceptable alternative as it applies to commercial property.

• Leasehold. ALTA Endorsement 13.1-06 to provide additional coverage when the Project is secured by a HUD-approved ground lease.

• Access and Entry. ALTA Endorsements 17-06 (direct access), 17.1-06 (easement access), as applicable, to provide affirmative coverage related to property access and entry. The access endorsement must be consistent with the point(s) of access depicted on the Survey.

• Tax Parcels. ALTA Endorsement 18-06 (for Land consisting of a single parcel) or 18.1-06 (for Land consisting of multiple tax parcels or Land that includes insured easements), as applicable, to provide affirmative coverage related to tax parceling risk.

  • Contiguity. ALTA Endorsements 19-06 and 19.1-06, as applicable, to provide additional coverage for Projects with contiguity risks (e.g . , multiple or adjacent parcels, or beneficial easements).

• Same as Survey. ALTA Endorsement 25-06 or 25.1-06, as applicable, to provide coverage related to non-objectionable inconsistencies between the record legal description (Land in Schedule A) and the boundaries identified on the Project’s survey. The survey reference in the endorsement must be consistent with the date and number revision of the HUD-approved Survey.

• Policy Authentication, Electronic Signature. ALTA Endorsement 39-06, as applicable, to ensure coverage when the Title Policy will be issued electronically or without wet-ink signatures.

• Pending Disbursements. ALTA Endorsements 32-06 and 33-06, to provide alternative coverage when the title company will only insure a new construction or substantial rehabilitation loan by deleting Covered Risk 11(a) (mechanic’s lien coverage) during the construction of the Project. HUD only permits deletion of Covered Risk 11(a) and pending disbursements title coverage for loans closed as new construction/substantial rehabilitation Insurance of Advances . Pending disbursements coverage is prohibited when HUD insures the total Loan amount at endorsement (e.g . , 223(f) projects with Expanded Work, see Section 19.6.1.9) or where mechanic’s liens relate back to the start of construction pursuant to state law.

• Easements and Encroachments. ALTA 28 Series Endorsements, as applicable, when easements or encroachments are shown on survey and listed as senior to the Security Instrument in Schedule B.

• Minerals and Other Sub-Surface Substances. ALTA Endorsement 35.1-06 (improved land), or ALTA Endorsement 35.3-06 (land under development), as applicable, to provide affirmative coverage over Schedule B exceptions for mineral or other sub-surface substance rights.

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Note: The 35 series endorsements provide additional coverage that is not afforded by the Series 9 comprehensive endorsement(s).

• Other Resource Extraction. Endorsement, such as CLTA Endorsement 103.5-06, to provide affirmative coverage when title or survey show rights of third parties to subsurface resource extraction or surface use of the Land (e.g . , mineral or water extraction, water irrigation, other resource reservations).

• Utility Access. When required by the Firm Commitment or applicable closing checklist, ALTA Endorsement 17.2-06 to provide affirmative coverage related to a Project’s access to standard utilities.

2. Non-Standard Exception Deletions from Policy. The matters listed below must be resolved prior to closing and deleted from the Title Policy. Affirmative coverage is not permitted.

   • Taxes. Specific tax liabilities that are not yet due and payable may be listed on Schedule B. However, all taxes that are liens and payable as of closing, must be paid prior to closing.

• Specified Mechanic’s Liens. Previously recorded mechanic’s liens shown in Schedule B must be resolved, and the liens removed from the Title Policy prior to closing.