[Federal Register Volume 61, Number 57 (Friday, March 22, 1996)]
[Rules and Regulations]
[Pages 11709-11717]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6698]



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  Federal Register / Vol. 61, No. 57 / Friday, March 22, 1996 / Rules 
and Regulations  

[[Page 11709]]


DEPARTMENT OF AGRICULTURE

Rural Housing Service, Rural Business-Cooperative Service, Rural 
Utilities Service, and Farm Service Agency

7 CFR Part 1927

RIN 0575-AB52


Real Estate Title Clearance and Loan Closing

AGENCIES: Rural Housing Service, Rural Business-Cooperative Service, 
Rural Utilities Service, and Farm Service Agency, USDA.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Rural Housing Service (RHS) and the Farm Service Agency 
(FSA), collectively hereafter referred to as ``agency,'' amend the Real 
Estate Title Clearance and Loan Closing regulation. This action makes 
loan closing procedures consistent with the private sector for 
commercial loans and makes loan closing requirements consistent with 
local laws and procedures that are typical in the area where an agency 
loan is made. The intended effect is to provide the public with easier 
and less costly access to agency programs.

EFFECTIVE DATE: April 22, 1996.

FOR FURTHER INFORMATION CONTACT: Walter B. Patton, Senior Loan 
Specialist, Rural Housing Service, USDA, Room 5334, South Agriculture 
Building, 14th and Independence Ave. SW, Washington, DC 20250, 
Telephone (202) 720-0099.

SUPPLEMENTARY INFORMATION:

Classification

    This rule has been determined to be not significant for purposes of 
Executive Order 12866 and, therefore, has not been reviewed by OMB.

Paperwork Reduction Act

    The information collection requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) under the provisions of 44 U.S.C. chapter 35 and have been 
assigned OMB control number 0575-0147, in accordance with the Paperwork 
Reduction Act of 1980. This final rule does not impose any new 
information collection requirements from those approved by OMB.

Environmental Impact Statement

    This document has been reviewed in accordance with 7 CFR part 1940, 
subpart G, ``Environmental Program.'' It is the determination of the 
agency that this action does not constitute a major Federal action 
significantly affecting the quality of the human environment, and in 
accordance with the National Environmental Policy Act of 1949, Pub. L. 
91-190, an Environmental Impact Statement is not required.

Intergovernmental Consultation

    This regulation is an instructional procedure and is not covered by 
Executive Order 12372. Programs listed in the Catalog of Federal 
Domestic Assistance are as follows: Catalog Nos. 10.405, Farm Labor 
Housing Loans and Grants; 10.415, Rural Rental Housing Loans; and 
10.416, Soil and Water Loans, are subject to the provisions of 
Executive Order 12372, which require intergovernmental consultation 
with State and local officials (7 CFR part 3015, subpart V, 48 FR 
29112, June 24, 1983). Catalog Nos. 10.404, Emergency Loans; 10.406, 
Farm Operating Loans; 10.407, Farm Ownership Loans; 10.410, Very Low to 
Moderate Income Housing Loans, and nonprogram loans are excluded from 
the scope of Executive Order 12372.

Civil Justice Reform

    This final rule has been reviewed under Executive Order 12778, 
Civil Justice Reform. In accordance with this rule: (1) all state and 
local laws and regulations that are in conflict with this rule will be 
preempted; (2) no retroactive effect will be given to this rule; and 
(3) pursuant to section 212 of the Department of Agriculture 
Reorganization Act of 1994, Public Law 103-354 (October 13, 1994), 
administrative appeal proceedings must be exhausted before bringing 
suit challenging actions taken under this rule.

Unfunded Mandates Reform Act of 1995

    Title II of the Unfunded Mandate Reform Act of 1995 (UMRA), Pub. L. 
104-4, establishes requirements for Federal agencies to assess the 
effects of their regulator actions on State, local, and tribal 
governments and the private sector. Under section 202 of the UMRA, the 
agency generally must prepare a written statement, including a cost-
benefit analysis for proposed and final rules with ``Federal mandates'' 
that may result in expenditures to State, local, or tribal governments, 
in the aggregate, or to the private sector, of $100 million or more in 
any one year. When such a statement is needed for a rule, section 205 
of the UMRA generally requires the agency to identify and consider a 
reasonable number of regulatory alternatives and adopt the least 
costly, more cost-effective or least burdensome alternative that 
achieves the objectives of the rule.
    This rule contains no Federal mandates (under the regulatory 
provisions of Title II of the UMRA) for State, local, and tribal 
governments or the private sector. Thus, today's rule is not subject to 
the requirements of sections 202 and 205 of the UMRA.

Discussion

    On May 11, 1994, the Farmers Home Administration (FmHA) 
(predecessor to the Rural Housing Service and the Farm Service Agency), 
published a proposed rule with a request for public comments to revise 
7 CFR part 1927, subpart B, ``Real Estate Title Clearance and Loan 
Closing.''
    The agency received fifteen comments. Eight comments came from 
within the United States Department of Agriculture (USDA); six comments 
came from private practice attorneys, and one comment came from a title 
insurance company.
    Those sections of the proposed regulation that are administrative 
in nature and apply only to administrative procedures within the agency 
have been removed from this document. These procedures are available 
from any agency office upon request.
    The proposed rule discussed the need to make real estate title 
clearance and loan closing procedures more

[[Page 11710]]
compatible with the public sector requirements. Many of the comments 
addressed this desire.
    The agency policy is that all loans be closed with the issuance of 
a title insurance policy except in those areas of the country where 
title insurance is unavailable. It is anticipated that in most states, 
attorneys will continue to close loans and be issuing agents of title 
insurance for a title insurance company instead of providing a title 
opinion. This provides better protection for both the agency and the 
borrower. When a title insurance company indemnifies the issuing agent 
attorney through the use of an indemnification agreement, the attorney 
will not be required to obtain a fidelity bond or errors and omissions 
insurance.

Comments and Other Significant Changes are Discussed Below

    One respondent questioned the need for a title insurance company to 
provide an audited financial statement in order to show financial 
responsibility to the agency. We feel it is important that the agency 
can determine the financial responsibility of a title insurance 
company. We will allow each State Office to determine whether the State 
Agency which regulates title insurance companies requires sufficient 
proof of financial responsibility to meet this requirement, or if 
additional proof is necessary. If the State Office concludes that the 
State Insurance Agency provides sufficient assurance of financial 
responsibility of State regulated title insurance companies, no other 
minimal information will be required from the individual title 
insurance company.
    One respondent questioned Sec. 1927.59(a)(1) (i) through (iii), 
which states that title insurance will only be obtained for subsequent 
loans in certain situations. The recommendation was that title 
insurance should be required in all subsequent loan cases. It has been 
decided that title insurance or title opinions will be obtained unless 
the cost of title services is excessive in relationship to the size of 
the loan, the agency currently has a first mortgage security interest, 
the applicant has sufficient income to service all loans from the 
agency, the borrower is current on all existing agency loans, and the 
best mortgage obtainable adequately protects agency security interests.
    A comment questioned the policy of not allowing the mention of the 
use of abstracts of title in any title opinions furnished to the United 
States Department of Agriculture (USDA). The agency does not prevent an 
attorney from using an abstract of title when preparing an attorney's 
opinion, but what the agency requires is the unqualified opinion of the 
attorney, not an opinion which passes the liability for an error from 
the attorney to an abstract company. Reviewing the abstract is a method 
an attorney can use to arrive at his or her opinion and it is not 
necessary on the face of the opinion to indicate the methodology by 
which the attorney arrived at the opinion. With the agency's policy 
shifting to the use of title insurance policies, instead of title 
opinions, this concern will be diminished. (This subject is not 
specifically addressed in this regulation and no change is being made.)
    The recommendation to continue to have the attorney use Forms FmHA 
1927-9, ``Preliminary Title Opinion,'' and FmHA 1927-10, ``Final Title 
Opinion,'' on title opinions for both loan closing and foreclosure 
proceedings when an attorney's opinion is used, is acceptable. The 
proposed regulation did not preclude this practice.
    A comment was made suggesting that loan closing attorneys and title 
companies agree to indemnify the agency against any losses that occur 
as a result of mistakes. The agency does not agree with this 
suggestion. Title insurance will provide the agency with adequate 
coverage against any errors made by the title insurers. The agency will 
be a named insured on title insurance policies issued in conjunction 
with agency loans. In those areas where attorney's opinions will still 
be used, the agency is protected to a lesser extent by the attorney's 
malpractice insurance.
    A comment was received debating the use of a title opinion versus 
title insurance, and the additional cost incurred if a title insurance 
company were to require a survey. Typically, the agency requires a 
survey unless the title insurance company provides survey coverage. The 
change to the regulation will give State Offices the authority to 
decide the form of title insurance certification and form of survey 
that is best for their state.
    It was recommended that the definitions of ``approved attorney'' 
and ``approved title insurance company,'' be expanded to cross 
reference the provisions providing for approval. This recommendation 
was accepted.
    It was pointed out that an ``issuing agent'' may or may not be a 
party who can perform closing services, depending on local law. This 
fact was incorporated.
    It was pointed out that the reference to ``warranty deed'' in the 
definition of ``mortgage'' in Sec. 1927.52 is somewhat confusing. This 
reference was removed.
    It was suggested to expand the definition of ``quitclaim deed.'' 
The current method of conveying title by use of a quitclaim deed has 
not been a problem.
    The Anti-Deficiency Act, 31 U.S.C. Secs. 1512-1519, precludes 
Federal agencies from agreeing to expend federal funds in excess of an 
appropriation. The covenants in warranty deeds could commit the agency 
to expend funds in future fiscal years were a warranty to be breached. 
This would violate the Anti-Deficiency Act and, for this reason, the 
agency cannot use warranty deeds in conveying property to which it 
holds title. Therefore, no change was made.
    It was pointed out that a closing protection letter need not be 
furnished when the loan closing is conducted in a branch office of the 
title insurance company. This was incorporated.
    It was also pointed out that by saying a closing protection letter 
must provide equivalent protection of a ``professional liability and 
fidelity insurance policy,'' will create problems, because title 
insurance companies are prohibited by law from providing professional 
liability and fidelity insurance. This reference was removed.
    It was pointed out that Sec. 1927.54(d)(4) is not needed when a 
closing protection letter is provided. The paragraph stated, ``Title 
insurance company agrees that the title insurance company employee or 
closing agent who supervises the closing of the transaction will be 
authorized to receive funds and give receipts for the company's 
charges.'' This paragraph has been removed.
    It was suggested that we remove what appears to be a mandatory 
requirement that an owner's title insurance policy be issued. In most 
instances, an owner should obtain an owner's policy of title insurance 
for the owner's protection and the agency will encourage but not 
require this. A correction was made to clarify this point.
    It was pointed out that in some states only an attorney can prepare 
a deed. Therefore, a change was made that a closing agent can prepare a 
deed unless prohibited by law.
    One commentor stated that the statement, ``Loan funds for the 
payment of a lien may be disbursed only upon the receipt of a 
discharge, satisfaction, or release,'' in Sec. 1927.58(a), is 
impracticable. We agree with this perception; however, a completely 
satisfactory wording is impracticable. The word ``receipt'' is being 
changed to ``recording.'' We believe it is understood by closing agents 
that funds change hands and releases and recordings occur substantially 
simultaneously.

[[Page 11711]]

    A comment was made that instead of ``recommending'' the use of 
title insurance, we should ``require'' its use unless prohibited by 
State law. If this were implemented, any deviation would need to be 
authorized by the Administrator. Since State laws vary greatly, it is 
important to give State Offices latitude in this regard. In some very 
rural areas of the country title insurance may be unavailable for 
logistical as opposed to legal reasons. This wording will remain 
unchanged.
    The question was raised as to why the agency requires the borrower 
to receive a copy of the title opinion. It goes on to say neither the 
conventional nor the government mortgage market provides a title 
opinion to the borrower. The agency has a responsibility to provide 
supervised credit. It is important that all borrowers are aware of the 
terms and conditions of the title insurance commitment as well as the 
final title insurance binder. No change is made with regard to this 
comment.
    A comment was made concerning ``a loan is considered closed,'' and 
``the date of closing,'' and which definition is correct. The terms 
apply to two different events and are not meant to be the same. By 
definition ``closed loan'' is ``a loan is considered to be closed when 
the mortgage is filed for record.'' The date of closing is the date 
that the closing agent conducts the loan closing activity. No change 
was made.
    It was commented that sometimes ``mortgagee's policy'' was 
interchanged with ``lender's policy.'' All references were changed to 
``lender's policy.''
    Concerning debarment or suspension, a comment was made that the 
proposed regulation implied that once a party was debarred or suspended 
they are always debarred or suspended. This was corrected by inserting 
the words ``is currently.''
    A comment was made that the closing agent should not be required to 
determine the validity of the legal description, but rather should use 
the legal description provided by the survey or other legal document. 
It is part of the closing agent's duties to verify an accurate legal 
description. Using the survey or other recorded legal document is one 
way of meeting this requirement but the ultimate responsibility rests 
with the closing agent. No change has been made.
    A comment was made that in one section we required the return of 
``the final title opinion or policy of title insurance,'' within one 
day, while in another section it requires they be returned ``as soon as 
possible.'' The requirement is removed from the section requiring their 
return within one day.
    It was recommended that Sec. 1927.59(a)(iv) be clarified by 
changing the word ``additional'' to ``subsequent.'' This change was 
made.
    A comment was made that we refer to a ``clear'' title while the 
conventional term is ``marketable.'' This change was made.
    A comment was made that there are different definitions and 
examples of ``exceptions'' in various passages. These variations were 
corrected.
    Two concerns were raised about the requirement that approved 
attorneys providing title opinions must have a $50,000 fidelity bond. 
The comment was that no other lender requires a fidelity bond and it 
results in increased cost to the borrower. We believe the continued 
requirement for a fidelity bond is necessary to protect these funds 
which are public monies. Therefore, this requirement will not be 
changed for closings where attorney opinions are obtained. In most 
cases where the party handling closing funds is covered by an 
acceptable closing protection letter, there will be no need for a 
fidelity bond.
    A question was raised concerning the ``certification of title,'' 
and the business of insuring titles. It is not the intent of this 
regulation that attorneys insure titles. In most cases, the agency will 
obtain title insurance and in such cases the agency will look to the 
title insurance company, not the closing agent, if there is a defect in 
title. In those cases where an attorney's opinion is issued instead of 
title insurance, if the title opinion is defective, the agency will 
seek redress from the attorney who issued the opinion.
    A question was raised with regard to the requirement that an 
approved attorney furnishing a title opinion must have at least a 
$250,000 errors and omissions insurance policy with a deductible not to 
exceed $5,000. The regulation will allow each State Office to establish 
the appropriate level of errors and omissions insurance coverage and 
the level of deductible, according to what is customary in the area and 
necessary for the protection of the agency. To the extent that real 
estate loans are closed using a title insurance policy with a closing 
protection letter covering the closing agent, concerns regarding 
fidelity bonds, and errors and omissions insurance coverage, are 
eliminated.
    One respondent requested the reinstatement of Form FmHA 427-18, 
``Fidelity Bond for Loan Closing Attorneys.'' It is felt that a surety 
company can provide verification of fidelity bond coverage without the 
agency developing a replacement form. In keeping with the Paperwork 
Reduction Act, this form will not be reinstated.
    Four public comments encouraged the agency to require the adoption 
of title insurance policies. Two respondents said they would reduce 
their legal fees, as an accommodation to the purchaser, when title 
insurance policies are issued. We believe the proposed rule adequately 
addressed these comments and no changes will be required.

List of Subjects for 7 CFR Part 1927

    Loan programs--Agriculture, Loan program--Housing and community 
development, Mortgages.

    Therefore, chapter XVIII, title 7, Code of Federal Regulations is 
amended by revising part 1927 to read as follows:

PART 1927--TITLE CLEARANCE AND LOAN CLOSING

Subpart A--[Reserved]

Subpart B--Real Estate Title Clearance and Loan Closing

Sec.
1927.51  General.
1927.52  Definitions.
1927.53  Costs of title clearance and closings of transactions.
1927.54  Requirements for closing agents.
1927.55  Title clearance services.
1927.56  Scheduling loan closing.
1927.57  Preparation of closing documents.
1927.58  Closing the transaction.
1927.59  Subsequent loans and transfers with assumptions.
1927.60--1927.99 [Reserved]-
1927.100  OMB control number.

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C. 1480.

Subpart A--[Reserved]

Subpart B--Real Estate Title Clearance and Loan Closing


1927.51  General.

    (a) Types of loans covered by this subpart. This subpart sets forth 
the authorities, policies, and procedures for real estate title 
clearance and closing of loans, assumptions, voluntary conveyances and 
credit sales in connection with the following types of Rural Housing 
Service (RHS) and Farm Service Agency (FSA) loans: Farm Ownership (FO), 
Nonfarm Enterprise (FO-NFE), Emergency (EM), Operating (OL), Rural 
Housing (RH), Farm Labor Housing (LH), Rural Rental Housing (RRH), 
Rural Cooperative Housing (RCH), Soil and Water (SW), Indian Land 
acquisition loans involving nontrust property, and NonProgram (NP) 
loans. This subpart does not apply to guaranteed loans.
    (b) Programs not covered by this subpart. Title clearance and 
closing for

[[Page 11712]]
all other types of agency loans and assumptions will be handled as 
provided in the applicable program instructions or as provided in 
special authorizations from the National Office.
    (c) [Reserved]
    (d) Copies of all agency forms referenced in this regulation and 
the agency's internal administrative procedures for title clearance and 
loan closing are available upon request from the agency's State Office. 
Forms and title clearance and loan closing requirements which are 
specific for any individual state must be obtained from the agency 
State Office for that state.


1927.52  Definitions.

    Agency. The Rural Housing Service (RHS) and Farm Service Agency 
(FSA) or their successor agencies.
    Approval official. The agency employee who has been delegated the 
authority to approve, close, and service the particular kind of loan, 
will approve an attorney or title company as closing agent for the 
loans. If a loan must be approved at a higher level, the initiating 
office may approve the closing agent.
    Approved attorney. A duly licensed attorney, approved by the 
agency, who provides title opinions directly to the agency and the 
borrower or upon whose certification of title an approved title 
insurance company issues a policy of title insurance. Approved 
attorneys also close loans, assumptions, credit sales, and voluntary 
conveyances and disburse funds in connection with agency loans. 
Approved attorney is further defined in Sec. 1927.54(c).
    Approved title insurance company. A title insurance company, 
approved by the agency, (including its local representatives, 
employees, agents, and attorneys) that issues a policy of title 
insurance. Depending on the local practice, an approved title insurance 
company may also close loans, assumptions, credit sales, and voluntary 
conveyances and disburse funds in connection with agency loans. If the 
approved title insurance company does not close the loan itself, the 
loan closing functions may be performed by approved attorneys or 
closing agents authorized by the approved title insurance company.
    Borrower. The party indebted to the agency after the loan, 
assumption, or credit sale is closed.
    Certificate of title. A certified statement as to land ownership, 
based upon examination of record title.
    Closed loan. A loan is considered to be closed when the mortgage is 
filed for record and the appropriate lien has been obtained.
    Closing agent. The approved attorney or title company selected by 
the applicant and approved by the agency to provide closing services 
for the proposed loan. Unless a title insurance company also provides 
loan closing services, the term ``title company'' does not include 
``title insurance company.''
    Closing protection letter. An agreement issued by an approved title 
insurance company which is an American Land Title Association (ALTA) 
form closing protection letter or which is otherwise acceptable to the 
agency and which protects the agency against damage, loss, fraud, 
theft, or injury as a result of negligence by the issuing agent, 
approved attorney, or title company when title clearance is done by 
means of a policy of title insurance. Depending on the area, closing 
protection letters may also be known as ``Insured Closing Letters,'' 
``Indemnification Agreements,'' ``Insured Closing Service Agreements,'' 
or ``Statements of Settlement Service Responsibilities.''
    Cosigner. A party who joins in the execution of a promissory note 
or assumption agreement to guarantee repayment of the debt.
    Credit sale. A sale in which the agency provides credit to the 
purchasers of agency inventory property. Title clearance and closing of 
a credit sale are the same as for an initial loan except the property 
is conveyed by quitclaim deed.
    Deed of trust. See trust deed.
    Exceptions. Exceptions include, but are not limited to, recorded 
covenants; conditions; restrictions; reservations; liens; encumbrances; 
easements; taxes and assessments; rights-of-way; leases; mineral, oil, 
gas, and geothermal rights (with or without the right of surface 
entry); timber and water rights; judgments; pending court proceedings 
in Federal and State courts (including bankruptcy); probate 
proceedings; and agreements which limit or affect the title to the 
property.
    Fee simple. An estate in land of which the owner has unqualified 
ownership and power of disposition.
    FSA. The Farm Service Agency, an agency of the United States 
Department of Agriculture ( and any successor agency). FSA is the 
successor agency for farm program loans of the former Farmers Home 
Administration.
    General warranty deed. A deed containing express covenants by the 
grantor or seller as to good title and right to possession.
    Indemnification agreement. An agreement that protects the agency 
against damage, loss, fraud, theft, or injury as a result of useful 
conduct or negligence on behalf of the issuing agent, approved 
attorney, or title company. This agreement may also be entitled closing 
protection letter, insured closing letter, insured closing service 
agreement, statement of settlement service responsibilities, or letters 
which provide similar protection.
    Issuing agent. An individual or entity who is authorized to issue 
title insurance for an approved title insurance company.
    Land purchase contract (contract for deed). An agreement between 
the buyer and seller of land in which the buyer has the right to 
possession and use of the land over a period of time (usually in excess 
of 1 year) and makes periodic payments of a portion of the purchase 
price to the seller. The seller retains legal title to the property 
until the final payment is made, at which time the buyer will receive a 
deed to the land vesting fee title in the buyer.
    Mortgage. Real estate security instrument which pledges land as 
security for the performance of an obligation such as repayment of a 
loan. For the purpose of this regulation the term ``mortgage'' includes 
deed of trust and deed to secure debt. A real estate mortgage or deed 
of trust form for the state in which the land to be taken as security 
is available in any agency office, and will be used to secure a 
mortgage to the agency.
    National Office. The National Headquarters Office of FSA or RHS 
depending on the loan program involved.
    OGC. The Office of the General Counsel, United States Department of 
Agriculture.
    Program regulations. The agency regulations for the particular loan 
program involved (e.g., subpart A of part 1944 of this chapter for 
single family housing (SFH) loans).
    Quitclaim deed. A transfer of the seller's interest in the title, 
without warranties or covenants. This type of deed is used by the 
agency to convey title to purchasers of inventory property.
    RHS. The Rural Housing Service, an agency of the United States 
Department of Agriculture, or its successor agency. RHS is the 
successor agency to the Rural Housing and Community Development Service 
(RHCDS) which was, in turn, the successor agency to the Farmers Home 
Administration.
    Seller. Individual or other entity which convey ownership in real 
property to an applicant for an agency loan or to the agency itself.
    Special warranty deed. A deed containing a covenant whereby the 
grantor agrees to protect the grantee against any claims arising during 
the grantor's period of ownership.

[[Page 11713]]

    State Office. For FSA this term refers to the FSA State Office. For 
RHS this term refers to the Rural Economic and Community Development 
State Director.
    Title clearance. Examination of a title and its exceptions to 
assure the agency that the loan is legally secured and has the required 
priority.
    Title company. A company that may abstract title, act as an issuing 
agent of title insurance for a title insurance company, act as a loan 
closing agent, and perform other duties associated with real estate 
title clearance and loan closing.
    Title defects. Any exception or legal claim of ownership (through 
deed, lien, judgment, or other recorded document), on behalf of a third 
party, which would prevent the seller from conveying a marketable title 
to the entire property.
    Trust deed. A three party security instrument conveying title to 
land as security for the performance of an obligation, such as the 
repayment of a loan. For the purpose of this regulation a trust deed is 
covered by the term ``mortgage.'' A trust deed is the same as a deed of 
trust.
    Voluntary conveyance. A method of liquidation by which title to 
agency security is transferred by a borrower to the agency by deed in 
lieu of foreclosure.
    Warranty deed. A deed in which the grantor warrants that he or she 
has the right to convey the property, the title is free from 
encumbrances, and the grantor shall take further action necessary to 
perfect or defend the title.


Sec. 1927.53  Costs of title clearance and closing of transactions.

    The borrower or the seller, or both, in compliance with the terms 
of the sales contract or option will be responsible for payment of all 
costs of title clearance and closing of the transaction and will 
arrange for payment before the transaction is closed. These costs will 
include any costs of abstracts of title, land surveys, attorney's fees, 
owner's and lender's policies of title insurance, obtaining curative 
material, notary fees, documentary stamps, recording costs, tax 
monitoring service, and other expenses necessary to complete the 
transaction.


Sec. 1927.54  Requirements for closing agents.

    (a) Form of title certification. State Offices are directed to 
require title insurance for all loan closings unless the agency 
determines that the use of title insurance is not available or is 
economically not feasible for the type of loan involved or the area of 
the state where the loan will be closed. If title insurance is used, 
State Offices are authorized to require a closing protection letter 
issued by an approved title insurance company to cover the closing 
agent, if available. A closing protection letter need not be furnished 
when the closing is conducted by the title insurance company.
    (b) Approval of closing agent. An attorney or title company may act 
as a closing agent and close agency real estate loans, provide 
necessary title clearance, and perform such other duties as required in 
this subpart. A closing agent will be responsible for closing agency 
loans and disbursing both agency loan funds and funds provided by the 
borrower in connection with the agency loan so as to obtain title and 
security position as required by the agency. The closing agent must be 
covered by a fidelity bond which will protect the agency unless a 
closing protection letter is provided to the agency. The borrower will 
select the approved closing agent. If title clearance is by an 
attorney's opinion, the agency will approve the attorney who will 
perform the closing in accordance with paragraph (c) of this section. 
The attorney will be approved after submitting a certification 
acceptable to the agency. If title certification is by means of a 
policy of title insurance, the title company which will issue the 
policy must have been approved in accordance with paragraph (d) of this 
section. A closing agent's delay in providing services without 
justification in connection with agency loans may be a basis for not 
approving the closing agent in future cases.
    (c) Approval of attorneys. Any attorney selected by an applicant, 
who will be providing title clearance where the certificate of title 
will be an attorney's opinion, must submit an agency form certifying to 
professional liability insurance coverage. If the attorney is also the 
closing agent, fidelity coverage for the attorney and any employee 
having access to the funds must be provided. The agency will determine 
the appropriate level of such insurance. Required insurance will, as a 
minimum, cover the amount of the loan to be closed. The agency will 
approve the form stipulating the bond coverage. The agency will approve 
any attorney who is duly licensed to practice law in the state where 
the real estate security is located and who complies with the bonding 
and insurance requirements in this section. If the certification of 
title will be by means of title insurance, any attorney or closing 
agent designated as an approved attorney or closing agent by the 
approved title insurance company which will issue the policy of title 
insurance will be acceptable, and when covered by a closing protection 
letter, will not be required to obtain professional liability insurance 
or a fidelity bond. Each approved title insurance company may provide a 
master list of their approved attorneys that are covered by its closing 
protection letters to the State Office and, in such cases the attorneys 
are approved for closings for that title insurance company. Delay in 
providing closing services without justification may be a basis for not 
approving the attorney in future cases.
    (d) Approval of title companies. A title company acting as a 
closing agent, or as an issuing agent for a title insurance company, 
must be covered by a title insurance company closing protection letter 
or submit an agency form certifying to fidelity coverage to cover all 
employees having access to the loan funds. The agency will determine 
the appropriate level of such coverage and will approve the form 
stipulating the bond coverage. Delay in providing closing services 
without justification may be a basis for not approving the company in 
future cases. Each approved title insurance company may provide a 
master list of their approved title companies that are covered by its 
closing protection letter to the State Office and, in such cases the 
title companies on the list are approved for closings for that title 
insurance company.
    (e) Approval of title insurance companies. The agency will approve 
any title insurance company which issues policies of title insurance in 
the State where the security property is located if:
    (1) The form of the owner's and lender's policies of title 
insurance (including required endorsements) to be used in closing 
agency loans are acceptable to the agency, and will contain only 
standard types of exceptions and exclusions approved in advance by the 
agency;
    (2) The title insurance company is licensed to do business in the 
state (if a license is required); and
    (3) The title insurance company is regulated by a State Insurance 
Commission, or similar regulator, or if not, the title insurance 
company submits copies of audited financial statements, or other 
approved financial statements satisfactory to the agency, which show 
that the company has the financial ability to cover losses arising out 
of its activities as a title insurance company and under any closing 
protection letters issued by the title insurance company.

[[Page 11714]]

    (4) Delay in providing services without justification may be a 
basis for not approving the company.
    (f) [Reserved]
    (g) Conflict of interest. A closing agent who has, or whose spouse, 
children, or business associates have, a financial interest in the real 
estate which will secure the agency debt shall not be involved in the 
title clearance or loan closing process. Financial interest includes 
having either an equity, creditor, or debtor interest in any 
corporation, trust, or partnership with a financial interest in the 
real estate which will secure the agency debt.
    (h) Debarment or suspension. No attorney, title company, title 
insurance company, or closing agent, currently debarred or suspended 
from participating in Federal programs, may participate in any aspect 
of the agency loan closing and title clearance process.
    (i) Special provisions. Closing agents are responsible for having 
current knowledge of the requirements of State law in connection with 
loan closing and title clearance and should advise the agency of any 
changes in State law which necessitate changes in the agency's State 
mortgage forms and State Supplements.
    (j) [Reserved]


Sec. 1927.55  Title clearance services.

    (a) Responsibilities of closing agents. Services to be provided to 
the agency and the borrower by a closing agent in connection with the 
transaction vary depending on whether a title insurance policy or title 
opinion is being furnished. The closing agent is expected to perform 
these services without unnecessary delay.
    (b) [Reserved]
    (c) Ordering title services. Application for title examination or 
insurance will be made by the borrower to a title company or attorney. 
The lender's policy will be for at least the amount of the loan. The 
United States of America will be named as the insured lender.
    (d) Use of title opinion. If a title opinion will be issued, a 
title examination will include searches of all relevant land title and 
other records, so as to express an opinion as to the title of the 
property and the steps necessary to obtain the appropriate title and 
security position to issue a title opinion as required by this subpart. 
The closing agent or approved attorney will determine:
    (1) The legal description and all owners of the real property;
    (2) Whether there are any exceptions affecting the property and 
advise the approval official and borrower of the nature and effect of 
outstanding interests or exceptions, prior sales of part of the 
property, judgments, or interests to assist in determining which 
exceptions must be corrected in order for the borrowers to obtain good 
and marketable title of record in accordance with prevailing title 
examination standards, and for the agency to obtain a valid lien of the 
required priority;
    (3) Whether there are outstanding Federal, State, or local tax 
claims (including taxes which under State law may become a lien 
superior to a previously attaching mortgage lien) or homeowner's 
association assessment liens;
    (4) Whether outstanding judgments of record, bankruptcy, 
insolvency, divorce, or probate proceedings involving any part of the 
property, whether already owned by the borrower, or to be acquired by 
assumption or with loan funds, or involving the borrower or the seller 
exist;
    (5) If a water right is to be included in the security for the 
loan, and if so, the full legal description of the water right;
    (6) In addition to paragraph(d)(2) of this section, if wetlands 
easements or other conservation easements have been placed on the 
property;
    (7) What measures are required for preparing, obtaining, or 
approving curative material, conveyances, and security instruments, and
    (8) That sufficient copies of these interests and exceptions are 
provided as requested by the approval official.
    (e) Use of title insurance. When title insurance is to be obtained, 
the approval official will be furnished with a title insurance binder 
disclosing any defects in, exceptions to, and encumbrances against, the 
title, the conditions to be met to make the title insurable and in the 
condition required by the agency, and the curative or other actions to 
be taken before closing of the transaction. The binder must include a 
commitment to issue a lender policy in an amount at least equal the 
amount of the loan, except in instances where there may be an 
outstanding owner's policy in favor of the borrower. Not withstanding 
the provisions of this section, the instance of an assumption without a 
subsequent loan, the existing policy may be continued if the coverage 
meets or exceeds the assumption balance and the title company agrees in 
writing to extend coverage in full force and effect.
    (f) [Reserved]


Sec. 1927.56  Scheduling loan closing.

    The agency, in coordination with the closing agent, will arrange a 
loan closing and send loan closing instructions, on an agency form to 
the closing agent when the agency determines that the exceptions shown 
on the preliminary title opinion or title insurance binder will not 
adversely affect the suitability, security value, or successful 
operation of the property and all other agency conditions to closing 
have been satisfied.


Sec. 1927.57  Preparation of closing documents.

    (a) Preparation of deeds. The closing agent, unless prohibited by 
law, will prepare, complete, or approve documents, including deeds, 
necessary for title clearance and closing of the transaction and 
provide the agency with the policy of title insurance or title opinion 
providing the lien priority required by the agency and subject only to 
exceptions approved by the agency. Agency forms will be used when 
required by this part.
    (1) [Reserved]
    (2) [Reserved]
    (b) Preparation of mortgages. The closing agent will insure that 
all mortgages are properly prepared, completed, executed, and filed for 
record. Where applicable, the mortgages should recite that it is a 
purchase money mortgage. The following requirements will be observed in 
preparing agency morgages:
    (1)-(8) [Reserved]
    (9) Alteration of mortgage form. An agency mortgage form may be 
altered pursuant to a State Supplement having prior approval of the 
National Office, or in a special case, to comply with the terms of loan 
approval prescribed in accordance with program instructions. No other 
alterations in the printed mortgage forms will be made without prior 
approval of the National Office. Any changes made by deletion, 
substitution, or addition (excluding filling in blanks) will be 
initialed in the margin by all persons signing the mortgage.
    (10) [Reserved]
    (11) Mortgages on leasehold estates. When the agency security 
interest is a leasehold estate, unless State law or State Supplement 
otherwise provides, the real estate mortgage or deed of trust form, 
available in any agency office, will be modified as follows:
    (i) In the space provided on the mortgage for the description of 
the real property security, the leasehold estate and the land covered 
by the lease must be described. The following language must be used 
unless modified by a State Supplement:

    All of borrower's right, title, and interest in and to a 
leasehold estate for an original term of ____ years, commencing on 
______, 19 ____, created and established by and between ______ as 
lessor and owner and ____ as

[[Page 11715]]
lessee, including any extensions and renewals thereof, a copy of 
which lease was recorded or filed in book ____, page ____, as 
instrument number ____, in the Office of the (e.g., County Clerk), 
for the aforesaid county and State and covering the following real 
property: ______.

    (ii) Immediately preceding the covenant starting with the words 
``should default,'' the following covenant will be added:

    (  ) Borrower covenants and agrees to pay when due all rents and 
any and all other charges required by said lease, to comply with all 
other requirements of said lease, and not to surrender or 
relinquish, without the Government's prior written consent, any of 
borrower's right, title, or interest in or to said leasehold estate 
or under said lease while this mortgage remains of record.

    (12) Mortgages on land purchase contract. When the agency security 
interest is on a borrower's interest in a land purchase contract, OGC 
will provide language used to modify agency forms.
    (13) [Reserved]
    (c) [Reserved]
    (d) Preparation of protective instruments. The closing agent will 
properly prepare, complete, and approve releases and curative documents 
necessary for title clearance and closing, in recordable form and 
record them if required.
    (1) Prior lienholder's agreement. If any liens (other than agency 
liens or tax liens to local governmental authorities) or security 
agreements (hereafter called ``liens''), with priority over the agency 
mortgage will remain against the real property securing the loan, the 
lienholders must execute, in recordable form, agreements containing all 
of the following provisions unless prior approval for different 
provisions has been obtained from the National Office:
    (i) The prior lienholder shall agree not to declare the lien in 
default or accelerate the indebtedness secured by the prior lien for a 
specific period of time after notice to the agency. The agreement must:
    (A) Provide that the specified period of time will not commence 
until the lienholder gives written notice of the borrower's default and 
the prior lienholder's intention to accelerate the indebtedness to the 
agency office servicing the loan,
    (B) Include the address of the agency servicing office,
    (C) Give the agency the option to cure any monetary default by 
paying the amount of the borrower's delinquent payments to the prior 
lienholder, or pay the obligation in full and have the lien assigned to 
the agency, and
    (D) Provide that the prior lienholder will not declare the lien in 
default for any nonmonetary reason if the agency commences liquidation 
proceedings against the property and thereafter acquires the property.
    (ii) When the prior lien secures future advances, including the 
lienholder's costs for borrower liquidation or bankruptcy, which under 
State law have priority over the mortgage being taken (or an agency 
mortgage already held), the prior lienholder shall agree not to make 
advances for purposes other than taxes, insurance or payments on other 
prior liens without written consent of the agency.
    (iii) The prior lienholder shall consent to the agency making (or 
transferring) the loan and taking (or retaining) the related mortgage 
if the prior lien instrument prohibits a loan or mortgage (or transfer) 
without the prior lienholder's consent.
    (iv) The prior lienholder shall consent to the agency transferring 
the property subject to the prior lien after the agency has obtained 
title to the property either by foreclosure or voluntary conveyance if 
the prior lien instrument prohibits such transfer without the prior 
lienholder's consent.
    (2) [Reserved]
    (3) [Reserved]
    (4) Agreement by holder of seller's interest under land purchase 
contract. If the buyer's interest in the security property is that of a 
buyer under a land purchase contract, it will be necessary for the 
seller to execute, in recordable form, an agreement containing all of 
the following provisions:
    (i) The seller shall agree not to sell or voluntarily transfer the 
seller's interest under the land purchase contract without the prior 
written consent of the State Office.
    (ii) The seller shall agree not to encumber or cause any liens to 
be levied against the property.
    (iii) The seller shall agree not to commence or take any action to 
accelerate, forfeit, or foreclose the buyer's interest in the security 
property until a specified period of time after notifying the State 
Office of intent to do so. This period of time will be 90 days unless a 
State Supplement provides otherwise. The agreement shall give the 
agency the option to cure any monetary default by paying the amount of 
the buyer's delinquent payments to the seller, or paying the seller in 
full and having the contract assigned to the agency.
    (iv) The seller shall consent to the agency making the loan and 
taking a security interest in the borrower's interest under the land 
purchase contract as security for the agency loan.
    (v) The seller shall agree not to take any actions to foreclose or 
forfeit the interest of the buyer under the land purchase contract 
because the agency has acquired the buyer's interest under the land 
purchase contract by foreclosure or voluntary conveyance, or because 
the agency has subsequently sold or assigned the buyer's interest to a 
third party who will assume the buyer's obligations under the land 
purchase contract.
    (vi) When the agency acquires a buyer's interest under a land 
purchase contract by foreclosure or deed in lieu of foreclosure, the 
agency will not be deemed to have assumed any of the buyer's 
obligations under the contract, provided that the failure of the agency 
to perform any such obligations while it holds the buyer's interest is 
a ground to commence an action to terminate the land purchase contract.
    (5) [Reserved]
    (6) [Reserved]
    (e) [Reserved]


1927.58  Closing the transaction.

    The closing agent will cooperate with the approval official, 
borrower, seller, and other necessary parties to arrange the time and 
place of closing. The transaction may be closed when the agency 
determines that the agency requirements for the loan have been 
satisfied and the closing agent or approved attorney can issue or cause 
to be issued a policy of title insurance or final title opinion as of 
the date of closing showing title vested as required by the agency, the 
lien of the agency's mortgage in the priority required by the agency, 
and title to the mortgaged property subject only to those exceptions 
approved in writing by the agency. The loan will be considered closed 
when the mortgage is filed for record and the required lien is 
obtained.
    (a) Disbursement of loan funds. When the closing agent indicates 
that the conditions necessary to close the loan have been met, loan 
funds will be forwarded to the closing agent. Loan funds will not be 
disbursed prior to filing of the mortgage for record; however, when 
necessary, loan funds may be placed in escrow before the mortgage is 
filed for record and disbursed after it is filed. No development funds 
will be kept in escrow by the closing agent after loan closing, unless 
approved by the agency. Loan funds for the payment of a lien may be 
disbursed only upon the recording of a discharge, satisfaction, or 
release of prior lien interests (or assignment where necessary to 
protect the interests of the agency).

[[Page 11716]]

    (b) Title examination and liens or claims against borrowers. If 
there are exceptions or recorded items which have arisen since the 
preliminary title opinion, the transaction will not be closed until 
these entries have been cleared of record or approved by the agency. 
The closing agent will advise the approval official of the nature of 
such intervening instruments and the effect they may have on obtaining 
a valid mortgage of the priority required or the title insurance policy 
to be issued.
    (c) Taxes and assessments. The closing agent will determine if all 
taxes and assessments against the property which are due and payable 
are paid at or before the time of loan closing. If the seller and the 
borrower have agreed to prorate any taxes or assessments which are not 
yet due and payable for the year in which the closing of the 
transaction takes place, the seller's proportionate share of the taxes 
and assessments will be deducted from the proceeds to be paid to seller 
at closing and will be added to the amount required to be paid by 
borrower at closing. Appropriate prorations as agreed upon between the 
borrower and seller may also be made for taxes paid by the seller which 
are applicable to a period after the closing date, and for common area 
maintenance fees, prepaid rentals, insurance (unless the borrower is to 
obtain a new policy of insurance), and growing crops.
    (d) Affidavit regarding work of improvement.
    (1) Execution by borrower. If required by State Supplement, the 
closing agent will require that an affidavit regarding work of 
improvement, provided by the agency, be completed and executed when a 
loan is being made to a borrower who already owns the real estate to be 
mortgaged. This affidavit will be executed by the borrower at closing.
    (2) Execution by seller. If required by State Supplement, the 
closing agent will require that an affidavit regarding work of 
improvement, provided by the agency, be completed and executed 
(including acknowledgment) by the seller when the agency is making a 
loan to a borrower to enable the borrower to acquire the property 
(including transfers). This affidavit will be executed by the seller at 
closing.
    (3) Legal insufficiency of affidavit form. If the agency affidavit 
regarding work of improvement is not legally sufficient in a particular 
State, a State form approved by OGC will be used. A similar form that 
may be required by a title insurance company may be substituted for the 
agency form.
    (4) Recording. The affidavit will not be recorded unless the 
closing agent deems it necessary and State law permits.
    (5) Delay in closing. The loan will not be closed if, at the loan 
closing, the seller (in a sale transaction) or the borrower (in a 
nonpurchase money loan situation) indicates that construction, repair, 
or remodeling has been commenced or completed on the property, or 
related materials or services have been delivered to or performed on 
the property within the time limit specified in the affidavit, unless a 
State Supplement provides otherwise. The closing agent will notify the 
approval official, who will determine if the work of improvement could 
result in a lien prior to the agency lien. The State Office will, with 
the advice and concurrence of OGC, provide in a State Supplement the 
period of time to be used in completing the affidavit.
    (e) [Reserved]
    (f) [Reserved]
    (g) Return of loan documents to approval official after loan 
closing. Within 1 day after loan closing, the closing agent will return 
completed and executed copies of the loan closing instructions, the 
executed original promissory note, and all other documents required for 
loan closing (except the mortgage), to the approval official. If the 
recorded mortgage is customarily returned to the borrower or closing 
agent after recording, then it must be forwarded to the approval 
official immediately.
    (h) Final title opinion or title insurance policy. As soon as 
possible after the transaction has been closed.
    (1) Final title opinion. The attorney will issue a final title 
opinion to the agency and the borrower on a form provided by the 
agency. Issuance of the final title opinion should not be held up 
pending the return of recorded instruments. If it is not possible for 
the final title opinion to show the book and page of recording of the 
agency security instrument, the words ``and is recorded'' in the final 
title opinion form provided by the agency office, may be deleted and 
the blank space completed to show the filing office and the filing 
instrument number, if available. Attached to the final title opinion 
will be required documents then available, including any which the 
approval official has furnished to the attorney which were not 
previously returned. The attorney will ensure that all recorded 
instruments are forwarded or delivered to the proper parties after 
recording. The certification of title will be forwarded for a voluntary 
conveyance.
    (2) Title insurance policy. The closing agent will send or deliver 
the title insurance policy, with the United States listed as mortgage 
holder, to the approval official. The policy will be subject only to 
standard exceptions and those outstanding encumbrances, and exceptions, 
approved by the approval official. If an owner's policy of title 
insurance is requested, the closing agent will send or deliver it to 
the borrower. The closing agent will ensure that all recorded 
instruments are delivered or sent to the proper parties after 
recording.
    (3) [Reserved]
    (i) Other services of the closing agent.
    (1) The closing agent will assist the approval official in 
preparing, completing, obtaining execution and acknowledgment, and 
recording the required documents when necessary. The closing agent will 
keep the approval official advised as to the progress of title 
clearance and preparation of material for closing the transaction.
    (2) The closing agent will provide services for deeds in lieu of 
foreclosure as set forth in Sec. 1927.62 of this subpart, and 
Sec. 1955.10 of subpart A of part 1955 of this chapter.


Sec. 1927.59  Subsequent loans and transfers with assumptions.

    Title services and closing for subsequent loans to an existing 
borrower will be done in accordance with previous instructions in this 
subpart, except that:
    (a) Loans closed using title insurance or title opinions.
    (1) Title insurance or title opinions will be obtained unless:
    (i) The cost of title services is excessive in relationship to the 
size of the loan,
    (ii) The agency currently has a first mortgage security interest,
    (iii) The applicant has sufficient income to service the additional 
loan,
    (iv) The borrower is current on the existing agency loan, and
    (v) The best mortgage obtainable adequately protects the agency 
security interests.
    (2) Title insurance or a final title opinion will not be obtained 
for a subsequent Section 504 loan where the previous Section 504 loan 
was unsecured or secured for less than $7,500 and the outstanding debt 
amount plus the new loan is less than $7,500.
    (3) Loans closed using a new lender title insurance policy:
    (i) Will cover the entire real property which is to secure the 
loan, including the real property already owned and any additional real 
property being acquired by the borrower with the loan proceeds.
    (ii) Will cover the entire amount of any subsequent loan plus the 
amount of any existing loan being refinanced (if

[[Page 11717]]
the existing loan is not being refinanced, the new lender policy will 
insure only the amount of the subsequent loan).
    (b) Title services required in connection with assumptions. These 
regulations are contained in part 1965, subparts A, B, and C, of this 
chapter as appropriate for the loan type.


Secs. 1927.60-1927.99  [Reserved]


Sec. 1927.100  OMB control number.

    The reporting requirements contained in this regulation have been 
approved by the Office of Management and Budget and have been assigned 
OMB control number 0575-0147. Public reporting burden for this 
collection of information is estimated to vary from 5 minutes to 1.5 
hours per response, with an average of .38 hours per response, 
including time for reviewing instructions, searching existing data 
sources, gathering and maintaining the data needed, and completing and 
reviewing the collection of information. Send comments regarding this 
burden estimate or any other aspect of this collection of information, 
including suggestions for reducing this burden, to Department of 
Agriculture, Clearance Officer, OIRM, Ag Box 7630, Washington, D.C. 
20250; and to the Office of Management and Budget, Paperwork Reduction 
Project (OMB# 0575-0147), Washington, D.C. 20503. You are not required 
to respond to the collection of information unless it displays a 
currently valid OMB control number.

    Dated: February 25, 1996.
Jill Long Thompson,
Under Secretary, Rural Economic and Community Development.

    Dated: February 28, 1996.
Eugene Moos,
Under Secretary, Farm and Foreign Agriculture Services.
[FR Doc. 96-6698 Filed 3-21-96; 8:45 am]
BILLING CODE 3410-07-U