[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]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
week.
========================================================================
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