NEW CONSTRUCTION LOAN PROCEDURES

Presented by:Douglas G. SmithVP & Associate Sr. Underwriter

Notice of Commencement• Purpose is to put the public on notice of the

commencement of work, to identify the party (designee) to whom the laborers and suppliers will provide their Notices of Furnishing and provide the legal description of the property . Elements:

▫ Recordation of notice▫ Legal description of property (for lien claimants)▫ Name(s) of owners▫ Name of Designee (Agents/Affiliates: do not act as

designee without Company approval—we don’t want to create an agency relationship with the owner.)

▫ Post the property

Notice of Furnishing• Instrument provided to the Designee evidencing that the party

providing the notice has contracted to provide a work of improvement to the subject property.

▫ Lien claimants are required to provide notice of the fact they are supplying labor or materials to the site. This is to protect the claimant in the event the General Contractor fails to reflect them on the sworn statement.

▫ Failure to provide a N/F creates a loss of priority of the construction lien claimant to the lender, if the lender disburses in reliance on a sworn statement that does not reflect the name of the trade (laborer or supplier). But if supplied, it preserves the trade’s priority position and increases the likelihood of being paid like they were listed on the sworn statement.

▫ Rarely supplied in Michigan.

Claim of Lien

• The right to a construction/mechanic’s lien shall cease to exist unless within 90 days after the lien claimant’s last day of work, a claim is recorded in the county where the real property is located.

• The form lists the name of the party the claimant contracted with, the first day of work, the last day of work, contract amount, name of the claimant, and the amount of the claim.

Sworn Statement• Contractor’s sworn statement is a statement

furnished by the General Contractor identifying all the parties with whom they have contracted that shall be providing labor or furnishing materials/supplies to the project.

• Form identifies the name of the subcontractor/supplier, type of improvement, total contract price, amount paid, amount currently owing, and balance to complete, etc.

Waivers of Lien

• A release of a right to claim a lien against the property for work completed by the trade:

▫ 4 different forms: Partial Conditional, Partial Unconditional, Full Conditional, Full Unconditional

▫ Note: the conditional waivers are functionally payoff letters indicating that if the claimant receives the amount specified, they will give an unconditional waiver.

Priorities between Construction Lender and the contractors/laborers/suppliers• All construction lien claimants on the project have priority back to the date

of the first physical improvement to the property. [“First spade in the ground.”] The landscaper has equal and simultaneous priority with the excavator.

• A mortgage, lien or other interest recorded before the first physical improvement to the property shall have priority over construction liens except for indebtedness arising out of advancements made subsequent to the first physical improvement.

• Functionally, this makes Michigan an absolute loss of priority state for lenders as virtually all disbursements are made subsequent to the first day of work. Since our job is to insure the priority of the lender’s mortgage over construction liens this creates an insuring problem.

• Priority may only be regained by the lender for subsequent disbursements made in reliance on the submitted sworn statement and receipt of a waiver of lien from each party reflected on the sown statement for that draw.

Construction Loan Procedures• All construction loan commitments must be approved by the

Company. An “over-limits” form is not required to be submitted unless the amount of the commitment exceeds the Agency contract/Company established limits.

• Commitment must include:▫ Requirement for recordation of the Notice of Commencement.

▫ Requirement for the designee to provide an affidavit that they shall submit a copy of all Notices of Furnishing to the Company.

▫ Requirement for indemnities from Owner and Contractor.

▫ Pending disbursement clause exception. [Never modify the clause.]

Construction Loan Procedures• Contractor sworn statements and waivers are

required to be submitted and reviewed on all construction loan draws.

▫ The Company neither approves nor authorizes deviation from this procedure for any builder client.

▫ Agent/Affiliate is expected to spot check/verify waivers with the party waiving their lien rights for the authenticity of their signature.

Construction Loan Procedures

• Receipt of indemnifications from both the owner and contractor. Form may be downloaded and printed from Virtual Underwriter. [www.vuwriter.com]

Construction Loan Procedures• Depending on the level of exposure, the

Company may require the submission of:

▫ Audited financials for the owner and contractor.

▫ Construction documentation such as draw projections, and/or copies of the construction contract.

▫ Additional requirements which may be imposed after review.

Construction Loan Procedures

• The Company does not require recording of mortgage prior to first physical improvement in Michigan, unless the Company is requested to insure a construction loan (infrastructure loan) on a new condominium or multiple lot/building site projects.

• Stewart Bulletin MI2011006 – Jeddo Drywall v. Cambridge Investment Group

Construction Loan Procedures

• In the event construction has begun before recordation of the mortgage (“pre-start”) a requirement for submission of a sworn statement and waivers should be reflected on the commitment and the contractor must submit evidence of satisfactory payment to all the trades at time of closing.

Construction Loan Procedures

• Agents/Affiliates may insure draws on a “lag” or “draw behind” basis except the final disbursement at which time all waivers must be furnished (double waivers). [Builder/Lender/Title Company impasse] Creates automatic liability for the Company.

Construction Loan Procedures

• For each draw, a down state of title is required since the date of closing or the last date of endorsement.

Construction Loan Procedures• Upon review of the sworn statement and submitted

waivers, the Agent/Affiliate may issue the Construction Loan Disbursement Endorsement E-3583. This is a Michigan Specific Endorsement.

• The ALTA 32 and ALTA 32.1 may not be issued without specific Company approval. If at all possible, the endorsement should be dated at the date to which you are currently posted at the County.

Construction Loan Procedures

• The amount of the lender disbursement should equal the amount shown on the sworn statement as “the amount currently owing” and should equal the amount reflected on the endorsement. You may insure “soft costs” as a part of the disbursements but be careful to monitor soft cost depletion of the construction loan.

Construction Loan Procedures

• In the event a lien is found in the update of title during the disbursement process, the Company may require that:

▫ The owner secures the statutory penal bond for twice the amount of the lien or escrows with the Company an amount 1 ½ times the amount of the lien.

Construction Loan Procedures• In the event multiple liens are found in the update of title, the Company,

shall require that:

▫ The owner secures the statutory penal bond for twice the amount of the liens or escrows with the Company an amount 1 ½ times the amount of the liens.

▫ The Agent/Affiliate discontinues insuring on a draw behind basis and makes direct disbursements to trades in exchange for waivers for each draw [“current draw basis”].

▫ No monies are to be disbursed to the General Contractor except for work or materials supplied by the general contractor as a line item on the sworn statement.

▫ All funds identified on the sworn statement for general contractor “profit and overhead” be retained and disbursed on the final draw, adequate loan funds permitting.

Construction Loan Procedures• At all times, the balance of the construction loan

funds should equal or exceed the cost to complete as reflected on the sworn statements submitted in connection with the project. If out of balance, the Company may:

▫ Discontinue disbursements until the owner injects additional equity in the property for which we require the appropriate waivers, or

▫ The lender modifies the mortgage to provide additional, sufficient funding.

Construction Loan Procedures• Never delete the construction lien exception for the

owner’s policy. Should you get a request to do so, contact Stewart Legal Underwriting.

• The Company does not review sworn statements or waivers for the benefit of the owner.

• The Company does not act as the Agent of the owner for any purpose. For this reason, do not act as Designee on the Notice of Construction as it creates an Agency relationship with the owner inconsistent with the Indemnity and our exceptions from coverage.

Construction Loan Procedures• Please note that the Pending Disbursement Clause is a very specialized exception.

• It is used in conjunction with the removal of the mechanic’s lien exception for the loan policy only.

• The language provides conditional coverage over mechanics liens and not absolute coverage through a date certain.

• The clause provides that the Company is liable for only recorded liens and for liens arising from the non-payment of work reflected on the sworn statements or notices of furnishing supplied to the Company.

• Again, this language may not be modified without Company approval.

• You may hard code $0.00 in the open field in the exception as that amount is used for both the commitment and the policy. You only increase policy coverage by way of endorsement.

Construction Loan Procedures

• Please review Stewart Bulletin MI2009009 and MI2010007 for the Company guidelines for insuring new construction loans.

Thank you for attending!Questions? Please contact Doug Smith at doug.smith@stewart.comor 734-469-9461.

A recording of this webinar can be found at: www.stewart.com/michigan