Title insurance — fraud protection and more

Mar 10th, 2015 | By John Tracy

As a lender, when you make the decision to release funds, you need to know that your loan is well protected. Otherwise you and your organization could be at risk for losses associated with (but not limited to) the following:

•    Liens
•    Defects revealed by an up-to-date survey
•    Challenges to the enforceability or validity of the mortgage
•    Title defects


With title insurance in place you can rest easier, knowing that you’re protected. And if you aren’t yet sold on its value, consider these real-life examples where title insurance saved the day.

Super priority lien
A title-insured mortgage went into default and the lender proceeded to sell the property. However, unbeknownst to the lender, the borrower had failed to remit GST payments to the Canada Revenue Agency (CRA). The CRA claimed priority over the insured lender’s mortgage so they were paid out first from the proceeds of the sale of the property. This resulted in a shortfall of over $20,000 for the lender. Because of the title insurance policy in place, the lender was reimbursed for the amount owing to the CRA as of the policy date, minimizing their potential loss in this situation.

Survey defects
A lender had approved a mortgage on a grocery store which then went into default. The lender attempted to sell the property to recover the debt, only to discover that in a previous transfer of the land, a portion of the land that included a parking lot and loading dock was never properly conveyed. Therefore, this parcel of land still belonged to the original owner, who offered to sell it to the insured lender at a highly inflated rate. He knew that without it, the lender’s sale of the grocery store would be difficult. Since no agreement could be reached, FCT stepped in and compensated the lender for a reduced purchase price for the mortgaged land. The original owner later negotiated the sale of the parking and dock areas at a fair market price and no one suffered a loss thanks to FCT’s involvement.

Mortgage enforceability
A lender had issued a mortgage for just under $1M to a husband and wife. When the mortgage went into arrears and the lender attempted to contact the mortgagors, the wife advised the lender that she and her husband were currently in the middle of a highly contested divorce settlement and that she had never signed any mortgage documents. Because it was arranged without her knowledge or consent, she claimed that the mortgage was unenforceable. Since the lender had insisted on the mortgage being titled insured when they approved funding, FCT covered them for the legal costs of defending the enforceability of the mortgage and the loss as a result of negotiating a settlement with the wife.

Title and/or legal description defects
A mortgage in the amount of $110,000 was in arrears and the lender commenced a power of sale to try to recoup their investment.  Once the proceedings were underway, the lender was advised by legal counsel that there was a life interest registered on title, making it impossible to sell the property until that individual was either paid out or signed off on the sale. Since the holder of the life interest had since passed on, FCT retained and paid for counsel on behalf of the lender to delete the life interest from title. The sale went ahead as planned and lender was able to avoid a loss.

Do you have any fraud stories or prevention tips you’d like to share? Feel free to comment below.

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