Pub. 12 2015 Issue 3

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S 18 The three NM 83 series construction loan endorsements dif- fer by the required manner of payment to the subs and suppli- ers in order for mechanics’ lien coverage to exist: i) NM 83 (ALTA 32-06) only covers claims by subs and sup- pliers designated for payment by the general or the owner in documentation supporting a construction loan advance; ii) NM 83.1 (ALTA 32.1-06) limits coverage to claims by subs and suppliers paid directly by the title insurance underwriter or by the lender with the title underwriter’s written approval; or iii) NM 83.2 (ALTA 32.2-06) provides coverage for claims by subs and suppliers paid directly by the lender or on the lend- er’s behalf. Any of the NM 83 series endorsements are updated by issu- ance of the NM 84 (ALTA 33-06) Disbursement Endorsement which updates the Date of Coverage and increases the policy limit Aggregate Amount by the amount of the additional con- struction loan advance. This endorsement is issued based upon a title downdate, proof of payment of the subs and suppliers, partial or final lien waivers, and other payment documentation. The issuance of the NM 84 endorsement is discretionary; the ti- tle underwriter can decline to issue this endorsement and freeze the mechanics’ lien coverage at the prior insured amount at any time during the course of a construction project. This is clearly a significant change for large construction loans and presents far more potential risk to the lender. If any of the NM 83 series endorsements are used, the lender cannot sim- ply rely on its recorded first mortgage to be superior to any and all mechanics liens and expect the title company to defeat any defective claims. While limited mechanics lien coverage in the loan policy does not limit the protection of a proper first mort- gage lien against later work and materials under §48-2-5(A), the title company may not be obligated to step in and bear the expense of that fight on behalf of the lender. When the restric- tive endorsements are used, there is significantly more risk to the lender in the event of a “problem project” which has cost overruns, diverted loan proceeds, failure of the contractor to pay subs or suppliers, owner/general contractor disputes, or dispute with a major or specialized sub or supplier. Mechanics liens rarely occur in a vacuum and are usually only one indica- tion of a problem. III. Conclusion Financial Institutions and lenders must understand the dif- ference between expiring/non-expiring loan policies and must understand the limits and requirements for the new types of mechanics’ lien coverages and exclusions. Loan policies and procedures need to address these new coverages and require enhanced loan administration if more limited mechanics’ lien coverage applies. Loan officers need to clearly understand what mechanics lien coverages, exclusions, and conditions will be ap- plied by the title company for each proposed loan/policy. These specifics are important in order to issue a loan commitment to the borrower and should affect protective terms and conditions in loan documents. After closing, a policy expiration and the mechanics lien coverage requirements/exclusions should drive the level of needed loan/advance monitoring to meet title pol- icy endorsement requirements and coverage conditions. Sup- port staff training is also important to help manage these new construction risks. One final note about NM title insurance policies and cover- ages – New Mexico’s title policy and endorsement forms are no longer embedded in the New Mexico title regulation and are in- stead hyperlinked to the promulgated form.  Authors Gordon S. Little, Esq. is Of Counsel with the Miller Stratvert P.A. law firm in Albuquerque. Gordon’s continuing banking clients include global, regional and community banks and other financial institutions. Since 1983, Gordon’s practice has focused on complex commercial and real estate lending, loan workouts, creditor representation in commercial and business bankruptcies and collections, lender liability defense and with bank operations matters. Prior to his legal career Gordon was a commissioned National Bank Examiner in New Mexico for the Office of the Comptroller of the Currency. Gordon has been an Associate Mem- ber of the NMBA for many years and was a speaker at the NMBA 2014 Lend- ers Conference. glittle@mstlaw.com www.mstlaw.com Stephen J. Rhoades, Esq. is Vice President and New Mexico State Counsel for the Fidelity National Title Group with an office in Albuquerque. Stephen has been New Mexico underwriting counsel for two title insurance underwriters for the past 12 years. Prior to that time, Stephen was an attorney in private practice focusing his practice on representation of title insurance underwriters, title insurance agents and insureds under title insurance policies. Stephen served as President of the New Mexico Land Title Association in 2013-2014. stephen.rhoades@fnf.com www. FNTGSWAgency.com 1 Remember that in New Mexico, all the content and terms of all title policies and en- dorsements are controlled by the Office of the Superintendent of Insurance regulation (59A-30-4 NMSA 1978). All policies and endorsements issued by all title companies are uniform. Neither the underwriter nor the local title agency has the ability to make or allow changes to policy forms (13.14.18.9 NMAC). 2 The limitation or termination of loan policy coverage due to a “novation” (replacement of the original note by a new, replacement or renewal note) continues to be a risk avoided by modifying but never replacing the original note. 3 §48-2-5(A) NMSA provides that all mechanics liens have priority over any lien or mortgage which attaches (is recorded) after the commencement of construction, work done or materials furnished on site. 4 Access to all promulgated forms including commitments, policies and endorsements can be obtained by visiting http://www.osi.state.nm.us/title-insurance/index.html and clicking on the link in the table in the middle of the page: Official Title Forms. 5 This article is presented for general information purposes only and does not reflect the policy or positions of the authors, their employers, clients or customers. The contents are not intended as and may not be taken for legal or technical advice or opinions.  Lien Times  continued from page 17