Bulletin: CA000022

Dear Associates:

It has recently come to the attention of the California underwriters that a large potential for liability under our title insurance policies exists with respect to Mello-Roos assessments which are collected with the real property taxes by the County Tax Collector.

When an installment of taxes becomes delinquent more than 5% of the total dollar amount of the Mello-Roos assessments in that Mello-Roos district are uncollected the Tax Collector is authorized by the bondholder to ?strip? the Mello-Roos assessments from the taxes. This creates a situation where, when the delinquent Taxes are brought current, the delinquent Mello-Roos assessment, which has been stripped, is not included in the redemption amount paid to the Tax Collector. The delinquent assessment continues to accrue interest and costs and, sometime in the next fiscal year, a bond foreclosure action is instituted against the property by the bondholder.

Because Mello-Roos assessments are most prevalent in new construction and new subdivisions, it is the innocent purchaser of the home from the developer who is named in the lawsuit, This innocent purchaser will also be the named insured in any owner's policy issued at the time the sale was closed. When the insured receives service of the bond foreclosure action a tender of defense under the terms of the policy will be made. In order to obtain a dismissal of the bond foreclosure action STG will not only have to pay the delinquent amount plus penalties, but will also have to pay the attorney's fees and costs of the foreclosing bondholder.

In order to reduce and hopefully avoid this type of loss in the future, the following underwriting procedures must be instituted.

UNDERWRITING GUIDELINE

If the property under search is determined to lie within a Mello-Roos assessment district, a careful search must be conducted to determine if there have been any delinquent taxes, within both the current fiscal year and the previous fiscal year. If taxes were delinquent within any of those two time periods, a determination must be made by inquiring with the appropriate agency (municipal or county) whether the Mello-Roos assessment was stripped for that time period. If not, Taxes should be reported in the normal manner. If the assessment was stripped, then a special exception must be made disclosing the stripped bond, the fact that the bond is no longer collected with the taxes and the amount necessary to redeem the delinquency.

Any unpaid and/or delinquent amounts, penalties, costs and interest for (Name of the Assessment District and bond or assessment number) that are not included in current amounts due and are not collected with ad valorem real property taxes.

Bond assessment for the fiscal year(s) _________ have not been collected with the ad valorem real property taxes. For the amount necessary to being the assessment current, please contact _____ at ______________.

If you have any questions please contact STG underwriting personnel.