Bulletin: MU2021001

Dear Associates:

The Company continues to experience a high volume of claims involving non-institutional lender transactions, more commonly referred to as “hard money loan transactions.” It many instances, it is an acceptable risk to insure an owner who is funding the acquisition of property via a non-institutional loan and/or insuring a non-institutional lender, where the policies to be issued are standard ALTA policies and contain standard exceptions. However, under certain circumstances, the risk is elevated and further review is necessary. These circumstances include: 

• Loan proceeds are to be used for construction, remodeling, or rehabilitation purposes
• Owner policy amount exceeds purchase price
• Loan policy amount exceeds loan amount
• The number of mortgagees/beneficiaries exceeds four

An additional factor which increases risk with hard money loan transactions is that many of these lenders conduct limited due diligence as to the borrower and/or the property; instead, loan approval is based on the perceived value of the property and the coverage provided in the title insurance policy. As a result, hard money lender transactions are targets for fraud, in particular equity skimming and deed theft schemes.

Due to the increased fraud risk, an inquiry into the circumstances surrounding the transaction may be necessary. Below are some common fraud factors in non-institutional lender transactions and the due diligence that must be followed to detect and avoid a potentially fraudulent scheme. 

Common Fraud Factors in Non-Institutional Lender Transactions

• Borrower/buyer is out-of-state (not local)
• Borrower/buyer requests to sign documents using a power of attorney
• No direct contact with sellers or borrower/buyer
• Property owned by an entity and Secretary of State records disclose recent changes in management and/or authorized signatories
• Seller(s) is heir/devisee of title owner
• Chain of title discloses recent nominal consideration transfers
• Chain of title discloses recent transfers without institutional financing
• A large amount of cash is to be disbursed to borrower or seller
• Pressure for a rush closing
• Property is owned “free and clear”
• Chain of title discloses mortgages having been discharged without associated refinancing
• Property being sold without brokers or without listing on a multiple listing service (MLS)

(See also, SLS2012004 and Section 6.36 of the National Underwriting Manual)

Due Diligence Steps to Avoid Fraud Claims in Non-Institutional Transactions

• Disburse proceeds ONLY to borrower/seller, and not to a third party, unless proceeds are:
  • Used to pay off existing encumbrances;
  • Used to pay contractors’ or suppliers’ invoices for work on the property; or
  • Paid to another closing attorney, or to a title company in connection with the seller’s or borrower’s purchase of another property (secure evidence that borrower or seller is the actual purchaser).
• Conduct in-person closing with buyer/borrower
• Compare buyer’s/borrower’s signature against previously signed documents and identification, such as driver’s licenses
• Compare seller’s signatures to those shown on previously recorded documents
• Do not accept documents signed under Power of Attorney without underwriter approval
• When seller/borrower is receiving more than $25,000.00 in sale or loan proceeds, require two forms of identification
• If available, run borrower(s) and seller(s) names against Lexis Nexis database to confirm validity

REQUIREMENTS FOR NON-INSTITUTIONAL (“HARD MONEY”) LOAN TRANSACTIONS

Underwriter approval is necessary in a non-institutional loan transaction where any of the following exist:

1. All or some of the loan funds will be used for construction, rehabilitation or remodeling
2. All or some of the loan funds will be used to pay off a construction loan
3. Property is owned “free and clear”
4. Closing will not take place at the issuing agent’s office or is a “mail-away” closing
5. Use of a Power of Attorney for any transaction documents
6. 24-month chain of title discloses nominal transfers or transfers without simultaneous financing
7. Borrower or Seller is receiving funds in excess of $25,000.00
8. The number of mortgagees/beneficiaries exceeds four

If your transaction has any of the characteristics listed in 1-8 above, or your due diligence raises any concerns regarding the transaction, you must submit the Hard Money / Private Lender Transaction Approval Form for NH, ME, VT, MA, RI & CT through policyapprovalrequest@stewart.com.

For transactions which do not exhibit any of the characteristics listed in 1-8 above, underwriting approval is not necessary if an ALTA 2006 owner or loan policy is being issued which contains standard exceptions and the transaction does not involve an extrahazardous risk which requires underwriter approval (See VU 5.36).

If you have any questions relating to this or other bulletins, please contact a Stewart Title Guaranty Company underwriter.

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