the cause of much confusion.

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1 RATE RULES Which one is the attorney here? the cause of much confusion. David M. Hays Underwriting Counsel Title Resources Guaranty Company 2 RATE RULES If the facts don t fit the theory, change the facts. Albert Einstein The biggest challenge with many rate rules is that they are sometimes ambiguous and they don t always appear to fit the facts of a particular transaction. 3

2 Rate Rule Confusion Your interpretation of the rule may be different than mine. 4 Case Studies The best way to understand the rules is to see them in Live Action. 5

3 Case Study 1 You are asked to issue an LTP in connection with an interim construction loan on a residential lot owned by the borrower worth $50,000. The construction loan is $250,000 and the borrower paid for a policy when he bought the lot. Borrower wants an OTP for the appraised value at completion ($350,000). Can you comply with this request? What rate/procedural rules apply? What is the Policy Amount for each policy issued? What is the amount of premium collected? 6 Answer-Case Study 1 Yes, you can insure as requested. P-66, R-3(A)(1), R-5, OTP $350,000; LTP $250, Premium Calculation: $350,000otp $2,178 P-66 $ 50,000 ($ 503) R3(A)(1) Premium paid for surrendered policy $1,675 $250,000ltp $ 100 R5 Simultaneous issue $1,775 Total Premium Note: Policy must be issued with P-8.B. Exceptions for unpaid bills and pending disbursements; construction of residential homestead requires valid Mechanic s Lien Contract, signed by the homeowners and filed of record in order to properly renew and extended by lender s note and deed of trust. 7

4 Case Study 2 Upon Completion of construction you are requested to issue an OTP and LTP related to the refinance of the prior construction loan. However, do to change request made during construction, the payoff under the construction loan is $300,000 and Borrower wants to increase his OTP for the new appraised value of $400,000. Can you comply with this request? What rate/procedural rules apply? What are the policy amounts? What is the amount of premium collected? 8 Answer-Case Study 2 Yes, you can insure as requested. R-5(B), R3 OTP $400,000; LTP $300,000 Premium Calculation: $400,000otp $2,445 Basic Rate ($1,675)Surrendered OTP Prem $ 770 R-3 Basic Rate on new otp less basic rate paid on surrendered otp. $300,000lpt $ 100 R-5 Simultaneous Issue Total Premium $ 870 Key Term 9

5 Case Study 3 Same Borrower but in this case, the owner does not request a new owner s policy, you are only requested to issue an LTP for the new loan amount of $300,000. Can you comply with this request? What rate/procedural rules apply? What is the policy amount? What is the amount of premium collected? 10 Answer-Case Study 3 Yes, you can insure as requested. R-18 LTP $300,000 Premium Calculation: $300,000new ltp $1,911 Basic Rate $250,000prior ltp Differs in that it is not based on what was paid Key Term $1,644 R-18 Greater of: the excess $ 267 of the current promulgated premium on amount of new policy and the current promulgated premium on prior policy (construction); or the minimum basic premium ($229). Total Premium: $ 267 (being greater than $229) 11

6 Case Study 4 You are closing the refinance of a $300,000 construction loan for a commercial addition. Total value of the property after construction is $600,000. Property originally bought and OTP issued in 2000 for $150,000 cash. The owner now request that you simultaneously issue an OTP and LTP both in the amount of $300,000. Can you comply with this request? What rate/procedural rules apply? What are the policy amounts? What is the amount of premium collected? 12 Answer-Case Study 4 No, you cannot comply with this request. P-66(1)(b) If no sale is being made, all owner s policies shall be issued for an amount equal to the value of the land and any existing improvements ; R-5 OTP $600,000; LTP $300,000 Premium Calculation: $600,000 otp $3,513 $300,000 ltp $ 100 R-5 Total Premium $3,613 Note: No Credit given for old OTP under R-5 b/c more than 4 years has passed. 13

7 Case Study 5 You have received an order to issue the title policies on a transaction in which a corporate borrower has arranged for a first lien in the amount of $4,000,000 and a second lien in the amount of $2,000,000 on its company headquarters in your county. You are requested to simultaneously issue a loan policy to each of the lenders, but there is to be no owner policy issued. Each of the lenders requests the area and boundary exception amendment and both tax exception amendments. Can you comply with these requests? Why or why not? What is the Policy Amount of each policy? What rate rule(s) and/or procedural rule(s) apply? What is the amount of premium you should collect for each policy? 14 Answer-Case Study 5 Can you comply with these requests? Yes Why or why not? R-7 allows for the issuance of a mortgagee policy covering a first and subordinate lien issued simultaneously What rate rule(s) and/or procedural rule(s) apply? R-7, R-19, R-24 What is the Policy Amount of each policy? $4,000, first lien $2,000, second lien Premium Calculation: $4,000, first lien +2, second lien $6,000, aggregate liability -5,000, $1,000, X $ 3, , $ 26, (R-7) basic premium for first lien policy (R-19 & R-24) tax exception amendments $ 26, Premium for first lien policy $ 5.00 (R-7) premium for second lien policy (R-19 & R-24) tax exception amendments $ Premium for second lien policy 15

8 Case Study 6 More than five years ago, but less than six years ago, you issued a mortgagee policy to First National Bank insuring the lien of a construction loan executed by John Borrower (to construct a dry cleaning facility). The loan amount was $500,000. Three years ago John sold the property to a Buyer who assumed the construction loan. You issued the owner title policy in that transaction. Construction is finally complete and you have been asked to close the permanent loan transaction. The mortgagee policy is to be issued in the amount of $500,000, which will be given in renewal and extension of the unpaid balance on the construction loan. The new lender requests the area and boundary exception amendment, both tax exception amendments, and an EPL endorsement. Can you comply with these requests? Why or why not? What is the Policy Amount of each policy? What rate rule(s) and/or procedural rule(s) apply? What is the amount of premium you should collect for each policy? 16 Answer-Case Study 6 Can you comply with this request? Partially Why or why not? R-18 provides that if the new loan renews a construction loan on which a mortgagee policy (not a Binder) was issued, the premium for the new loan is the minimum basic rate, (unless the new loan is greater than the old loan). EPL endorsement is not available for commercial property. What is the Policy Amount? $500, What rate rule(s) and/or procedural rule(s) apply? R-18, R-19 &P-20, and R-24 & P-29; EPL endorsement is not allowed because property is not residential What is the amount of the premium you should collect? $ (R-18) current minimum basic premium rate (R-19, R-24) tax exception amendments $

9 Case Study 7 A customer comes to your requesting you issue their construction loan policy for a home on two lots they bought earlier, and asks about issuing a new OTP at the same time for the full value of the land and proposed improvements. Each lot had an OTP issued. The first lot was purchased in 2002 for $20,000 and the second in 2006 for $30,000. the new construction loan will be for construction of a home of $250,000 and then apply the credit allowed under revised Rate Rule 3 against the cost of the OTP. How much do you charge? What rate rules and cost savings can you advise the customer about in connection with the overall transaction? 18 Answer-Case Study 7 Rate Rule 3 was revised May 1, 2008 to allow a credit for multiple prior owner policies when an owner wants to construct improvements by issuance of a new OTP. Prior to this rule change only a single prior OTP on identical land was allowed to receive any credit toward a new OTP. The rule provides that if improvements are subsequently added, a new OTP may be issued in the aggregate amount of the original OTP, plus the cost of improvements, as provided in P-66. The amount of coverage therefore must be $250,000. The rule then states that if multiple original OTPs were issued, the premium for the new policy shall be at the Basic Rate (full premium) less the currently promulgated Basic Rate for the aggregate of the surrendered original policies. Therefore, the premium and credit under the rule is as follows: Basic Premium for new $250,000 policy + $1,644 Credit for total of $50,000 prior policies - $ 503 Net Premium = $1,141 19

10 Case Study 8 Husband and second wife purchase home. They receive an OTP (T-1R)for $250, Husband dies intestate leaving a child form a prior marriage who takes husband s ½ interest in the community property. Surviving spouse wants to buy child s ½ interest in the property. -What should you advise her regarding her current coverage? -Can she purchase a new policy? -What is the policy amount? -What is the premium that she will pay? 20 Answer to Case Study 8 In order to answer this case study we must review the Continuation of Coverage section of the OTP (T-1R): We insure you as long as you: a. own your title b. own a mortgage from c. are liable for any Title warranties you make We insure anyone who receives your title because of your death. We do not insure your transferee or assignee. In this case the surviving spouse no longer owns ½ of the property therefore her coverage is now limited to $125, under the policy. Assuming the property s value is at least $250,000.00, when she purchases the ½ interest from the child she can purchase a second policy insuring the ½ interest for $125, She would pay the basic premium rate of 1,

11 Case Study 9 You are requested to issue two policies on a commercial transaction. The first policy is $3,000, and the second is $1,500, The lenders have requested the T-19 endorsement. What is the Policy Amount of each policy? What rate rule(s) and/or procedural rule(s) apply? What is the amount of premium you should collect for each policy? 22 Answer to Case Study 9 Policy Amounts?$3,000,000.00; $1,500, Rate Rule? R-7; R29 Premium Calculation: $3,000, $1,500, $3,000,000 $4, ($1,000,000.00) $3,5000, x $ 15, , $ 21, $5.00 (R-7) $ 21, $ 1, (10% of base premium) $ (10% of base premium not $ 23, the $5.00 paid) $1,500,000 23

12 Case Study 10 You are closing a transaction on the sale of a tract of land with a sales price of $80,000. The purchaser is using this land as collateral for three separate loan transactions: a first lien in the amount of $50,000 to the seller; a second lien in the amount of $20,000 to a bank; and a third lien in the amount of $15,000 to another bank. You are asked to simultaneously issue an owner title policy and three mortgagee policies. Can you comply with this request? What would each policy state as a Policy Amount? What rate rule(s) and/or procedural rule(s) apply? What is the amount of premium you should collect for each policy? 24 Answer to Case Study 10 Can you comply with this request? Yes What would each policy state as a Policy Amount? $80, OTP $ (R-3) $50, LTP $ (R-5) 1st lien policy $20, LTP $ (R-5) 2nd lien policy $15, LTP $ (R-5) 3rd lien policy What rate rule(s) and/or procedural rule(s) apply? The amount of the LTP(s) exceed the amount of the OTP, therefore, the third lien mortgagee policy is calculated as provided in R-5 B: What is the amount of premium you should collect for each policy? $ Premium for $85,000 liability R-5 B Simultaneous issue rate $ <707.00> Premium for $80,000 liability of OTP $

13 Case Study 11 Two contiguous tracts of land are to be used as collateral to secure a $40,000 loan. The borrower currently owns one of the tracts, and will acquire the other tract for a sales price of $12,000 simultaneously with the creation of the lien. You are requested to issue an owner title policy to the borrower on the tract he is purchasing, and to simultaneously issue a mortgagee policy to the lender in the amount of the $40,000 loan. Can you comply with this request? Why or why not? What is the Policy Amount for each policy? What rate rule(s) and/or procedural rule(s) apply? What is the amount of premium you should collect for each policy? 26 Answer to Case Study 11 Can you comply with this request? Yes, but not using R-5 Why or why not? The R-5 simultaneous issue rate of $ is not available for the mortgagee policy because all the land insured is not covered by the owner policy. There is a charge for one additional chain of title (R-9) because all of the land covered by the mortgagee policy was not owned by the same party at the time the order was received. What is the Policy Amount and Premium for each policy? $10, OTP $ Total OTP Premium $ $40, MTP $ R-9 Add n Chain $ Total LTP Premium $ What rate rule(s) and/or procedural rule(s) apply? P-66;R-9 27

14 Case Study 12 March 1, 2012, you have received an order to close the purchase of a residential lot in an old part of town. The sales price is $25,000. The earnest money contract, prepared by an attorney representing the buyer, requires that the tax exception be amended to insure against roll back taxes and taxes not yet due and payable in the owner title policy. Lender makes same request. Taxes are paid through Can you comply with this request? Why or why not? What is the Policy Amount? What rate rule(s) and/or procedural rule(s) apply? What is the amount of the premium you should collect? 28 Answer to Case Study 12 Can you comply with this request? No with respect to OTP; Yes to LTP Why or why not? The rules governing amendment of the tax exception (P-20) only apply to a MTP or Binder, not an OTP. In connection with the issuance or amendment of any Loan Policy or of any Loan title Policy Binder What is the Policy Amount and Premium? $25, otp $ (P-66) $25, ltp $ (R-5) $ (R-19)ltp only $ What rate rule(s) and/or procedural rule(s) apply? P-66; R-5; R-19 29

15 Case Study 13 You are asked to issue an OTP and LTP for $180, The LTP is to be issued in accordance to P-8a. The borrower bought the lot in 2008 and purchased an OTP at that time insuring the value of the lot ($50,000.00). -Can you comply with this request? -What are the Policy Amounts and Premiums? -What rate rules and/or procedural rule apply? 30 Answers to Case Study 13 Can you comply? Yes Policy Amounts and Premiums: $180, otp $1, $180, ltp ($ ) (R-3 via R-5.C.) $ $ (R-5) Total Premium $

16 Answer Case Study 13 (Cont.) What if the borrower purchased the lot in 2005? The OTP credit provided in (R-5.C) is limited to transactions wherein the new OTP is issued within 4 years of the previously issued OTP therefore, no credit would be given and the total premium would be: $1, $100.00(R-5)=$1, Case Study 14 You are requested to issue an LTP on a $100, home equity loan. $35, of the home equity proceeds are going to payoff an existing purchase money loan that was refinanced last year. -Can you comply with this request? -What is the policy amount? -What rate rules and/or procedural rules apply? 33

17 Answer to Case Study 14 Can you comply? Yes Policy Amount and Premium: $100, ltp $ P-66 ($400.00) R-8.A. credit based on payoff of $35K Total Premium: $ P-8 is not limited to straight rate and term refinance transactions. issued on a loan to fully take up, renew, extend or satisfy an old mortgage Rate Rules: P-66, P-8, R-8 34 Case Study 15 You have received an order for the refinance of a loan with a written payoff balance of $150, You closed on the prior transaction in October 2010, and issued a MTP for $145, The borrower has obtained two new loans to payoff this loan and you will issue a MTP on the first lien in the amount of $100, and a MTP on the second lien in the amount of $50, Can you comply with this request? Why or why not? What is the Policy Amount? What rate rule(s) and procedural rule(s) apply? What is the amount of the premium you should collect for each policy? What if the lender decides not to have a second lien policy? 35

18 Answer to Case Study 15 Can you comply with this request? Yes Why or why not? The revision of R-8 states that on Mortgagee Policies, issued on multiple loans to fully take up, renew, an old mortgage insured by a single Mortgagee Policy, the new policies being in the amount of the new mortgages, the premium for the larger Mortgagee Policy shall be at the Basic Rate, but a credit shall be allowed upon the premium as set forth previously in this rule. The premium for the remaining new Mortgagee Title Policy(ies) shall be at the Basic Rate. It also states that in the calculation of the credit, the amount from the written payoff balance shall not exceed 100% of the original amount of the old mortgage. Therefore, the credit is calculated on the original loan amount of $145, and not the $150, written payoff balance. 36 Answer to Case Study 15 (Cont.) What is the Policy Amount? $100,000 1 st Lien $50,000 2 nd Lien What rate rule(s) and procedural rule(s) apply? R-8(b) What is the amount of the premium you should collect for each policy? Can t use payoff amount b/c it exceeds original policy. $145, prior policy at current rate = $1, x 35% [R-8(b) credit % as over 2 years but under 3] $ credit $ Premium on $100, st lien (379.05) R-8(b) credit amount $ $ Premium on $50, nd lien $ Total Premium 37

19 Case Study 16 You are requested to issue an OTP and LTP on a purchase transaction involving 3 tracts of land located in the same county. All three tracts of land are being sold by a single owner. Two of the tracts are adjoined, the third tract does not adjoin the other two. The total purchase price of the three tracts is $300, Can you comply with this request -What is the Policy amount? -What rate rules/procedural rules apply? -What is the premium to be collected? 38 Answers to Case Study 16 Can you comply? Yes What is the policy amount? $300, What rate rules/procedural rules apply? P-66; R-9; R-5 Premium Calculation: $300, otp $1, (P-66) $ (R-9 Additional Chain) $200, ltp $ (R-5) Total Premium: $2, Key Term R-9 requires that you charge the minimum basic premium rate for each additional chain. For purposes of applying this rule contiguous tracts of land in the same county are treated as one tract. In this case tract one and two would be treated as a single chain and tract three would be an additional chain. 39

20 Case Study 17 If we change the facts of Case Study 16 and state that while tracts 1 & 2 adjoin, tract 2 is in a different county does this affect our premium calculation? 40 Answer to Case Study 17 Yes, our premium calculation is as follows: Premium Calculation: $300, otp $1, (P-66) Tract 2 $ (R-9 Additional Chain) Tract 3 $ (R-9 Additional Chain) $200, ltp $ (R-5) Total Premium: $2, R-9 requires that you charge the minimum basic premium rate for each additional chain. For purposes of applying this rule when parcels lien in more than one county, there are separate chains of title in each county. In this case tract two, while adjoining tract 1, constitutes a separate chain, as does tract 3, being noncontiguous. 41

21 Case Study 18 You are requested to issue an OTP and on the purchase of 3 non-contiguous lots that are located in the same subdivision. The lots are owned by the same seller. The purchase price is $150, How would you apply R-9 in this situation? - What is the premium? 42 Answer to Case Study 18 R-9 States that noncontiguous lots in the same subdivision and having the same plat recording date, belonging to the same owner shall be treated as one tract. Premium calculation: $150, otp $1, (P-66) No charge for additional chain. 43

22 Case Study 19 (Variation on R-9) You are requested to issue an OTP and LTP for the purchase of a single tract of land that spans two counties. The purchase price is $300, Does R-9 apply in this situation? -What is the premium calculation? 44 Answer To Case Study 19 R-9 states that if the parcels lie in more than one county, there are separate chains of title in each county. Although this is a single parcel, because it requires a search in both counties, and additional chain fee will apply. $300, otp $1, (P-66) Additional Chain $ (R-9) Simultaneous issue $ (R-5) Total Premium: $2,