Texas Title Insurance and Real Estate Questions

Transcription

1 Texas Title Insurance and Real Estate Questions Steve Lawrence, President Steven G. Lawrence, P.C., a Texas Corporation [email protected] Nationwide Toll Free Alternate Phone Nationwide Toll Free Fax Alternate Fax Mailing Address: P.O. Box 1009, Allen, Texas Express Delivery: 121 South Tennessee Street, McKinney, Texas Steve Lawrence is a Licensed Texas Attorney (since 1979) and is Board Certified by the Texas Board of Legal Specialization in: (i) Residential Real Estate Law; and, (ii) Commercial Real Estate Law. February 8, 2001 (10:58AM)

2 TOC i TABLE OF CONTENTS A. TEXAS TITLE INSURANCE TOTAL REGULATORY ENVIRONMENT General Regulatory Overview Prohibition Against Use of Non-Promulgated Insurance Forms Basic Promulgated Forms Prohibition Against Providing Coverages Outside the Policy Forms... 1 B. GENERAL ABBREVIATED OVERVIEW OF TEXAS TITLE INSURANCE COVERAGES Commitment Binder Policies Available Premium for Policy Endorsements... 3 a. Adjustable Mortgage Loan Endorsement (T-33)... 3 b. Assignment Endorsement (T-3)... 3 c. Balloon Mortgage Endorsement (T-39)... 3 d. Completion Endorsement (T-3)... 3 e. Correction Endorsement (T-3)... 4 f. Downdate Endorsement (T-3)... 4 g. Environmental Protection Lien Endorsement (T-36)... 4 h. Home Equity Endorsement (Equity Loan Mortgage Endorsement) (T-42)... 4 i. Home Equity Endorsement (Supplemental Coverage Equity Loan Mortgage Endorsement) (T-42.1)... 4 j. Leasehold Mortgagee Policy Endorsement (T-5)... 5 k. Manufactured Housing Endorsement (T-31)... 5 l. Modification Endorsement (Mortgagee Policy of Title Insurance P-9.b(3) Endorsement Form - Partial Release, Release of Additional Collateral, Modification Agreement, Reinstatement Agreement, or Release from Personal Liability) (T-38)... 5 m. (Texas) Reverse Mortgage Endorsement (T-43)... 5 n. Revolving Credit Endorsement (T-35) Optional Coverages in the Mortgagee Policy... 5 a. Arbitration b. Area and Boundary (Survey) Coverage c. Coinsurance d. Creditors Rights e. Easements and Access... 6 f. Express Insurance Encroachments g. Express Insurance Defects in Title h. Express Insurance Prior Unreleased Liens i. Gap Coverage j. Insuring Around k. Maintenance Liens l. Mechanic s Lien m. MERS n. Minerals o. Parties in Possession p. Restrictions.... 8

3 TOC ii q. Standard Exceptions and Extended Coverage r. Subordinate Liens and Leases s. Successors and Assigns t. Survey Coverage (see Area and Boundary Coverage ) u. Tax Coverage TABLE OF "ENDORSEMENTS AND COVERAGES"... 9 Additional Advance... 9 Additional Insured... 9 Adjustable Mortgage Loan... 9 Apportionment Clause Arbitration Deletion Area and Boundary Amendment Assignment Endorsement Balloon Mortgage Endorsement Binder Certificate of Title (U.S.A.) Certificate of Title for Easement (U.S.A.) Coinsurance Commitment for Title Insurance Commitment for Texas Department of Transportation Completion Endorsement Contiguity Correction Endorsement Covenants Creditor's Rights Defects in Title Downdate to Binder Downdate to Mortgagee Policy Downdate to Owner Policy Easements - encroachments Easements - insurance against enforcement Easements - insurance that easement provides access to street Easements - abutter's rights Easements - lack of access Encroachments (over private setback line; over public building line; over easement; over property line) Environmental Protection Lien Endorsement Exceptions - Special Exceptions - General Extension of Binder Immediately Available Funds Procedure Agreement (Good Funds) Increase Mortgagee Policy Increased Owner Policy Increased Value Endorsement Insured Closing Service to Lender Insured Closing Service to Purchaser/Seller Insured Owner Policy Insured Lender Insuring Around Leasehold Mortgagee Policy Endorsement Leasehold Owner Policy Endorsement Leasehold Endorsement to Residential Owner Policy (Residential Leasehold Endorsement)... 18

4 TOC iii Location Manufactured Housing Endorsement Mechanic s Liens Minerals Modification Endorsement Mortgagee Policy of Title Insurance Multiple Liens Nonmerger Option/Refusal Owner Policy of Title Insurance Owner Policy Rejection Form Owner Policy U.S.A. (Policy of Title Insurance (U.S.A.) Purchaser/Seller Insured Closing Service Letter Proof of Loss (Texas Title Insurance Proof of Loss Form) Reinsurance Agreement (Facultative Reinsurance) Reinsurance Agreement - Tertiary Reinsurance Commitment Residential Owner Policy of Title Insurance Restrictions Revolving Credit Endorsement Subordinate Liens Tax Coverage Tax Deletion U.S.A. Endorsement D TITLE INSURANCE RATE REDUCTION TABLE E. TEXAS TITLE LAWYER S PERSPECTIVE OF THE HOME EQUITY AMENDMENT F. TITLE INSURANCE ASPECTS OF JANUARY 1, 1999 TEXAS CONSTITUTIONAL AMENDMENT WITH RESPECT TO HOME EQUITY LENDING Home Equity Lending a. Important Definitions (1) Home Equity Loan Definitions i. "Traditional Home Equity Loan ii. "Home Equity Cash-Out Refinance Loan (2) Insuring Form Definitions i. T-42.1 Supplemental Equity Endorsement ii. "T-42 Endorsement" iii. "T-2 Mortgagee Policy" (3) Transactional Definitions i. Deed of Trust ii. Promissory Note iii. The Office of a Title Company or Title Company iv. Grantor(s) v. Maker(s) b. Overview (1) The Constitution (2) Mandatory T-42 Endorsement (3) Optional T-42.1 Supplemental Endorsement c. Suggested Title Insurance Underwriting Considerations For T-2 Mortgagee

5 TOC iv Policy And T-42 Endorsement And T-42.1 Supplemental Equity Endorsement Insuring a Home Equity Loan (1) How the Existing T-42 Endorsement Works with the T-2 Mortgagee Policy and the New Supplemental Equity Endorsement {T-42.1} (2) A Non-technical Description of the New Coverages and Basic Underwriting Requirements d. Premium for T-42 and T-42.1 Endorsements and the Global Regulatory Requirements for the Supplemental Coverage Equity Loan Mortgagee Endorsement T (1) Premium Charges i. T-2 Mortgagee Policy with T-42 Endorsement Only ii. T-2 Mortgagee Policy + T-42 Endorsement + T-42.1 Endorsement (2) How Rate Rule R-8 Premium Credit Affects the T-42 Endorsement and T-42.1 Supplemental Equity Endorsement Premium Calculations (3) No T-42.1 Supplemental Coverage Endorsements for Loans Prior to November 12, (4) Other Endorsements and Coverages are Still Available (5) Circumstances Requiring Mandatory Deletion of Coverages A Through H in the New T-42.1 Supplemental Equity Endorsement Not Closed at the Office of the Title Company (6) Express Insurance Availability Pursuant to Procedural Rule P (7) No T-42.1 Supplemental Equity Endorsement Is Available Without the T-42 Endorsement e. Detailed Title Insurance Underwriting Considerations (1) Signature Before Specified Date - Insuring Provision 1(a) of T (2) No Loan Proceeds Disbursement Before Fourth Day - Insuring Provision 1(b) of T (3) Execution of Election Not to Rescind - Insuring Provision 1(c) of T (4) Document Copies - Insuring Provision 1(d) of T (5) Fees - Insuring Provision 1(e) of T (6) Blanks in an Instrument - Insuring Provision 1(f) of T (7) Attachment of Appraisal or Evaluation - Insuring Provision 1(g) of T (8) Signature of Acknowledgment of Fair Market Value - Insuring Provision 1(h) of T (9) No Land in Excess of Homestead Allotment - Insuring Provision 1(i) of T (10) No Other Land with a Home Equity Mortgage - Insuring Provision 1(j) of T (11) No Other Land With Released or Paid Off Home Equity Mortgage Within Past Twelve Months- Insuring Provision 1(k) of T f. Miscellaneous Issues (1) Rate Rule R-8 and Home Equity Cash-out Refinance Loans (2) Using Powers of Attorney (3) Mail-out Transactions (4) Urban Business Homestead And Urban Residential Homestead Considerations (5) Texas Home Equity Right of Recission and Federal Right of Recission g. Exhibits G. TITLE INSURANCE COVERAGES AND REFINANCE TRANSACTIONS UNDER TEXAS CONSTITUTION SECTION 50(e) Refinance Dilemma Analogy Purpose... 58

6 TOC v 3. Legislative Background Scope of Application Past Title Insurance Practices Reasonable Refinance Costs a. For Loan Origination Fee b. For Buy Down Points and Discount Points c. For Mortgage Insurance Premium: d. For Other Refinance Costs: General Underwriting Requirements a. Lender Approval b. Partial Invalidity Clause c. Subrogation Language d. Absolutely No Cash Back to Borrower e. Release or Assignment of Prior Lien Reminder Concerning Valid Loans on Homestead a. Refinance Transactions b. Purchase Money Loan Transactions c. Mechanic Lien Contract Loan Transactions Rate Rule Reminders a. All Transactions b. Refinance Transactions A More Liberal Underwriting Paradigm For Refinance Costs Includable in Mortgagee Policy Amount of Insurance a. General Parameters b. Additional Items Which May Be Included Based Upon Percentage Limitations No Cash Back to Borrower on Traditional Refinance Transactions a. Excess Cash at Closing (1) Redraft Loan Documents (2) Principal Reduction At Closing b. Borrower Wants Reimbursement for Prepaid Refinance Costs Home Equity Cash Out Refinances How the Section 50(e) Amendment May Affect Title Insurance Coverages a. Texas Department of Insurance Commissioner s Bulletin B The 3% Safe Harbor Archetype? Are Section 50(e) Issues Covered Title Insurance Risks? a. Business Difficulties Created by Insurance Department Bulletin (1) Is Section 50(e) a consumer Credit Protection Matter? (2) Lending Community Reaction to Commissioner s Bulletin H. TITLE INSURANCE COVERAGES AND UNDERWRITING APPROACHES RELATING TO CONSTRUCTION TRANSACTIONS ON HOMESTEAD AFTER AMENDMENT TO TEXAS CONSTITUTION 50(a)(5) Scope of Application Two Categories of Mechanic Lien Contract Transactions a. Non-Affected Homestead Transaction b. Affected Homestead Transaction c. How to Determine if it is an (i) Affected Homestead Transaction; or (ii) Non-Affected Homestead Transaction Legislative Background and Constitutional Language... 73

7 TOC vi 4. Underwriting Requirements a. Non-affected Homestead Transactions b. Affected Homestead Transactions (1) Special Exception Language (2) Builder Financed Transactions (3) Three Day Right Recission (4) The Location of Executing the Mechanic Lien Contract Requirement i. Execution at the Title Company ii. Execution At Lender s or Attorney s Office iii. Execution at Another Location and Powers of Attorney (5) Twelve Day Cooling Off Period (6) Emergency Situations Exception (7) Curing of Constitutional Defects I. TEXAS RECORDING LAWS Types of Notice Types of Recording Laws Notice of Bankruptcy Place of Filing and Recording Method of Filing Required Form of Instrument a. Short Form Acknowledgment: b. Ordinary (Long Form) Acknowledgment Filing Fees ATTORNEY S TITLE CHECKLIST ABUTTER S RIGHTS OF ACCESS (see ACCESS) ACCESS (see EASEMENT) ADDITIONAL ADVANCE (see INCREASED COVERAGE) ADDITIONAL INSURED (see INSURED) ADJUSTABLE RATE MORTGAGE (see VARIABLE RATE MORTGAGE) AFFIDAVIT ALLOCATION (see COINSURANCE) APPLICATION APPORTIONMENT (see ALLOCATION, see COINSURANCE) ARBITRATION AREA AND BOUNDARY (see SURVEY) ASSIGNMENT AUTHORITY BALLOON MORTGAGE BEACH (see WATER) BINDER (see ASSIGNMENT, see MECHANIC S LIENS, see MODIFICATION) BUILDING SETBACKS (see ENCROACHMENT) CERTIFICATIONS CLOSING INSTRUCTIONS (see Exhibit "MASTER CLOSING INSTRUCTIONS") CLOSING PROTECTION (see INSURED CLOSING SERVICE) COINSURANCE POLICY (see APPORTIONMENT) COMMITMENT (see SURVEY) COMPLETION ENDORSEMENT (see MECHANIC S LIENS) CONDOMINIUMS (see MAINTENANCE LIENS) CONTIGUITY (see SURVEY)... 86

8 TOC vii CONTRACT (see TREC) CONTRACT FOR DEED (see OPTION) CREDITORS RIGHTS DATE OF POLICY DEED DIRECT ISSUE (see HOME OFFICE ISSUE) DISCLOSURE (see KNOWLEDGE) DOWNDATE (see MECHANIC S LIENS) EARNEST MONEY (REPORT BOUNCED CHECKS) EASEMENT (see ENCROACHMENT, see SURVEY, see TAXES) ENCROACHMENTS (see EXPRESS INSURANCE, see FOUNDATIONS, see SURVEY, see WATER) ENVIRONMENTAL PROTECTION LIEN ENDORSEMENT EQUITY KICKER (see VARIABLE RATE) ERRORS EXCEPTIONS EXPRESS INSURANCE (see EASEMENT, see ENCROACHMENT, see INSURING AROUND, see SURVEY) FANNIE MAE FORFEITURE AND REVERSION (see Restrictions) FORMS (see Part C. Table of Endorsements and Coverages ) FOUNDATIONS (see ENCROACHMENT, see EXPRESS INSURANCE, see SURVEY) FUTURE ADVANCE (see REVOLVING CREDIT) FUTURE INSURANCE (see EXPRESS INSURANCE, see INSURING AROUND) GAP COVERAGE (see COMMITMENTS) GOOD FUNDS HEIRSHIP (see AFFIDAVITS) HOMESTEAD (see AFFIDAVIT, see BINDER, see REFINANCE) HOME OFFICE ISSUE IMPROVEMENTS (see LEASES, see MECHANIC S LIENS) INCREASED COVERAGE (see VARIABLE RATE MORTGAGE) INDEMNITY (See AFFIDAVIT) INFLATION (see INCREASED COVERAGE) INSPECTION, WAIVER OF (see PARTIES IN POSSESSION) INSURED INSURING AROUND (see EXPRESS INSURANCE) INSURED CLOSING SERVICE KNOWLEDGE LEASES (see PARTIES IN POSSESSION) LICENSE LIENS LOCATION (see SURVEY) MAINTENANCE LIENS (see SUBORDINATE LIENS AND LEASES) MANUFACTURED HOUSING MARITAL STATUS (see AFFIDAVIT) MECHANICS LIEN (see AFFIDAVIT, see INSURING AROUND) MERS MINERALS (see AFFIDAVIT) MISTAKES (see ERRORS) MODIFICATION (see REVOLVING CREDIT, see VARIABLE RATE) MULTIPLE MORTGAGES MULTIPLE TRACTS (see ALLOCATION, see APPORTIONMENT, see HOME OFFICE ISSUE)... 99

9 TOC viii NEGATIVE AMORTIZATION (see VARIABLE RATE) NON-PRODUCTION (see AFFIDAVIT, see MINERALS) NOT SAME PERSON (see AFFIDAVIT) OIL AND GAS (see AFFIDAVIT, see EXPRESS INSURANCE, see MINERALS, see EXCEPTIONS) OPTION (see EXPRESS INSURANCE) OWNER POLICY PARTIES IN POSSESSION (see INSPECTION, WAIVER OF, see LEASES) POWER OF ATTORNEY (see AUTHORITY) PRO FORMA PRORATIONS RATES (see Part C. Table of Endorsements and Coverages ) REFINANCE (see RATES) REINSURANCE (see FANNIE MAE) RELEASE REQUIREMENTS RESOLUTIONS (see AUTHORITY) RESTRICTIONS (see EXPRESS INSURANCE, see SUBORDINATIONS) REVERSION (see RESTRICTIONS) REVOLVING CREDIT RIGHT OF FIRST REFUSAL (see OPTION) ROLLBACK (see TAXES) RULES (see Part C. Table of Endorsements and Coverages ) SEPARATE PROPERTY (see MARITAL STATUS) SHORTAGES IN AREA (see SURVEY) SIMULTANEOUS ISSUE (see Exhibit "Endorsements and Coverages") SINGLE RISK (see FANNIE MAE, see REINSURANCE) SUBDIVISION SUBROGATION SUBORDINATE LIENS AND LEASES SUBORDINATIONS SURVEY (see ENCROACHMENT, see WATER) SURVIVORSHIP TAXES (see EASEMENT) TREC (see CONTRACT) TRUTH IN LENDING UCC (see SUBORDINATIONS) USURY UTILITIES (see EASEMENTS) VARIABLE RATE (see NEGATIVE AMORTIZATION) WATER (see ENCROACHMENT, see EXPRESS INSURANCE, see SURVEY) ZONING OWNER/BORROWER QUESTIONNAIRE FOR RURAL HOMESTEAD CHARACTERIZATION

10 1 A. TEXAS TITLE INSURANCE TOTAL REGULATORY ENVIRONMENT 1. General Regulatory Overview In Texas, the business of title insurance is in all respects totally regulated by the State of Texas in accordance with: (i) Article 9.01 et. seq. of the Texas Insurance Code; and, (ii) THE BASIC MANUAL OF RULES, RATES AND FORMS FOR THE WRITING OF TITLE INSURANCE IN THE STATE OF TEXAS. The Texas Insurance Code and The Basic Manual for Title Insurance are hereinafter jointly referred to as: The Regulations. Pursuant to Article 9.01 of the Texas Insurance Code, the legislature of the State of Texas found that the business of title insurance, both the direct issuance of policies and the reinsurance of assumed risk, of every type, should in all respects be totally regulated by the State of Texas. The Texas Department of Insurance, acting pursuant to the delegation of authority contained in the Texas Insurance Code, has promulgated THE BASIC MANUAL OF RULES, RATES AND FORMS FOR THE WRITING OF TITLE INSURANCE IN THE STATE OF TEXAS {hereinafter the Basic Manual for Title Insurance } which contains: (i) all insuring forms and endorsements; (ii) rate rules for insurance coverages; (iii) procedural rules for insurance coverages; (iv) administrative rules for dealing with the Texas Department of Insurance; (v) non-policy coverage forms required to be used; (vi) claims procedures; and (vii) Texas Department of Insurance bulletins. Accordingly, all title insurance policies, and endorsements thereto, are issued on forms promulgated by the State of Texas. The Basic Manual for Title Insurance, as adopted and enforced by the Texas Department of Insurance, specifically delineates the available title insurance coverages, and rates, for Texas real estate transactions which must be insured in accordance with the Texas Title Insurance Act. 2. Prohibition Against Use of Non-Promulgated Insurance Forms Article 9.07 of the Texas Title Insurance Act provides that no policy of title insurance, reinsurance of any assumed risk under any policy of title insurance, or any guaranty of any character on Texas titles shall be issued or valid unless written by a corporation complying with the provisions of, and authorized or qualified under this chapter. The provision further provides that under no circumstances may any title insurance company or title insurance agent use any form which has not been promulgated or approved by the Commissioner of Insurance. 3. Basic Promulgated Forms Pursuant to The Regulations, all of the following forms {among others} are promulgated by the Texas Department of Insurance: (i) Commitment for Title Insurance; (ii) Owner Policy of Title Insurance; and, (iii) Mortgagee Policy of Title Insurance. Except as specifically authorized by The Regulations, none of the promulgated provisions of any insuring forms may be amended, modified, waived or deleted. Endorsements to these forms are available solely in accordance with The Regulations. The alteration, completion, amendment or issuance of a promulgated form, in a manner contrary to the coverage language required to be used under The Regulations, may have the effect of creating an illegal non-promulgated form in violation of Article 9.07 of the Texas Title Insurance Act. 4. Prohibition Against Providing Coverages Outside the Policy Forms The Basic Manual for Title Insurance prohibits Texas title insurance companies, Texas direct operations, and licensed Texas title insurance agents, from providing opinions or estoppel letters concerning the affect of various owner/lender/borrower documents upon policy coverage. Such

11 opinion or estoppel letters may have the effect of waiving or modifying the terms of a promulgated form in violation of The Regulations. Procedural Rule P-35 {prohibiting guarantees, affirmations, indemnifications and certifications} further prohibits Texas title insurance companies, Texas direct operations, and licensed Texas title insurance agents, from providing opinions or commentaries concerning the affect of various documents upon policy coverage. B. GENERAL ABBREVIATED OVERVIEW OF TEXAS TITLE INSURANCE COVERAGES The Texas Department of Insurance promulgates the Texas title insurance forms. Title companies may not use any other title insurance forms in Texas transactions. The premium is promulgated by the Texas Department of Insurance and may not be negotiated. 1. Commitment Prior to issuance of the policy, the title company may issue a commitment for title insurance. The commitment is effective for 90 days. There is no charge to the lender or buyer for issuance of the commitment. In some transactions, the Basic Manual for Title Insurance requires that a commitment for title insurance be issued (Procedural Rule P-18). 2. Binder The lender may request a Mortgagee Title Policy Binder on Interim Construction Loan ( Binder ) to cover its mortgage during construction in lieu of a Mortgagee Policy. The Binder is effective for 1 year and may be extended by Extension Endorsements six times for six months each. The premium for the Binder is $270. The premium for the Extension Endorsement is $25. The date of coverage of the Binder may be extended by Downdate Endorsements, which cost $ Policies Available The policies available on residential transactions in Texas are the Owner Policy (Form T-1), the Residential Owner Policy (T-1R) (if the insured is a natural person), and the Mortgagee Policy (T- 2). Although the Department of Insurance has adopted the Texas Residential Limited Coverage Junior Mortgagee Policy (T-44) and endorsements to that Policy for junior home equity loans, it is not available at this time because no premium charge has been promulgated. The lender, the trustee, an attorney, or the loan servicer may secure a Limited Pre-Foreclosure Policy (T-40), which insures as to record matters, prior to foreclosure for a premium of 40% of the basic rate. The title company may issue Limited Pre-Foreclosure Downdate Endorsements (T-41) for a premium of $50. The 1970 and 1992 ALTA (American Land Title Association) Policies are not available in Texas. The Texas Policies are similar to the ALTA 1992 Policies, but do not insure against unmarketability of title. The Texas Policies insure good and indefeasible title; because of the meaning of good title and because the Texas Policies insure against defects in title, the Texas coverage is not significantly different from ALTA coverage as to marketability. 4. Premium for Policy The Texas Department of Insurance promulgates the premium charge for the Mortgagee Policy. Other charges, such as recording costs, tax search or certificates, and escrow fees are not promulgated or included in the premium charge. The basic premium for a Mortgagee Policy is the same as the basic premium for an Owner Policy. If a Mortgagee Policy is issued simultaneously 2

12 with the Owner Policy and does not exceed the amount of the Owner Policy, the premium for the simultaneous Mortgagee Policy is $100. The seller customarily pays for issuance of a buyer s Owner Policy, and the buyer customarily pays for issuance of the Mortgagee Policy. Some builders agree to pay only for the Mortgagee Policy, and the buyer may pay for the additional cost of the Owner Policy. If a lender refinances a loan insured by a prior Mortgagee Policy issued by any prior title company within the last 7 years, the new Mortgagee Policy issued by any title company must be issued at a reduced rate. The reduced rate is based on a credit against the premium for the unpaid balance of the prior loan equal to 40% within the first 2 years, 35% in the 3rd year, 30% in the 4 th year, 25% in the 5 th year, 20% in the 6 th year, and 15% in the 7 th year after the date of the prior Mortgagee Policy. A refinance of a construction loan covered by a prior Mortgagee Policy must be issued for the minimum promulgated premium ($270), if the new Mortgagee Policy does not exceed the prior Mortgagee Policy. If two prior mortgages are refinanced by one new mortgage, or one prior mortgage is refinanced by two new mortgages, many title companies will give the refinance credit (of 15-40%) on the new Mortgagee Policy. The amount of the Mortgagee Policy must be the loan amount or value of the land. If the mortgage may include additional capitalized interest or if the lender otherwise requests, the policy may be issued for up to 125% of the original loan amount. There is no additional charge for this extra coverage if the amount of the Mortgagee Policy does not exceed the amount of the Owner Policy. 5. Endorsements The ALTA and CLTA (California Land Title Association) endorsements, such as the CLTA 100 ( comprehensive ) endorsement and ALTA Form 9 endorsement (restrictions, encroachments, and minerals), are not issued in Texas. The available endorsements to the Mortgagee Policy are: a. Adjustable Mortgage Loan Endorsement (T-33), which insures against loss of priority because of adjustments in the interest rate. The premium for this endorsement is $20. b. Assignment Endorsement (T-3), which insures the assignment and downdates the policy. The endorsement may be issued to Fannie Mae, Ginnie Mae, VA, or HUD, if the land is one to four family property. The endorsement may be issued only if the land is not one to four family property if the endorsement is issued to any other person. The premium for the endorsement is $270. c. Balloon Mortgage Endorsement (T-39), which insures against invalidity, unenforceability or loss of priority because of a Conditional Right to Refinance. The endorsement may be issued if the mortgage covers residential real property. The premium for the endorsement is $25, if issued at the time of issuance of the Mortgagee Policy, or $50, if issued after issuance of the Mortgagee Policy. d. Completion Endorsement (T-3), which downdates the mechanic s lien coverage and removes the mechanic s lien exception from a Mortgagee Policy after completion of improvements. There is no charge for this endorsement. 3

13 e. Correction Endorsement (T-3), which corrects errors in the Mortgagee Policy. There is no charge for this endorsement. f. Downdate Endorsement (T-3), which downdates a Mortgagee Policy insuring a construction loan mortgage. This endorsement extends the Policy only as to recorded matters. Since the Mortgagee Policy insuring a construction loan mortgage is required by Texas Procedural Rules to except to unrecorded mechanic s liens, neither this endorsement nor the Mortgagee Policy insuring a construction loan mortgage insures priority over mechanics liens recorded after the Date of Policy. The premium for this endorsement is $50. g. Environmental Protection Lien Endorsement (T-36), which insures against recorded environmental protection liens and against priority of environmental protection liens recorded after Date of Policy. Fannie Mae allows exception in paragraph (b) of the endorsement to Tex. Health & Safety Code Section ; Tex. Health & Safety Code Sections , ; Tex. Local Gov t Code Sections (b), (d), and (e), ; Tex. Nat. Res. Code Section , if applicable. The premium for this endorsement is $50. h. Home Equity Endorsement (Equity Loan Mortgage Endorsement) (T-42), which may insure against invalidity of the Home Equity Mortgage because of lack of consent of the owners and spouses, agricultural tax assessment, prior Home Equity Mortgages on the land closed within 12 months, other outstanding Home Equity Mortgages, failure of the insured mortgage to disclose that it is a Home Equity Mortgage, and failure to close at the title company. The endorsement excepts to other violations of the requirements for Home Equity Mortgages. The title company may delete a coverage if it does not consider the risk acceptable. The endorsement must be attached to a Mortgagee Policy insuring a Home Equity Mortgage. The premium for this endorsement is 10% of the Basic Premium Rate for the Mortgagee Policy. i. Home Equity Endorsement (Supplemental Coverage Equity Loan Mortgage Endorsement) (T-42.1), which may insure against invalidity of the Home Equity Mortgage because of (1) signature before specified date, (2) loan proceeds disbursement by title company before 4 th day after closing, (3) early execution of election not to rescind, (4) failure to provide document copies, (5) fees not shown on settlement statement sent to lender before closing, (6) blanks in instruments, (7) failure to attach appraisal or evaluation to written acknowledgment of fair market value, (8) failure of owner to sign acknowledgment of fair market value, (9) land in excess of homestead allotment, (10) other land with a Home Equity Mortgage, or (11) other land with a Home Equity Mortgage closed in last 12 months. The title company may delete a coverage if it does not consider the risk acceptable. The endorsement may be attached to a Mortgagee Policy insuring a Home Equity Mortgage if the lender requests the endorsement. Fannie Mae and Freddie Mac currently require that loans sold to them have a Mortgagee Policy with this endorsement and without any deletions. The title company is not required by regulation to secure a survey certifying the acreage before it may insure that there is no land in excess of the homestead allotment. If the land is in a city which is located in more than one county (such as Houston or Dallas), the title company may add or in an adjoining county to the coverage of paragraphs 1(j) and 1(k) relating to Home Equity Mortgages on other land. The premium for this endorsement is 15% of the Basic Premium Rate. 4

14 j. Leasehold Mortgagee Policy Endorsement (T-5), which defines the leasehold estate, and states the manner of computing loss and additional damages. This endorsement must be attached to the Mortgagee Policy insuring a leasehold estate. There is no additional charge for this endorsement. k. Manufactured Housing Endorsement (T-31), which includes the identified manufactured housing unit in the definition of the (insured) land. This endorsement may be issued if the unit is affixed to the land as part of the real property. The premium for this endorsement is $20, additional charges for survey and inspection may be made. l. Modification Endorsement (Mortgagee Policy of Title Insurance P-9.b(3) Endorsement Form - Partial Release, Release of Additional Collateral, Modification Agreement, Reinstatement Agreement, or Release from Personal Liability) (T-38), which acknowledges that the Mortgagee Policy coverage is not terminated or reduced by the agreement. The endorsement does not downdate the policy or insure the modification agreement. The endorsement is not available if the modification grants a new lien or power of sale, if the debt is evidenced by a new promissory note, if new principal debt other than accrued interest or advances pursuant to the original mortgage is created, or if the modification adds new collateral. The premium for this endorsement is $100 plus $10 for each 12-month period after the first year after the issuance of the Mortgagee Policy. m. (Texas) Reverse Mortgage Endorsement (T-43), which insures the priority of future advances under the reverse mortgage on homestead, and insures that the owners and spouses consented to the mortgage, and excepts to other requirements for a reverse mortgage. The endorsement must be attached to a Mortgagee Policy insuring a reverse mortgage. There is no premium charge for this endorsement. n. Revolving Credit Endorsement (T-35), which insures the priority of future advances under a revolving credit loan secured by the mortgage. Many title companies will issue this endorsement if the mortgage secures future advances, even if the mortgage does not contain a revolving credit (readvance after repayment) feature. This endorsement is not applicable to loans on homestead, since revolving credit loans are not authorized on homestead. The premium for this endorsement is $ Optional Coverages in the Mortgagee Policy a. Arbitration. The Mortgagee Policy (Form T-2) contains an arbitration provision that allows either the insured or title insurer to require arbitration if the policy does not exceed $1 million. The insured lender can request deletion in its closing instructions. The title company may then add the following to Schedule B of the policy: Section 13 of the Conditions and Stipulations of this Policy is hereby deleted. b. Area and Boundary (Survey) Coverage. The title company can delete the area and boundary exception (survey exception), except any shortages in area from the Mortgagee Policy if it is furnished a current survey. If the loan is a refinance on (one to four family) residential real property, the title company must accept a survey dated no earlier than 7 years prior to the new Mortgagee Policy if the borrower will sign an affidavit evidencing that there have not been subsequent changes. Some title companies will accept older surveys on refinances and will accept old surveys on sales. The title company may amend the survey exception without a survey if the land is a condominium. 5

15 c. Coinsurance. If two or more title insurers issue separate Mortgagee Policies to the lender on the same mortgage and land, each title insurer covers a portion of the risk and the Schedule B of each policy must state: This policy is issued contemporaneously with Policy No. of (Name of Title Insurance Company(ies)) for $. The liability of the Company hereunder is limited to (proportion) of any loss, but said liability shall not exceed the face amount of this Policy. d. Creditors Rights. The Mortgagee Policy contains a creditors rights exclusion. This exclusion may not be deleted. e. Easements and Access. The Mortgagee Policy can insure an easement, if the easement is described in Schedule A of the policy. If the policy does not describe the easement, the Mortgagee Policy only insures some legal right of access to and from the land, but does not insure the particular access that may be necessary for the land. The policy does not insure that the access complies with the requirements of Fannie Mae or Freddie Mac for access to the land. For example, Fannie Mae requires that the land front on a publicly dedicated and maintained street that meets community standards and is generally accepted by area residents. If the property is on a community-owned or privately owned and maintained street, there must be an agreement for maintenance of the street. Closing instructions may address this issue. If the land does not have a legal right of access, the title company may except in the Mortgagee Policy to Lack of a right of access to and from the land. Insuring provision number 3 is hereby deleted. This exception generally is prohibited in the lender s closing instructions. The Mortgagee Title Policy Binder on Interim Construction Loan does not commit to insure legal right of access, but can commit to insure an easement. f. Express Insurance Encroachments. If the Mortgagee Policy will except to encroachments (over building or setback lines, over easements, or over property lines), the title company may provide express (affirmative) insurance in Schedule B of the policy, if the title company believes the risk is acceptable. The title company does this by excepting to the encroachment and then adding: Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of a final, nonappealable judgment of a court of competent jurisdiction that orders the removal of this improvement because it encroaches over or into. Company agrees to provide defenses to the insured in accordance with the terms of this Policy if suit is brought against the insured to require the removal of this improvement because it encroaches as herein stated. g. Express Insurance Defects in Title. If the Mortgagee Policy will except to a matter that is a defect in title (such as an adverse claim of ownership or lis pendens, a blanket easement that may not be in use, a lease or option or contract that may have expired, the right to use the surface of the land for exploration and development of excepted mineral or mineral lease rights, or a covenant or restriction that may not be enforceable due to violations), the title company may provide insurance in Schedule B of the policy, if the title company believes the risk is acceptable. The title company does this by excepting to the defect in title and then adding one of the two following alternative provisions: (1) Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of a final, nonappealable judgment of a court of competent jurisdiction that divests the insured of its interest as insured because of this right, claim or interest. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to divest the insured of its interest as insured because of this right, claim or interest. [Use, for example, if adverse claim of ownership or lis pendens.]; or (2) Company insures the insured against loss, if any, sustained by the insured under the terms of this 6

16 Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land. [Use, for example, if adverse claim is a blanket easement or restriction.] h. Express Insurance Prior Unreleased Liens. If the title company will insure against a prior unreleased lien, it may insure against that lien by (1) insuring around without exception in Schedule B, or (2) express insurance in Schedule B of the policy, by exception to the prior lien and by then noting that (1) the exception is deleted, or (2) the title company insures against foreclosure of the prior lien and agrees to defend the insured. i. Gap Coverage. Gap coverage (insurance against matters subsequent to the date of the commitment, as updated, and prior to filing of the insured mortgage) is customarily given, when the closing is conducted by the title company. Although no gap endorsement is available in Texas, the title company will provide this coverage based on the lender s closing instructions and local practice. Frequently, the lender s closing instructions provide that no loan proceeds may be disbursed by the title insurance agent {or direct operation} unless the closing agency is in a position to issue the mortgagee policy with no additional exceptions (other than those permitted exceptions in the commitment). According to the Texas Department of Insurance, the Date of Policy of the Mortgagee Policy must be the date of recording of the insured s mortgage if a policy is issued in connection with a current loan transaction. j. Insuring Around. The title company may issue without exception to (and thereby insure against) a prior unreleased lien (such as a judgment lien, tax lien or mortgage), if it secures consent of the new insured and if it considers the risk acceptable. The title company must comply with regulatory requirements that establish circumstances when insuring around is permitted (such as holding money in escrow in some cases or securing an indemnity from another title insurer that previously issued without exception). In the alternative, the title company may protect the insured by expressly insuring against the unrecorded lien in Schedule B of the policy. k. Maintenance Liens. The Mortgagee Policy may insure that a maintenance (homeowners association) lien is subordinate to the insured mortgage by (1) retaining the exception to subordinate liens and leases in the policy and not separately excepting to the maintenance lien, or (2) excepting to the maintenance lien and then insuring that the maintenance lien is subordinate to the insured mortgage. l. Mechanic s Lien. The Mortgagee Policy insures against mechanic s liens recorded after Date of Policy that have an inception date prior to Date of Policy, unless Schedule B of the policy excepts to mechanic s liens. If the loan is a construction loan, the Mortgagee Policy must include the following exception: Any and all liens arising by reason of unpaid bills or claims for work performed or materials furnished in connection with improvements placed, or to be placed, upon the subject land. However, the Company does insure the insured against loss, if any, sustained by the insured under this Policy if such liens have been filed with the County Clerk of County, Texas, prior to the date hereof. If the policy contains this exception, it does not insure priority of the mortgage over later filed mechanic s liens. If the mortgage does not secure a construction loan, this exception may not be included in the policy. 7

17 m. MERS. If the lender s closing instructions request, MERS may be shown as an additional insured in connection with a MERS MOM loan. n. Minerals. If the Mortgagee Policy excepts to minerals or oil, gas and other mineral leases, title companies may be willing to (1) note that surface rights are waived, if a waiver appears in the instrument creating the mineral exception or in a separate waiver; or (2) note that a zoning ordinance limits or prohibits drilling, if applicable; or (3) provide express insurance against use of the surface of the land for exploration and development of the minerals, if the title company considers the risk acceptable. o. Parties in Possession. The title company may add this exception to a title policy if the insured consents in writing. However, this exception is rarely added to the Mortgagee Policy (because it is not acceptable to lenders). In some transactions, the Mortgagee Policy may include a more limited exception, such as to rights of tenants as tenants only under unrecorded leases (or under listed leases). p. Restrictions. Paragraph 1 of Schedule B of the Mortgagee Policy states The following restrictive covenants of record itemized below, but Company insures that any such restrictive covenants have not been violated so as to affect, and that future violations thereof will not affect the validity or priority of the mortgage hereby insured: The title company must delete this provision if it does not list restrictive covenants. If the Mortgagee Policy does not contain a separate exception in a later paragraph to a maintenance lien or reversionary interest, this provision insures against the priority of the mortgage over such maintenance lien or reversionary interest set forth in the restrictive covenants. This provision does not otherwise insure against existing violations of restrictions. The title company can separately insure against enforcement of restrictions by express insurance, if it considers the risk acceptable. q. Standard Exceptions and Extended Coverage. The Mortgagee Policy contains, or may include, several general standard exceptions that may be modified. Those exceptions are (1) recorded restrictions, which is deleted if no specific recorded restrictions are mentioned; (2) survey matters ( area and boundary exception), which may be amended to read any shortages in area if a current survey is furnished; (3) taxes, which may be modified to insure that taxes are not due and payable and to delete exception to possible rollback taxes; (4) subordinate liens and leases, which may be deleted upon request; (5) a general exception to mechanic s liens, which may be included only if the loan is a construction loan; and (6) parties in possession, which may be an exception only if the mortgagee agrees in writing to allow the general exception but which generally is not allowed by the lender s closing instructions. There is no standard exception in the Mortgagee Policy to water rights or wetland issues or to marital rights of the owner, and such exceptions are generally not permitted by the lender s written closing instructions. r. Subordinate Liens and Leases. Schedule B, exception number 4 of the Mortgagee Policy contains a standard exception to Liens and leases that affect the title to the estate or interest, but that are subordinate to the lien of the insured mortgage. The title company may delete the exception if requested by the lender. If a subordinate lien or lease is then specifically excepted, the title company may add Company insures the insured against loss, if any, sustained by the insured under the terms of the Policy if this item is not subordinate to the lien of the insured mortgage. 8

18 9 s. Successors and Assigns. The title company may name the insured in the Mortgagee Policy as ABC Mortgage Company and each successor in ownership of the indebtedness secured by the insured mortgage, except a successor who is an obligor under the provisions of Section 12(c) of the Conditions and Stipulations. The Mortgagee Policy may not simply say ABC Mortgage Company, its successors and assigns, but may include VA or HUD (or any other specifically named party such as MERS) as additional insureds. t. Survey Coverage (see Area and Boundary Coverage ). u. Tax Coverage. The standard exception to taxes in the Mortgagee Policy is Standby fees, taxes, and assessments by any taxing authority for the year 19 and subsequent years, and subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership. The title company may delete from the Mortgagee Policy or Binder the phrase and subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership if it considers the risk acceptable and if it is paid an additional $20 premium. The title company may add to the exception on the Mortgagee Policy Company insures that standby fees, taxes and assessments by any taxing authority for the year are not yet due and payable if the taxes are not yet billed and if the title company is paid an additional $5 premium. The title company may escrow for payment of taxes if the prior lender or owner asserts that taxes are paid, but the title company has not been able to confirm payment with collected funds. The title company may not escrow for payment of current taxes, if the current tax rolls are not certified. C. TABLE OF "ENDORSEMENTS AND COVERAGES" This section sets forth in detail, with reference to the relevant rate and procedural rule, the title insurance coverages available in Texas. Reference is also made to the owner policy forms for cases where the lender is either obtaining or providing an owner policy in connection with the sale of R.E.O. property. Coverage Form Procedural Rule Rate Rule Additional Advance T-2 (Mortgage Policy) Issue Mortgagee Policy for additional advance insuring mortgage as modified to extent it secures additional advance (except to mortgage otherwise) None Additional Insured Adjustable Mortgage Loan T-1: (Owner Policy) T-1R: (Texas Residential Owner Policy) T-2: (Mortgagee Policy) Show multiple insureds on policy (such as optionor/optionee, contract seller/buyer, lender/guarantor, collateral assignor/collateral assignee T-33 Endorsement to Mortgagee Policy insures against loss of priority because of adjustments in interest rate. None P-9b(6) Attach to adjustable mortgages R-4 Issue Mortgagee Policy for amount or "loan(s) insured" R-3: "Owner policies shall be written to protect the estate or interest in the land..." R-4: "All Mortgagee Policies shall be for the amount of the loan(s) insured." R-11-d $20 R-4 No charge if charges extra for mortgagee policy for 125% of loan.

19 Coverage Form Procedural Rule Rate Rule Add clause to Schedule B of Owner No additional charge Policy (T-1): "The liability of the Company, exclusive of the costs which the Company is obligated to pay under the Conditions and Stipulations of the Policy, shall not exceed the sum Apportionment Clause Arbitration Deletion (from T-1 [Owner Policy] and T-2 [Mortgagee Policy]) Area and Boundary Amendment Assignment Endorsement of $ as to Parcel One of the land and shall not exceed the sum of $ as to Parcel Two of the land." Add clause to Schedule B of Owner Policy (T-1): "Section 14 of the Conditions and Stipulations of this Policy is hereby deleted." Add clause to Schedule B of Mortgagee Policy (T-2): "Section 13 of the Conditions and Stipulations of this Policy is hereby deleted." Endorsement Instruction VI (or strike language) Deletes area and boundary exception, except "any shortages in area," since area is not insured. Endorsement Instruction III Endorsement to Mortgagee Policy insures assignment and downdates policy. Endorsement "shall be effective when the note or notes T-1, Section 8 of Conditions and Stipulations "8. APPORTIONMENT. If the land described in Schedule A consists of two or more parcels that are not used as a single site, and a loss is established affecting one or more of the parcels but not all, the loss shall be computed and settled on a pro rata basis as if the Amount of Insurance under this policy was divided pro rata as to the value on Date of Policy of each separate parcel to the whole, exclusive of any improvements made subsequent to Date of Policy, unless a liability or value has otherwise been agreed upon as to each parcel by the Company and the insured at the time of the issuance of this policy and shown by an express statement or by an endorsement attached to this policy." P-36: Delete Arbitration Clause from Mortgagee Policy or Owner Policy (T-1) upon request before issuance of policy. P-2: The company must be forwarded an acceptable current survey (no time limit or definition). Survey 7 years or less on residential refinance. P-9b(1) Assign to FNMA, GNMA, VA, or HUD (any property). P-9b(2) No additional charge 10 R percent of basic rate for owner Policy; no charge for Mortgagee Policy or Binder. R-11a Minimum basic premium rate ($270) or 50% of premium for original Mortgagee Policy,

20 Coverage Form Procedural Rule Rate Rule secured by the lien insured have Except one-to-four whichever is less. been delivered to the Insured named family residential herein." property, assign to other persons (cannot issue if one-to-four Balloon Mortgage Endorsement Binder (Mortgagee Title Policy Binder on Interim Construction Loan T-13) Certificate of Title (U.S.A.) Certificate of Title for Easement (U.S.A.) Coinsurance Commitment for Title Insurance P-39 Endorsement to Mortgagee Policy insures against loss because of invalidity, unenforceability, or loss of priority of insured lien because of Conditional Right to Refinance. T-13 Commitment on loan for construction which does not commit to insure priority over mechanic s liens or access and which is effective one year unless extended. T-6 A title certificate certifying that a thorough search was made and that title is indefeasibly vested. T-9 A title certificate certifying that a thorough search was made and that insures valid title to an easement was vested of record. Add Clause to Schedule B: "This policy is issued contemporaneously with Policy No. of (Name of Title Insurance Company(ies) for $. The liability of the company hereunder is hereby limited to (proportion) of any loss, but said liability shall not exceed the face amount of this Policy." T-7 A commitment is effective for 90 days. family) P-9b(10) Attach if mortgage covers residential real property and contains balloon rider. P-16 Issue on interim construction loan before completion, but can include purchase and refinance advances. R-17 May be issued to U.S.A. before acquisition of title in amount designated by U.S.A. Upon acquisition, a final certificate of Title may be issued to U.S.A. R-17 May be issued to U.S.A. before acquisition of easement in amount designated by U.S.A. Upon acquisition of easement, a final certificate of title easement may be issued to U.S.A. P-6 Add promulgated clause to each policy if two or more insurers. No joint liability. P-18 Delivery of commitment for Owner Policy on residential real property or an Owner Policy not to exceed R-11 $25 $50 if issued after policy 11 R-13 Minimum policy basic premium rate ($270) but credit available in one year on one-to-four family (½ of premium paid) on full refinance or on an Owner Policy. R-17 Basic rate. Final certificate is basic rate less prior rate paid. R-17 Basic rate. Final certificate is basic rate less prior rate paid. P-6 Basic charge (unless other credit applies) for each policy. If total of policies exceeds $15,000,000, calculate as one policy charge and divide among title insurers. R-12 No charge R-25 Commitment to FDIC or OTS if no contract is premium for $25,000 ($390).

21 Coverage Form Procedural Rule Rate Rule $300,000 is required. P-15 Commitment to OTS or FDIC must be for $25,000 and for one year if no contract of purchase and sale. T-20 P-14 Commitment to State of Texas has Issue to TxDOT only. no time limit. Commitment for Texas Department of Transportation (TxDOT) (Owner Title Policy Commitment to TxDOT) Completion Endorsement Contiguity Correction Endorsement Covenants Endorsement Instruction II Endorsement to Owner Policy or Mortgagee Policy upon completion of improvements provides mechanic s lien coverage. Describe perimeters of aggregate parcels or state: "Any adverse right, claim or interest to strips, gores or tracts of land between tract and tract. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the Insured to enforce said rights as to the land." T-3 Use appropriate language for corrections. Describe covenants or "Rights and privileges" of document in Schedule A as insured estate or interest. P-8 Issue upon completion of improvements, owner s acceptance, and satisfactory evidence of payment of bills. P-39(b) Insure against possible defects by exception and express insurance. Endorsement Instruction IV Issue to correct typographical error, omission, or addition relating to facts existing at date of policy. R-3 Issue Owner Policy "to protect the estate or interest in the land..." 12 R-23 $200 with credit for policy in three years. No charge. No charge No charge. R-3 Applicable rate for Owner Policy

22 13 Coverage Form Procedural Rule Rate Rule Creditor's Rights Exclusion may not be deleted for P-39(b): Insure No charge. current transaction. Policy may be against possible issued without exception or with defects by exception express insurance as to prior and express transaction issue. Example: "Any insurance. claim that the (deed/mortgage) from to recorded was a fraudulent transfer or conveyance. Company insures the insured against loss, if any, sustained by the insured under the terms of this policy by reason of a final, nonappealable judgment of a court of competent jurisdiction that divests the insured of its interest as insured because of this right, claim, or interest. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to divest the insured of its interest as insured because of this right, claim, or interest." Defects in Title Insure against defects in owner or mortgage policy or binder by exception (e.g., to option, lis pendens, contract, or deed) and express insurance: "Adverse right, claim, or interest in title to the land reflected by (deed/lis pendens/ option, etc.). Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of a final, nonappealable judgment of a court of competent jurisdiction that divests the insured of its interest as insured because of this right, claim, or interest. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to divest the insured of its interest as insured because of this right, claim or interest." Or "Company insures the insured against loss, if any, by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the Insured in accordance with the terms of this Policy if suit is brought against the Insured to enforce said rights as to the land." P-39(b) Insures against possible defects by exception and express insurance. No charge.

23 14 Coverage Form Procedural Rule Rate Rule Downdate to Binder Endorsement Instruction VII P-9b(4) R-11c Basically a record downdate. May be issued upon $50 request in connection with construction advances Downdate to Mortgagee Policy Downdate to Owner Policy Easements - encroachments Endorsement Instruction V Basically a record downdate on a construction loan covered by a Mortgagee Policy with P-8 exceptions. Endorsement Instruction VIII Basically a record downdate during construction on Owner Policy with P- 8 exceptions. "Encroachment by on or into that easement recorded in. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of a final, nonappealable judgment of a court of competent jurisdiction that orders the removal of this improvement because it encroaches over or into. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to require the removal of this improvement because it encroaches as herein stated." P-9b(4) May be issued upon request in connection with construction advances P-9a(3) May be issued upon request in connection with construction costs. P-39(a) May insure against encroachment if amend area and boundary exception based on current survey. R-11c $50 R-15 $50 P-39(a) Charge is cost of amendment of area and boundary exception (15% basic premium on owner Policy; no cost on Mortgagee Policy or Binder) Easements - insurance against enforcement Easements - insurance that easement provides access to street Easements - abutter's rights "Any right of use or maintenance of the easement referred to in paragraph over or through the land. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the Insured in accordance with the terms of this Policy if suit is brought against the Insured to enforce said rights as to the land." The policy can insure the appurtenant easement as "an easement for ingress and egress to and from a public street known as. The described land may include "together with abutter's rights of access to and from the physically open street known as. P-39(b) Insure against possible defects (such as easements not in use). None None No charge No charge No charge

24 Coverage Form Procedural Rule Rate Rule Except in Owner Policy (T-1): "Lack P-37 No charge of right of access to and from the except to lack of land. Insuring provision number 4 is access if not satisfied hereby deleted." as to insurability Except in Mortgagee Policy (T-2): "Lack of a right of access to and from the land. Insuring provision number 3 is hereby deleted." Except in Residential Owner Policy (T-1R): "Lack of a right of access to and from the land. Company deletes the insurance of access under covered title risks." Binder requires "satisfactory evidence of legal right of access to and from the land." Easements - lack of access Encroachments (over private setback line; over public building line; over easement; over property line) Environmental Protection Lien Endorsement "Encroachment by over the (property line of the land/ easement described in / building line set forth in ). Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of a final, nonappealable judgment of a court of competent jurisdiction that orders the removal of this improvement because it encroaches over or into. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to require the removal of this improvement because it encroaches as herein stated." T-36 Unless excepted, this endorsement to the Mortgagee Policy insures against current recorded environmental protection liens and against priority of future recorded environmental protection liens pursuant to existing state statutes (e.g., "superliens") P-39(a) Insure against encroachment if amend area and boundary exception. Based on current survey. P-9b(9) May be issued on land used or to be used for primarily residential purposes and is not limited to one-to-four family land (e.g., may be used on unimproved land and apartments). Cited exceptions are approved by FNMA. 15 P-39(a) Charge is cost of amendment of area and boundary exception (15% basic premium on owner policy; no cost on mortgagee policy or binder) P-11g $50 Exceptions - Special Exceptions - General Exceptions developed from examination, inspection, or closing. 1. Restrictions 2. Area and boundary (see area and boundary heading) 3. Marital rights on Owner Policy 4. Water, rivers, and tidelands on Owner Policy 5. Taxes (see taxes heading) P-5 Special exceptions are permissible 1. P-4, P-39 Restrictions may be deleted or express insurance may be provided as to specific restrictions. 2. P-2 May be amended with current survey. P- 39(a) express No charge. 1. No charge. 2. R-16, 15% of basic premium for owner policy; no charge for binder or mortgagee policy 3. Not applicable 4. Not applicable

25 Coverage Form Procedural Rule Rate Rule insurance. 3. No authority to delete or provide express insurance on Owner Policy (P-39(b) relates to special exceptions only) 4. No authority to delete or provide express insurance on Owner Policy. Extension of Binder Endorsement Instruction I P-16 R-13 Extends binder for six months; may Extensions may be $25 be issued six times (so that binder issued after may be effective up to four years). completion of Extension does not downdate improvements. binder. Immediately Available Funds Procedure Agreement (Good Funds) Increase Mortgagee Policy T-37 Three-party agreement of financial institution (e.g., mortgage company), title company (issuing agent or direct operation), and federally insured lender that established financial institution check as good funds. Blank endorsement form (T-3) or new policy may be issued to include negative amortization (original policy can include interest) up to 25% of principal per R-4. P-27 Checks issued in compliance with T-37 are good funds and disbursements can be made. R-4 Issue policy to include interest; endorse or reissue to include negative amortization, up to 25% of principal. No extra charge. 16 R-4 Basic rate for difference, but no charge if Mortgage Policy does not exceed Owner Policy. Increased Owner Policy Increased Value Endorsement Insured Closing Service to Lender Insured Closing Service to Purchaser/Seller T-1, T-1R Reissue new Owner s Policy after improvements added T-34 Endorsement to Owner Policy increasing amount of insurance, but does not change policy date or insure against matters created or known by insured. T-50 Letter to lender protecting against settlement funds loss due to failure of named licensed agent to comply with closing instruction or loss of such funds due to fraud or dishonesty of the licensed title insurance agent. T-51 Letter sent to purchaser/seller. P-9a(2) Title company must be "satisfied" as to current value, but discretion is left to the title company. Article 9.49(a) (Insurance Code) Allows to issue promulgated form to lender. Article 9.49(b) (Insurance Code) When an owner policy is to be issued, allows issuance to buyer or seller only if transaction exceeds R-3 Any title company may reissue after improvements added with credit for prior policy R-3c Basic rate less prior premium paid, but no less than minimum policy basic premium rate ($270). Article 9.49 Allows no charge to lender. Commissioner may, in his or her discretion, promulgate charge for letter to seller or buyer. No charge has been promulgated.

26 17 Coverage Form Procedural Rule Rate Rule $250,000. Insured Owner No endorsement to extend to No rule Not applicable. Policy successors. Section 1(a) of Conditions and Stipulations of Owner Policy (T-1) and section 2 of Conditions of Residential Owner Policy (T-1R) cover some successors. Insured Lender Insuring Around Bulletin 157 authorizes title company to name insured as "ABC mortgage Company and each successor in ownership of the indebtedness secured by the insured mortgage, except a successor who in an obligor under the provisions of Section 12(c) of the Conditions and Stipulations." Other language is not authorized except on VA and HUD loans. Insured must consent in writing to insure around liens pursuant to P- 11. P-39(c) provides: (c) Liens (1) If Company intends to provide insurance against an enforceable lien, it shall comply with P-11. If Company then determines to issue without exception to a lien pursuant to P-11b(1), (4), (5), (6), (7), it may show the lien in Schedule B of the Policy and then may state: "Exception No. is hereby deleted. Company provides insurance as to said lien in accordance with the terms of this Policy." (2) If Company then determines to issue with exception to the lien after otherwise complying with P-11, it may, pursuant to Procedural Rule P- 5, show the lien in Schedule B and may state one of the following: (a) If the Lien may only be foreclosed judicially: "Company insures the Insured against loss, if any, sustained by the insured under the terms of this Policy by reason of a final, nonappealable judgment of a court of competent jurisdiction that orders foreclosure of said lien on the land. Company agrees to provide defense to the Insured in accordance with the terms of this Policy if suit is brought against the insured to foreclose said lien on the land." (b) If the lien may be foreclosed nonjudicially: "Company insures the Insured against loss, if any, sustained by the insured under the terms of this Policy by reason of a foreclosure of None, except P-7 which authorizes a mortgagee policy to include VA or HUD as additional insureds. P-11 authorizes insuring around in some cases. P-39(c) authorizes express insurance against liens if comply with P-11. No charge. No charge. No charge.

27 18 Coverage Form Procedural Rule Rate Rule said lien on the land. Company agrees to provide defense to the Insured in accordance with the terms of this Policy if suit is brought against the insured to foreclose said lien on the land and to take action in accordance with the terms of the policy if the holder of the lien commences a foreclosure action based on said lien." The provisions of this Rule shall not modify or diminish the requirements of P-11. T-5 No additional charge. Defines leasehold estate (right to possession for described term or terms), subject to lease provisions limiting right of possession (e.g., default); provides computation formula and additional reimbursable moving and other expenses. Leasehold Mortgagee Policy Endorsement Leasehold Owner Policy Endorsement Leasehold Endorsement to Residential Owner Policy (Residential Leasehold Endorsement) Location T-4 Defines leasehold estate (right to possession for described term or terms, subject to lease provisions limited right of possession, e.g., default); provides computation formula and additional reimbursable moving and other expenses. T-4R Residential Leasehold Endorsement Defines leasehold estate (right to possession for described term or terms), subject to lease provisions limited right of possession (e.g., default); provides computation formula and additional reimbursable moving and other expenses. There is no endorsement available in Texas. Paragraph 2 of Schedule B (the area and boundary exception) may be amended. Schedule A may insure fee simple in the "land" (which includes improvements). The title company also could describe any P-9b(5) Must be issued on Mortgagee Policy covering leasehold estate; policy must except to "all terms, provisions, and conditions of said lease" (Schedule B presumable already does so). Not designed for timber "lease" or other interests in nature of profit a prendre. P-9a(1) Must be issued on (regular) Owner Policy (T-1) covering leasehold estate; policy must except to "all of the terms, provisions, and conditions of said lease" (Schedule B preamble already does so). Not designed for timber "lease" or other interest in nature of profit a prendre. P-9a(1) Must be issued on Residential Owner Policy (T-1R) covering a leasehold estate; policy must except to "all of the terms, provisions, and conditions of said lease." Not applicable (description of land) No additional charge. No additional charge. No charge.

28 Coverage Form Procedural Rule Rate Rule improvements thereon known as (address). T-31 P-9b(7) Endorsement to Mortgagee Policy May be issued if it is includes specific manufactured affixed to land as part housing unit in definition of (insured) of real property land (policy does already if a fixture (generally where title or if referred to in Schedule A). is canceled) Manufactured Housing Endorsement Mechanic s Liens Minerals Modification Endorsement Paragraph 6 of the Mortgagee Policy insuring provisions insures against "lack of priority of the lien of the insured mortgage over any statutory or constitutional mechanic s, contractor s, or materialman s lien for labor or material having its inception on or before Date of Policy." On an Owner Policy during construction or a construction loan insured by a Mortgagee Policy, the policy must add "any and all liens arising by reason of unpaid bills or claims for work performed or materials furnished in connection with improvements placed, or to be placed, upon the subject land. However, the Company does insure the Insured against loss, if any, sustained by the Insured under this Policy if such liens have been filed with the County Clerk of County, Texas, prior to the date hereof." "Any right to use the surface of the land for the extraction or development of the minerals shown as exception in Schedule B. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the Insured in accordance with the terms of this policy if suit is brought against the Insured to enforce said rights as to the land." The policy may be issued without exception to a mineral interest or the policy may actually insure the mineral interest. There is no prohibition in Texas against insuring mineral interests although it is not commonly done. T-38 Endorsement to Mortgagee Policy on partial release, release of additional collateral, modification agreement, reinstatement agreement, or release from personal liability; does not downdate policy or insure validity of described P-8 Exception during construction. P-39 Express insurance not allowed, since P-39 allowed only with P-5 special exceptions. P-39(b) Authorizes express insurance against defects that are special exceptions. P-9b(3) Do not issue if instrument grants lien or power of sale, if debt is evidenced by "new promissory note" (restated note not okay; however, 19 R-11e $20 plus expenses of company (e.g., survey and/or inspection (P-9b(7)). No charge for issuance with or without exception No charge. R-11b $100 plus $10 for each 12- month period after first year of mortgagee policy (never to exceed 50 percent of policy, but this won t occur).

29 Coverage Form Procedural Rule Rate Rule instrument; simply waives any claim extensive of coverage termination or that amendments are coverage "reduced." Policies issued okay), if new principal before 3/1/83 continue to contain debt except accrued time limit (original maturity plus interest or advances statute of limitations). A policy may per original mortgage, insure a modification of the lien by or if cross description in Schedule A. collateralization (but separate mortgage Mortgagee Policy of Title Insurance T-2 This policy is a modified ALTA Loan Policy (10/17/92) with revisions, including a different mechanic s lien insuring provision (consistent with Texas law); insurance of good and indefeasible title (instead of marketability of title, which is excluded); a definition of "access"; and incorporation of Art requirements relating to claims. okay). R-4 Policy shall be for amount of loan or value of land. May include additional amount (up to 25 percent) reflecting interest. 20 R-2 Pay as you go on construction loan over $5 million. R-4 Charge basic rate unless a special rate. R-5A Simultaneous issue of Mortgagee Policy for $100 if not greater than Owner Policy and no additional land. R-5B Mortgagee Policy on construction over $5 million and Owner Policy as simultaneous $100 policy if Owner Policy not greater and Owner Policy covers no additional land. R-6a 50 percent credit on purchase money mortgage on prior Owner Policy. R-6b 30 percent credit if prior Mortgagee Policy. R-6c 50 percent credit if failed title company policy. R-7 Simultaneous Mortgagee Policies. R-8 Refinance credit if within 7 years (15 to 40 percent). R-9 Additional chain of title for $270. R-18 Refinance of construction loan for $270 if not greater amount.

30 Coverage Form Procedural Rule Rate Rule Multiple Liens The Texas Rules do not prohibit the R-4 insurance of multiple liens on one Recognizes that the policy. A policy may insure a policy may relate to mortgage to the extent it secures multiple loans. specific indebtedness and except to that mortgage to the extent it secures other indebtedness. It may also except to a lien of equal or higher priority as well. Nonmerger Option/Refusal Owner Policy of Title Insurance Mortgagee Policy may be issued. If Mortgagee Policy is issued, the policy may state "Any claim of invalidity, unenforceability or lack of priority of the lien of the insured mortgage because of that deed (the deed in lieu) from to. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of a final, nonappealable judgment of a court of competent jurisdiction that divests the insured of its interest as insured cause of this right, claim, or interest. Company agrees to provide defense to the insured in accordance with the terms of this policy if suit is brought against the insured to divest the insured of its interest as insured because of this right, claim, or interest." The exception to right of first refusal applying to subdivision sales may simply except to right of first refusal as to future transactions or separate exception may be made. For example: "Right of first refusal to purchase the unit and its common elements which was exercised or could have been exercised at Date of Policy pursuant to. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." T-1 This policy is a modified ALTA Owner s Policy (10/17/92) with revisions, including an added mechanic s lien insuring provision (consistent with Texas law); P-39(b) Express insurance against defects in title. P-39(b) Allows express insurance against defects. P-1bb Defines the T-1 and T-1R P-38 Only the Residential Owner Policy (T-1R) 21 R-9 Additional chains may exist (at minimum promulgated rate). No charge in addition to premium to mortgagee policy. No charge. R-2 Pay as you go on construction if policy is over $5 million. R-2 Pass through credit if

31 Coverage Form Procedural Rule Rate Rule insurance of good and indefeasible title (instead of marketability of title, which is excluded); a definition of "access"; and incorporation of Article 9.57 requirements relating to claims. may be issued on residential real property. (T-1 may be issued to entities upon request.) The Owner Policy (T-1) shall be issued in other cases. R-3 Issue the Owner Policy for sales price or value; it may include cost of contemplated improvements. 22 simultaneous close on same land with consent. R-3 Owner Policy is basic premium for rentals, value, or sales price and may include contemplated improvements. R-5A Reissue credit if prior Owner Policy within four years and current policy to same owner has P-8 exceptions. R-5B Owner policy on construction for $5 million or more is $100 (plus higher rate for excess over Mortgagee Policy) if simultaneous issue. Credit available for prior Owner Policy without time limit. R-9 Additional chain charge is $270. R-20 Owner Policy reissue within one year after completion of improvements if prior owner policy for $5 million or more with P-8 exceptions. R-21 Simultaneous issue to seller and buyer with second policy for 30 percent of basic rate or $270, whichever is greater. R-22 Simultaneous issue to owner and lessee with second policy for 30 percent of basic rate or $270, whichever is greater. R-21 Simultaneous issue to seller and buyer with second policy for 30 percent of basic rate or $270, whichever is greater. R-22 Simultaneous issue to owner and lessee with second policy for 30 percent of basic rate or $270, whichever is greater.

32 Coverage Form Procedural Rule Rate Rule Owner Policy T-56 Article 9.55 Insurance None. Rejection Form Disclose that the mortgagee policy Code does not protect the owner and Must be secured on disclose the additional cost of the improved residential owner policy. real property if Mortgagee Policy Owner Policy U.S.A. (Policy of Title Insurance (U.S.A.) Purchaser/Seller Insured Closing Service Letter Proof of Loss (Texas Title Insurance Proof of Loss Form) Reinsurance Agreement (Facultative Reinsurance) T-11 Insures against defects, liens or encumbrances and that title is vested as stated, subject to "matters not of record." T-51 Letter to Purchaser or Seller protecting against settlement funds lost due to fraud or dishonesty of the licensed title insurance agent to extent loss exceeds $250,000 and only if transaction exceeds $250,000. T-40 Asks various questions about the claim and amount of loss; may serve as a proof of loss required under the policy, although the title insurer may require more information. T-18.1 This is the ALTA form (4/6/90) which contains direct access provisions in favor of the insured. issued on sale. R-17 Upon acquisition of title by U.S.A. an endorsement may be issued. An additional paragraph may be added (action or notice to or by Postal Service if Postal Service is insured). P-33 Policy may add Texas Natural Research Laboratory Commission or U.S.A. as their interests may appear, until September 1, 2000; now irrelevant Article 9.49 Insurance Code Provides that Commissioner is to promulgate a form for seller and buyer if sales price exceeds Guaranty Fund protection ($250,000). Code allows to issue separate promulgated form to lender. Claims Handling Principles and Procedures - Section II B Insurer must request within 15 days after notice of claim (defined, except 15 calendars days applied to residential Owner Policy), if it is required. P-10 The promulgated form must be used unless the Commissioner adopts any other form. Maximum liability is set by Article 9.19, Insurance Code. R-17 Basic rate with credit for prior policy before acquisition. 23 Article 9.49 Authorizes Commissioner in his or her discretion to promulgate charge for letter to seller and buyer. No charge at this time. Article 9.49 allows no charge to lender. Irrelevant. Article 9.07 Insurance Code Reinsurance rates are not promulgated.

33 Coverage Form Procedural Rule Rate Rule T-21 P-10 This agreement provides three levels Adopted form of of liability: primary, secondary, and Reinsurance tertiary. The direct access by the agreement shall be insured applies if the primary insurer used. discontinues or fails to pay. Reinsurance Agreement - Tertiary Reinsurance Commitment Residential Owner Policy of Title Insurance Reinsurance Comment A written offer disclosing "known" unusual risks and rates. T-1 This policy is substantively the same as T-1; it contains a mechanic s lien insuring provision (consistent with Texas law); insurance of good and indefeasible title (instead of marketability of title, which is excluded); insurance of "legal access" and incorporation of Article 9.57 requirements relating to claims. P-10 Adopted form "shall be used," although similar letters of acceptance are a common substitute. P-1bb Defines the T-1 and T-1R P-38 Only the Residential Owner Policy (T-1R) may be issued on residential real property. (T-1 may be issued to entities upon request.) The Owner Policy (T-1) shall be issued in other cases. R-3 Issue the Owner Policy for sales price or value; it may include cost of contemplated improvements. 24 Article 9.07 Insurance Code Reinsurance rates are not promulgated. Article 9.07 Insurance Code Reinsurance rates are not promulgated. R-3 Owner Policy is basic premium for rentals, value, or sales price and may include contemplated improvements. R-5A Reissue credit if prior Owner Policy within four years and current policy to same owner has P-8 exceptions. R-9 Additional chain charge is $270. R-21 Simultaneous issue to seller and buyer with second policy for 30 percent of basic rate or $270, whichever is greater. R-22 Simultaneous issue to owner and lessee with second policy for 30 percent of basic rate or $270, whichever is greater. Restrictions (Foundation Location) Amend paragraph 2 of Schedule B of the Mortgagee Policy. In addition, an exception and express insurance may be provided: "Any right to claim that the location of the foundations on the land violates the covenants, conditions or restrictions referred to in paragraph of Schedule B. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." (Mortgagee P-39(b) Allows express insurance against defects. No charge.

34 25 Coverage Form Procedural Rule Rate Rule Policy) Schedule B, paragraph 1 "The following restrictive covenants of record itemized below, but Company insures that any such restrictive covenants have not been violated so as to affect, and that future violation thereof will not affect the validity or priority of the mortgage hereby insured:" "Any rights because of present violations on the land of the following restrictive covenants (except those relating to environmental protection). Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." "Any right to enforce the covenants, conditions and restrictions referred to in paragraph of Schedule B (except covenants, conditions or restrictions relating to environmental protection) based upon a violation on the land prior to Date of Policy of that provision of said covenants, conditions and restrictions which provides that. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." "Any claim of enforcement of the covenants, conditions and restrictions referred to in paragraph of Schedule B (except covenants, conditions or restrictions relating to environmental protection), based upon a violation thereof on the land prior to date of policy. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this

35 26 Coverage Form Procedural Rule Rate Rule Policy if suit is brought against the insured to enforce said rights as to the land." "Any claim of enforcement of the covenants, conditions and restrictions referred to in paragraph of Schedule B (except covenants, conditions or restrictions relating to environmental protection) based upon a violation thereof on the land, present or future. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." "Any claim of enforcement of the covenants, conditions and restrictions referred to in paragraph of Schedule B (except covenants, conditions and restrictions relating to environmental protection) based upon a violation on the land, present or future, of that provision of said covenants, conditions and restrictions which provides that. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." (as to Reverter) Rely upon Schedule B paragraph 1 (Mortgagee Policy). In addition or in the alternative, affirmative insurance is available: "Any reverter, right of reentry or any right or a power of termination of the estate or interest referred to in paragraph of Schedule A upon breach of the covenants, conditions and restrictions referred to in Schedule B (except covenants, conditions or restrictions relating to environmental protection). Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in

36 27 Coverage Form Procedural Rule Rate Rule accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." "Any right to exercise a reverter, right of reentry, or any right or power of termination of the estate or interest referred to in Schedule A upon breach of the covenants, conditions and restrictions referred to in paragraph of Schedule B. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." "Any right to enforce the covenants, conditions and restrictions referred to in paragraph of Schedule B (except covenants, conditions, and restrictions relating to environmental protection) because of present violations on the land. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." "Any claim of violation of the covenants, conditions or restrictions (except covenants, conditions or restrictions relating to environmental protection) referred to in paragraph of Schedule B, based upon a violation on the land, present or future, of that provision of the covenants, conditions and restrictions which provides, provided that the improvements to be erected on the land are erected in accordance with the plans for the placement of said improvements on said land prepared by, dated and designated. Company insures the insured against loss, if any, sustained by the insured under the terms of this

37 Coverage Form Procedural Rule Rate Rule Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." T-35 P-9b(8) R-11f Provides that Mortgagee Policy The revolving line of $50 includes later mortgage advances credit must be in a and insures priority of advances, if in specific amount good faith and without knowledge of subject to fluctuation. defects or objections and subject to federal tax liens, real estate taxes, and assessments. Revolving Credit Endorsement Subordinate Liens Tax Coverage Insurance that a maintenance lien or other lien is subordinate may be accomplished by making no specific exception on the Mortgagee Policy if paragraph 4 of Schedule B is retained or by adding the following pursuant to Procedural Rule P- 11b(8): "Company insures the insured against loss, if any, sustained by the insured under the terms of the Policy if this item is not subordinate to the lien of the insured mortgage." The Company may add the following to the tax exception on a Mortgagee Policy or Binder: "Company insures that standby fees, taxes and assessments by any taxing authority for the year due and payable." Tax Deletion T-30 Delete rollback language form mortgagee Policy or Binder. U.S.A. Endorsement T-12 Amends the U.S.A. Policy by insuring title in the U.S.A. and updating. are not yet P-11b(8) Allows deletion and insurance. P-29 Issue on Mortgagee Policy or binder for current or next year as to all or some taxes. P-20 This endorsement can be issued or rollback tax language can be stricken or omitted from Mortgagee Policy or Binder; cannot be deleted from the Owner Policy. May be done though land specially assessed or value if sound underwriting is undertaken. R-17 Issue upon acquisition of title by the U.S.A. No charge. R-24 $5 premiums R-19 $20 28 R-17 A credit is given for the premium paid for the U.S.A. policy prior to acquisition.

38 29 D TITLE INSURANCE RATE REDUCTION TABLE This section illustrates the effect of the 1998 title insurance rate order. All forms, Procedural Rules, and Rate Rules are referenced. INSURING FORM Procedural Rule Rate Rule Existing Rate Effective Through July 31, 1998 New Rate Effective on August 1, 1998 Mortgagee Policy Endorsements Survey Exception Modification Endorsement (T-3 or amend Schedule B ) P-2 R-16 $0 No change Assignment of Lien/Mortgage Endorsement P-9.b.(1) and P- 9.b.(2) R-11.a. Least of: $278; or, 50% of M.P. Premium Least of: $270; or, 50% of M.P. Premium Modification, Partial Release, Release of Additional Collateral, Reinstatement & Release of Personal Liability Endorsement (T-38) P-9.b.(3) R-11.b. $100 plus $10 for each subsequent year {see premium cap in Rate Rule} No change Date Down Endorsement (T-3) P-9.b.(4) and P-8.b.(1) R-11.c. $50 No change Leasehold Endorsement (T-5) P-9.b.(5) None $50 No change Adjustable Mortgage Loan Endorsement (T-33) P-9.b.(6) R-11.d. $20 No change Manufactured Housing Endorsement (T-31) P-9.b.(7) R-11.e. $20 No change Revolving Credit Endorsement (T-35) P-9.b.(8) R-11.f. $50 No change Environmental Protection Lien Endorsement (T-36) P-9.b.(9) R-11.g. $50 No change Balloon Mortgage Endorsement (T-39) P-9.b.(10) R-11.h. $25 {$50 if issued after the policy} No change Completion of Improvements Endorsement (T-3) P-8.b.(2) and P-2.(a) None $0 No change Pending Disbursement Clause Deletion Endorsement (T-3) Insurance that Taxes Not Yet Due and Payable (T-3 or amend Schedule B ) Deletion of Subsequent Assessments... (Rollback) from Tax Exception Endorsement (T-3 or amend Schedule B ) P-19 None $0 No change P-29 R-24 $5 No change P-20 R-19 $20 No change

39 30 INSURING FORM Procedural Rule Rate Rule Existing Rate Effective Through July 31, 1998 New Rate Effective on August 1, 1998 Increased Value/Negative Amortization Endorsement (T-3) None R-4 Use formula in R-4 No change Correction Endorsement (T-3) None None $0 No change Interim Construction Binder Endorsements Basic Binder Premium P-16 R-13 $ $ Binder Extension Endorsement P-16 and P- 17 R-13 $25 No change Binder Date Down Endorsement P-9.b.(4) R-11.c. $50 No change Owner Policy Endorsements Survey Exception Modification Endorsement (T-3 or amend Schedule B ) P-2 and P-8.a.(2) R-16 $ No change Leasehold Endorsement for T-1R Residential Owner Policy (T-4-R) P-9.a.(1) None $0 No change Leasehold Endorsement for T-1 Owner Policy (T-4) P-9.a.(1) None $0 No change Increased Value Endorsement (T-34) P-9.a.(2) R-3.c. Use formula in R-3.c. No change Completion of Improvements Endorsement P-8.a.(2) and P-2.a. None $0 No change Correction Endorsement None None $0 No change Downdate Endorsement P-9.a.(3) R-15 $50 No change Other Endorsements and Coverages Limited Pre-Foreclosure Policy Date Down Endorsement P-43 R-26 $50 No change Additional Chain of Title Charge None R-9 $ $ NOTES: There were no changes to the following frequently used Rate Rules: Simultaneous Issue Rate (R-5) $ Refinance Credits (R-8) [40% to 15% credit as per the ter ms of the rule]

40 31 TEXAS TITLE INSURANCE PREMIUM RATES EFFECTIVE AUGUST 1, 1998 Policies Up to And Basic Including Premium $10,000 $270 10, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Policies Up to And Basic Including Premium $32,500 $450 33, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Policies Up to And Basic Including Premium $55,000 $631 55, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Policies Up to And Including Basic Premiu m $77,500 $812 78, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Premiums shall be calculated as follows for policies in excess of $100,000: 1. For policies of $100,001 - $1,000,000 Basic Premium (1) Subtract $100,000 from policy amount. (2) Multiply result in 1.(1) by $ and round to nearest whole dollar. (3) Add $992 to result in 1.(2). 2. For policies of $1,000,001 - $5,000,000 Basic Premium (1) Subtract $1,000,000 from policy amount. (2) Multiply result in 2.(1) by $ and round to nearest whole dollar. (3) Add $6,644 to result in 2.(2). 4. For policies of $15,000,001 - $25,000,000 Basic Premium (1) Subtract $15,000,000 from policy amount. (2) Multiply result in 4.(1) by $ and round to nearest whole dollar. (3) Add $69,744 to result in 4.(2). 5. For policies in excess of $25,000,000 Basic Premium (1) Subtract $25,000,000 from policy amount. (2) Multiply result in 5.(1) by $ and round to nearest whole dollar. (3) Add $100,044 to result in 5.(2). 3. For policies of $5,000,001 - $15,000,000 Basic Premium (1) Subtract $5,000,000 from policy amount. (2) Multiply result in 3.(1) by $ and round to nearest whole dollar. (3) Add $27,244 to result in 3.(2).

41 32 E. TEXAS TITLE LAWYER S PERSPECTIVE OF THE HOME EQUITY AMENDMENT These candid, direct, forthright and open statements of the author s professional impressions concerning H.J.R. 31have been made with the hope that these comments will provide the practitioner with a big picture view of the Home Equity Amendment as it affects: (i) construction transactions on homestead; (ii) refinance transactions on homestead; and (iii) home equity and reverse mortgage transactions. The Texas Home Equity Constitutional Amendment, represented by H.J.R. 31, constitutes the most significant change to Texas real estate practice {and to substantive Texas Homestead Law} since Regrettably, no enabling bill was adopted by the legislature. Accordingly, practitioners must be guided by the bare language of the constitution. Most real estate practitioners view H.J.R. 31 as poorly conceptualized and poorly drafted. It creates numerous interpretive problems which will result in a significant amount of title litigation over the next decade to determine its exact legal meaning. Practitioners should keep in mind that Texas cases {and federal cases} construing Texas homestead law often reach results which: (i) defy traditional business logic; (ii) seem unfair to the lender; and, (iii) lack common sense in that the borrower can give a knowingly fraudulent homestead affidavit, obtain a large loan, and then void the deed of trust on the land. Two cases which illustrate some of these principles include: (i) In re Niland, 825 F.2d 801 (5 th Cir. 1987); and (ii) Bradley v. Pacific Southwest Bank, F.S.B., 960 F.2d 502 (5 th Cir. 1992). Of course, there are many other cases. Texas law has consistently held that, in nearly all situations, a borrower cannot waive a constitutional homestead protection. Generally, Texas courts strictly construe homestead protections in favor of the borrower. The borrower s burden of proof is simple. To meet the initial burden of proof, the borrower must show a combination of both overt acts of homestead usage and the intention on the part of the owner to claim the land as homestead, Sims v. Beeson, 545 S.W.2d 262, 263 (Tex. Civ. App. Tyler 1976, writ ref d n.r.e.). Because homesteads are favorites of the law, we must give a liberal construction to the constitutional and statutory provisions that protect homestead exemptions, Tolman v. Overstreet, 590 S.W.2d 635, 637 (Tex. Civ. App. Tyler 1979, no writ). Regrettably, the constitutional nature of these new homestead protections will place the title company at odds with the economic interest of the borrower and lender. The borrower and lender are economically motivated to close the loan transaction with the requirement that the title company insure the deal with no exception as to the potential invalidity of the insured deed of trust {arising out of the lender s possible non-compliance with any covered title risks under the T-42 and T-42.1 endorsements concerning the new constitutional homestead home equity lending requirements}. If coverage is not carefully underwritten, the title insurance industry will experience full policy limits losses which will be unrecoverable losses due to the non-recourse {i.e. non-personal liability} nature of home equity loans. Title companies exist in a competitive environment. The underwriting counsel attempts to competitively position the title insurance company within the market. With the constitutional death penalty of having the insured lien declared totally invalid if the new constitutional due diligence home equity requirements are not satisfied in the loan transaction, the underwriting due diligence burden on lenders and title companies is extreme. In this author s opinion, the constitutionally required due diligence which should go into a first lien cash out refinance home equity loan {from the loan underwriting and title underwriting/closing perspectives} is roughly equivalent to the level of due diligence which goes into a five million-dollar commercial loan on an apartment complex. The constitutional fee limitations {and the statutory Texas Finance Code limitations on what fees the borrower may pay} will make it very difficult to fully and properly underwrite these loans (from both a title insurance underwriting and loan underwriting perspective) on a profitable basis.

42 F. TITLE INSURANCE ASPECTS OF JANUARY 1, 1999 TEXAS CONSTITUTIONAL AMENDMENT WITH RESPECT TO HOME EQUITY LENDING 1. Home Equity Lending In the context of Home Equity Loans, the purpose of this section is to provide lender oriented: (i) title insurance underwriting considerations for the issuance of a T-42.1 Supplemental Coverage Equity Loan Mortgage Endorsement {hereinafter T-42.1 Supplemental Equity Endorsement }; (ii) title insurance underwriting considerations for the issuance of T-42 Equity Loan Mortgage Endorsement {hereinafter T-42 Endorsement }; and, (iii) suggested procedures relating to escrow practice where a T-42 Endorsement and a T-42.1 Supplemental Equity Endorsement are to be issued. a. Important Definitions. The use of clearly defined terms is very important in the home equity context. To assist you in understanding the materials in this section, we have defined several terms below. Also, whenever a defined term is used, it will be shown in bold italic in this section of the article. (1) Home Equity Loan Definitions. In this section, the term Home Equity Loan(s) means either or both of the following sub-categories of equity loan: i. "Traditional Home Equity Loan means a typical Home Equity Loan where the borrower obtains cash proceeds to use for any purpose. These may be first, second or other subordinate lien. 33 ii. "Home Equity Cash-Out Refinance Loan means a cash out refinance transaction in which: (i) part of the equity loan proceeds are used to satisfy an existing loan(s) secured by a lien(s) on the homestead such as purchase money, ad valorem taxes, federal tax liens, owelties or mechanic lien contracts; and, (ii) the other portion of the equity loan proceeds involve cash equity to the borrower which may be used by the borrower for any purpose. (2) Insuring Form Definitions. The following definitions apply to the insuring forms: i. T-42.1 Supplemental Equity Endorsement means the T-42.1 Supplemental Coverage Equity Loan Mortgage Endorsement. ii. iii. "T-42 Endorsement" means the Equity Loan Mortgage Endorsement Form T-42. "T-2 Mortgagee Policy" means the standard Mortgagee Policy of Title Insurance Form T-2. (3) Transactional Definitions. The following other definitions apply: i. Deed of Trust means the deed of trust, security instrument or mortgage securing the Promissory Note evidencing a Home Equity Loan. ii. iii. Promissory Note means the non-personal liability promissory note evidencing the Home Equity Loan secured by the Deed of Trust. The Office of a Title Company or Title Company for purposes of this section, shall mean the leased or owned Texas office location(s) of: a title insurance company; or, a direct operation; or,

43 a title insurance agent; or, an attorney conducting the attorney s business in the name of a title insurance company or direct operation or title insurance agent where BOTH the attorney and the attorney s bona fide employees who close transactions are licensed as escrow officers as provided in Article 9.41.C, Texas Insurance Code. 34 iv. Grantor(s) means the person or persons who are executing the Deed of Trust securing the Promissory Note evidencing the Home Equity Loan. Grantor(s) include the following categories of persons with respect to the land described in the Deed of Trust: (i) persons having any ownership interest in the land; and, (ii) the spouse of any person having any ownership interest in the land. An ownership interest includes, but is not limited to, such interests as: fee simple, leasehold, life tenant/remainder, estate for years. The term ownership interest also includes all property holding relationships between multiple owners such as: community property, separate property, mixed community/separate property, undivided interests, co-tenants and co-tenancy with rights of survivorship. b. Overview v. Maker(s) means the person or persons who are executing the Promissory Note evidencing the Home Equity Loan. At the option of the lender, Maker(s) may include all or only some of the Grantors. (1) The Constitution. The constitutional amendment has created approximately 25 separate requirements for Home Equity Loans. The failure of the lender to fully comply with any one of the requirements may result in the entire Deed of Trust lien being found invalid by a Texas or Federal Court, under Section 50 of the Texas Constitution, if the Grantors of the Deed of Trust file a lawsuit to challenge the validity of the Deed of Trust lien. (2) Mandatory T-42 Endorsement. In January 1998, title companies were authorized to issue the Equity Loan Mortgage Endorsement {herein the T-42 Endorsement }. Issuance of the T-42 Endorsement is mandatory when a T-2 Mortgagee Policy insuring a Deed of Trust securing a Home Equity Loan is issued. The premium rate for the T-42 Endorsement is described in Paragraph d. below. (3) Optional T-42.1 Supplemental Endorsement. Effective November 12, 1998, the T-42.1 Supplemental Equity Endorsement added 11 new coverages to the home equity title insurance product line. When both the T-42 Endorsement and the T-42.1 Supplemental Equity Endorsement are attached to a T-2 Mortgagee Policy a total of 17 home equity related coverages are provided. The rate for the new T-42.1 Supplement Equity Endorsement is described in Paragraph d below. c. Suggested Title Insurance Underwriting Considerations For T-2 Mortgagee Policy And T-42 Endorsement And T-42.1 Supplemental Equity Endorsement Insuring a Home Equity Loan. (1) How the Existing T-42 Endorsement Works with the T-2 Mortgagee Policy and the New Supplemental Equity Endorsement {T-42.1}. In its first paragraph, the mandatory T-42 Endorsement excludes all liability under the mortgagee policy for compliance with any of the 25 +\- conditions imposed under the home equity constitutional amendment. Having excluded all liability for matters

44 arising under the constitutional amendment, the T-42 Endorsement then provides up to six specific coverages. A non-technical overview of the T-42 coverages, and suggested underwriting criteria, is presented on the table below: 35 OVERSIMPLIFIED STATEMENT OF COVERAGE UNDER T-42 T-42 PARAGRAPH REFERENCE SUGGESTED UNDERWRITING CONSIDERATIONS Failure of insured Security Instrument/Deed of Trust to be executed by each owner and each owner s spouse. The land having an agricultural use tax exemption as provided in the Tax Code. The home equity Security Instrument/Deed of Trust is the only home equity Security Instrument/Deed of Trust against the land. No other home equity lien instrument on the land has been recorded in the preceding 12 months. Failure of the insured home equity Security Instrument/Deed of Trust to disclose that it is a home equity mortgage. That the loan closed at a title company office which is a constitutionally permissible location. {Optional coverage} 2(a) All spouses must execute notwithstanding (i) the characterization of the property as separate or community; or (ii) claims that the property is not the homestead of one of the spouses. 2(b) The title insurance company will need to make an underwriting determination that the land is not subject to an open space exemption or agricultural exemption. 2(c) The title insurance company will need to make an underwriting determination that there are no other home equity lien is outstanding. 2(d) The title insurance company will need to make an underwriting determination that there is no home equity lien recorded within the past 12 months. If a home equity lien has been made and released within the past 12 months, the title company will show the home equity lien and the release as a Schedule B exception. Also, the title company will delete sub paragraph {d} of paragraph 2 of the T-42 endorsement. 2(e) The title company will review the Security Instrument/Deed of Trust to determine that the document states This Security Instrument/Deed of Trust Secures a Home Equity Loan or words of similar effect. 2(f) If the transaction was closed at the office of a title company, this optional coverage will be available. The T-42.1 Supplement Equity Endorsement added 11 new coverages {for a total of 17 coverages under both endorsements} for Home Equity Loans. A general nontechnical description of the 11 new coverages is set forth in the table below. Underwriting for routine matters {such as restrictions, easements, paid but unreleased liens, and survey matters...} remains the same as current customary underwriting requirements for the standard T-2 Mortgagee Policy.

45 (2) A Non-technical Description of the New Coverages and Basic Underwriting Requirements The eleven new coverages {stated in oversimplified plain language }, and abbreviated underwriting requirements, are set out below. Use this section for a very basic conceptual overview of the coverages and requirements. See Paragraph 5 Detailed Coverages and Detailed Underwriting Requirements. 36 OVERSIMPLIFIED STATEMENT OF COVERAGE UNDER T-42.1 SUPPLEMENTAL EQUITY ENDORSEMENT T-42.1 PARAGRAPH REFERENCE ABBREVIATED UNDERWRITING CONSIDERATIONS No Borrower Signatures Before The Date Specified by The Lender No Loan Proceeds Disbursed Before The Fourth Day No Early Execution of Election Not to Rescind Form Copy of Documents Provided to the Borrower(s) Fees Shown on The Settlement Statement are IDENTICAL to the Fees Disbursed by the Title Company 1(a) The title company should make sure the borrowers don t sign the Promissory Note and Deed of Trust before the date specified by the lender. 1(b) The title company should make sure that it does not disburse the loan proceeds until the forth calendar day after the Promissory Note and Deed of Trust are executed. 1(c) The title company should make sure that any document characterized as an Election Not to Rescind is not executed on or before the date of execution of the Promissory Note and Deed of Trust. 1(d) The title company should make sure it provides the owners/borrowers {and owner s/borrower s spouse} with a copy of all home equity related documents that it has. 1(e) If the title company is closing the transaction, it should make sure that the fees shown on the final settlement statement are identical to the fees actually disbursed. No Blanks in an Instrument 1(f) After closing, the title company should make sure there are no blanks left to be filled in on: (i) title company forms, (ii) Acknowledgment of Fair Market Value form; (iii) Deed of Trust; (iv) Promissory Note; and (v) all Affidavits.

46 37 OVERSIMPLIFIED STATEMENT OF COVERAGE UNDER T-42.1 SUPPLEMENTAL EQUITY ENDORSEMENT T-42.1 PARAGRAPH REFERENCE ABBREVIATED UNDERWRITING CONSIDERATIONS Attachment of Appraisal or Evaluation 1(g) At closing, The title company should make sure to physically staple the Appraisal or Evaluation to the document called something like Acknowledgment of Fair Market Value Timely Signature of Acknowledgment of Fair Market Value No Excess Homestead Land in Deed of Trust There is No Other Land Held by the Owner Which is Subject to a Home Equity Loan. There is No Other Land Held by the Owner Which has a Released Deed of Trust Securing a Home Equity Loan Within the Past 12 months. 1(h) At the same time the title company has the borrowers sign the Deed of Trust and Promissory Note, the borrowers must sign the Acknowledgment of Fair Market Value. 1(i) If the land is urban, the land described in the deed of trust cannot exceed ten acres. If the land is rural, it cannot exceed: (i) the 200 acre homestead allowed to a family; or (ii) the 100 acre homestead allowed to a single person. 1(j) This coverage is generally provided by securing an affidavit. 1(k) This coverage is generally provided by securing an affidavit. Please use the above table for a general overview and understanding of the new policy coverages. There are a number of more detailed underwriting considerations which are set forth below. d. Premium for T-42 and T-42.1 Endorsements and the Global Regulatory Requirements for the Supplemental Coverage Equity Loan Mortgagee Endorsement T-42.1 (1) Premium Charges. i. T-2 Mortgagee Policy with T-42 Endorsement Only. The premium for the T-42 Endorsement is 10% of the basic premium rate calculated for the T-2 Mortgagee Policy. NOTE: The title company should calculate the basic premium from the rate table and add ten percent to that amount. It should not add in other endorsement charges before calculating the ten percent premium for the T-42 Endorsement.

47 38 ii. T-2 Mortgagee Policy + T-42 Endorsement + T-42.1 Endorsement. When the T-2 Mortgagee Policy is issued with both endorsements, the premium for the T Supplemental Equity Endorsement is 15% of the basic premium rate for the T-2 Mortgagee Policy. The combined premium would be: T-42 Endorsement 10% of basic premium T-42.1 Endorsement Total 15% of basic premium 25% of basic premium NOTE: For both Endorsements, calculate the basic premium from the rate table and add ten percent for the T-42 Endorsement {and then add fifteen percent to basic premium rate for the T-42.1 Supplemental Equity Endorsement}. The title company should not add in other endorsement charges {such as the T-42 premium or other endorsement charges} before calculating the fifteen percent premium for the T-42.1 Endorsement. (2) How Rate Rule R-8 Premium Credit Affects the T-42 Endorsement and T-42.1 Supplemental Equity Endorsement Premium Calculations. If Rate Rule R-8 Refinance Credit is given, calculate the 10% and 15% premium for the T-42 Endorsement and T-42.1 Supplemental Equity Endorsement based upon the full Basic Premium Rate before applying the R-8 Credit. Example: Basic Premium Rate for $100, $ R-8 Credit for 80, Prior Mortgagee Policy with a $75, Loan Balance [792 X.40%] ($317.00) Net R-8 Mortgagee Policy Premium T-42 Premium [992 X 10%] T-42.1 Premium [992 X 15%] (3) No T-42.1 Supplemental Coverage Endorsements for Loans Prior to November 12, A title company should not issue, the T-42.1 Supplemental Equity Endorsement for any transaction which signed up prior to Lenders may not enhance the title insurance coverage of their existing loan portfolios {by purchasing a T-42.1 Supplemental Equity Endorsement} where the home equity loan was signed-up prior to The T-42 Endorsement must be issued at no premium for transactions which signed up prior to (4) Other Endorsements and Coverages are Still Available. Provided that normal underwriting procedures are followed, and further provided that the applicable Rate and Procedural Rules are satisfied, the following endorsements and coverages are available on a T-2 Mortgagee Policy issued together with the mandatory T-42 Endorsement {or on a T-2 Mortgagee Policy issued with both the T-42

48 Endorsement and the T-42.1 Supplemental Equity Endorsement}. The available endorsements and coverages include: 39 NO. COVERAGE/ENDORSEMENT FORM NO. RATE RULE 1998 PREMIUM 1 Adjustable Mortgage Loan Endorsement T-33 Rate Rule R-11.d. $ Assignment of Lien Endorsement T-3 & Instruction III Rate Rule R-11.a. Varies 3 Environmental Endorsement T-36 Rate Rule R-11.g. $ Mortgagee Policy P-9.b.(3) Endorsement T-38 Rate Rule R-11.b. Varies 5 Manufactured Housing Endorsement T-31 Rate Rule R-11.e. $ Taxes Not Yet Due & Payable None Rate Rule R-24 $ Deletion of Rollback Exception None Rate Rule R-19 $20.00 (5) Circumstances Requiring Mandatory Deletion of Coverages A Through H in the New T-42.1 Supplemental Equity Endorsement Not Closed at the Office of the Title Company. It is mandatory under Procedural Rule P-47.A.(4) to delete Subparagraphs a through h of the T-42.1 Supplemental Equity Endorsement if the Deed of Trust and Promissory Note are not executed at The Office of a Title Company. IMPORTANT NOTE: Please see the RESTRICTIVE definition of the The Office of a Title Company in Part F(1)(a)(3)(iii) of this section. For fee attorney offices to qualify as an Office of A Title Company they must meet the definition requirements for: (i) escrow officer licenses; and, (ii) operating in the name of the title company. The following language will generally appear in Schedule B and in the T-42.1 Supplemental Equity Endorsement to evidence deletion of coverages a through h : Subparagraphs a through h of numbered paragraph 1 (one) of the Supplemental Coverage Equity Loan Mortgagee Endorsement {T-42.1} are hereby deleted in their entirety. (6) Express Insurance Availability Pursuant to Procedural Rule P-39. Express insurance is available for survey matters and title defects {such as paid but unreleased liens} in accordance with normal underwriting requirements. However, no express insurance may be given with respect to any of the 17 home equity related coverages under the T-42 Endorsement or the T-42.1 Supplement Equity Endorsement. (7) No T-42.1 Supplemental Equity Endorsement Is Available Without the T-42 Endorsement. Under Procedural Rule P-47.A.(1) the title company cannot issue a T Supplemental Equity Endorsement unless it is also issuing the T-42 Endorsement. The T-42.1 Supplemental Equity Endorsement is simply not available as a stand alone endorsement; it must be issued in conjunction with a T-42 Endorsement.

49 40 e. Detailed Title Insurance Underwriting Considerations Set forth in this section are detailed underwriting considerations for each of the eleven T-42.1 coverages. There are differing title company requirements due to differences in constitutional and regulatory interpretation by various title companies. (1) Signature Before Specified Date - Insuring Provision 1(a) of T-42.1 Language of insuring provision: The insured mortgage and promissory note secured thereby being executed at an office of the Company or its Title Insurance Agent before the specific calendar date stated in written closing instructions from the insured named in Schedule A delivered to the Company or its Title Insurance Agent prior to the execution of the insured mortgage and promissory note. i. Suggested Escrow Officer/Closer Transactional Responsibilities Ascertain that the closing instructions specify a date which is the earliest date the Deed of Trust and Promissory Note may be executed. Ascertain that the Promissory Note was NOT executed by ANY OF THE MAKERS prior to the date specified in the closing instructions. Ascertain that the Deed of Trust was NOT executed by ANY OF THE GRANTORS prior to the date specified in the closing instructions. ii. Circumstances Requiring the Deletion of Insuring Provision 1(a) of T-42.1 No T-42 Endorsement was issued. {If no T-42 Endorsement is issued, the title company should not issue a T-42.1 Supplemental Equity Endorsement}. If a T-42 Endorsement is issued, it is issued with insuring paragraph 2(f) deleted. The Deed of Trust and Promissory Note are NOT executed at the Office of a Title Company as defined in Part F(1)(a)(3)(iii) of this section. The lender does not furnish written closing instructions to the escrow officer prior to the execution of the Promissory Note and Deed of Trust. The written closing instructions furnished to the escrow officer do not state a specific calendar date that is the earliest date that the Promissory Note and Deed of Trust are to be executed. NOTE: The closing instructions have not stated a specific calendar date if the instructions state something similar to: The documents must not be executed before days after. The title company should require a specific date like: The earliest date that the documents may executed is June 18, 2000".

50 (2) No Loan Proceeds Disbursement Before Fourth Day - Insuring Provision 1(b) of T Language of insuring provision: Any loan proceeds received by the Company or its Title Insurance Agent in connection with the extension of credit secured by the lien of the insured mortgage being disbursed by the Company or its Title Insurance Agent sooner than the fourth calendar day after the insured mortgage and promissory note secured thereby are executed. i. Suggested Escrow Officer/Closer Transactional Responsibilities Ascertain the date of execution shown on the Promissory Note and Deed of Trust. Not counting the day of execution, count three calendar days from the execution date referenced in paragraph 5(ii)(a)(A) above. Do not disburse until the beginning of the fourth day [i.e. the day following the third day as determined in paragraph 5(ii)(a)(B) above] 41 ii. Circumstances Requiring the Deletion of Insuring Provision 1(b) of T-42.1 No T-42 Endorsement was issued. {If no T-42 Endorsement is issued, the title company should not issue a T-42.1 Supplemental Equity Endorsement.} If a T-42 Endorsement is issued, it is issued with insuring paragraph 2(f) deleted. The Deed of Trust and Promissory Note are NOT executed at the Office of a Title Company as defined in Part F(1)(a)(3)(iii) of this section. If the title company does not disburse all of the loan proceeds received by the title company. If any of the loan proceeds received by the title company are disbursed sooner than the fourth calendar day after the Promissory Note and Deed of Trust are executed. (3) Execution of Election Not to Rescind - Insuring Provision 1(c) of T-42.1 Language of insuring provision: A document expressly purporting to evidence an election not to rescind the extension of credit secured by the lien of the insured mortgage being executed by the owner and spouse, if any, of the owner, in the presence of an escrow officer of the Company or its Title Insurance Agent on or before the date that the insured mortgage and promissory note secured thereby were executed.

51 42 i. Suggested Escrow Officer/Closer Transactional Responsibilities Make sure the closing instructions make reference to an Election Not to Rescind form and also set forth escrow instructions concerning handling of the Election Not to Rescind. Locate the unsigned Election Not to Rescind in the loan package and place it in a sealed envelope marked with the names of the borrowers on the outside of the envelope. The outside of the envelope should also be marked with a phrase like: Un-executed Election Not to Rescind. After the Promissory Note and Deed of Trust have been executed, just prior to the Makers leaving the title company, hand the sealed envelope to the Makers/Grantors with the instruction not to open the envelope until after they leave the title company premises. Inform the Grantors/Makers that the envelope contains a standard lending document which, under the Texas Department of Insurance regulations, cannot be executed by the Grantors/Makers until after they have left the title company premises following the closing. The envelop should contain instructions about how the lender wants the Election Not to Rescind returned and to whom the lender wants the Election Not to Rescind returned {i.e. returned to the lender s office or to the title company office}. It is the lender s decision to determine who must sign the Election Not to Rescind. ii. Circumstances Requiring the Deletion of Insuring Provision 1(c) of T-42.1 No T-42 Endorsement was issued. {If no T-42 Endorsement is issued, the title company should not issue a T-42.1 Supplemental Equity Endorsement.} If a T-42 Endorsement is issued, it is issued with insuring paragraph 2(f) deleted. The Deed of Trust and Promissory Note are NOT executed at the Office of a Title Company as defined in Part F(1)(a)(3)(iii) of this section. No Election Not to Rescind is included in the loan package. If the Election Not to Rescind is executed in the presence of an escrow officer at the Title Company on or before the date of execution of the Deed of Trust and Promissory Note. (4) Document Copies - Insuring Provision 1(d) of T-42.1 Language of insuring provision: Failure of the Company or its Title Insurance Agent to provide the owner with a copy of all documents related to the extension of credit secured by the lien of the insured mortgage that were executed by the owner at the office of the Company or its Title Insurance Agent on the date that the owner executed the insured mortgage and the promissory note secured thereby.

52 43 i. Suggested Escrow Officer/Closer Transactional Responsibilities Make a copy(ies) of each document signed by either the Maker(s) and/or Grantors and provide a full set of copies to: (i) each Maker of the Promissory Note; and, (ii) each Grantor on the Deed of Trust. ii. Circumstances Requiring the Deletion of Insuring Provision 1(d) of T-42.1 No T-42 Endorsement was issued. {If no T-42 Endorsement is issued, the title company should not issue a T-42.1 Supplemental Equity Endorsement.} If a T-42 Endorsement is issued, it is issued with insuring paragraph 2(f) deleted. The Deed of Trust and Promissory Note are NOT executed at the Office of a Title Company as defined in Part F(1)(a)(3)(iii) of this section. Copies of each document are not provided as required by paragraph 4(C)(i) above. (5) Fees - Insuring Provision 1(e) of T-42.1 Language of insuring provision: The Company or its Title Insurance Agent collecting or disbursing any fees not shown on the final settlement statement prepared by the Company or its Title Insurance Agent and sent to the lender named on the settlement statement prior to the execution of the insured mortgage and the promissory note secured thereby. i. Suggested Escrow Officer/Closer Transactional Responsibilities Review the loan closing instructions and generate a preliminary settlement statement reflecting: (i) the dollar amounts required to be shown on the settlement statement in accordance with the loan closing instructions; and (ii) estimated title company imposed fees and/or charges. EXAMPLE OF FEES the title company would estimate: Title insurance basic premium Typical Endorsement Charges Such as: T-42 Premium T-42.1 Premium Adjustable Mortgage Loan Endorsement (T-33) [1998 Premium $20.00] Assignment of Lien Endorsement (T-3 & Instruction III) [Premium calculated by R-11.a. formula] Environmental Endorsement Premium (T-36) [1998 Premium $50.00]

53 Manufactured Housing Endorsement (T-31) [1998 Premium $20.00] Not Yet Due & Payable Coverage [1998 Premium $5.00] Rollback Tax Coverage Premium [1998 Premium $20.00] Escrow Fee Courier Fee Tax Certificate Fee Recording Fees Suggest that the title company state its estimate of this fee something like this: 44 The greater of: (i) $ [estimated total recording fees] or, (ii) as $ for the first page recorded and $ for each recorded page thereafter. Example: Recording Fees are estimated as the greater of: (i) $19.00; or (ii) $9.00 for the first page recorded and $2.00 for each page thereafter. Since the lender controls the length of their documents, the lender is in the best position to estimate the final amount of recording fees. Provide the preliminary settlement statement, containing the estimated fees, to the lender for its approval. Request the lender to deliver to the title company {such as by fax delivery} a lender signed copy of the preliminary settlement statement with a notation like: Fees approved by Lender. Prepare the Final Settlement Statement to be identical in mathematical amount to each fee shown on the Preliminary Settlement Statement. Do not add any new fees to the Final Settlement Statement. If the title company finds that any of the fees on the Final Settlement Statement are greater than the fees shown on the Preliminary Settlement Statement it must either: Have the lender approve another Preliminary Settlement Statement reflecting the increased fees; or Have the Final Settlement Statement redrafted and re-executed to reflect fees which do not exceed the fees shown on the Preliminary Settlement Statement. In this regard, the title company will have several options: Ask a third party to reduce its fee so that the fee does not exceed the amount shown on the Preliminary Settlement Statement. Request the lender to pay the fees {or the portion of the fee in excess of the amount shown on the Preliminary Settlement Statement} directly from the lender s operating account to the party entitled to the fee.

54 45 ii. Circumstances Requiring the Deletion of Insuring Provision 1(e) of T-42.1 No T-42 Endorsement was issued. {If no T-42 Endorsement is issued, the title company should not issue a T-42.1 Supplemental Equity Endorsement.} If a T-42 Endorsement is issued, it is issued with insuring paragraph 2(f) deleted. The Deed of Trust and Promissory Note are NOT executed at the Office of a Title Company as defined in Part F(1)(a)(3)(iii) of this section. The lender does not request a Preliminary Settlement Statement prior to the execution of the Promissory Note and Deed of Trust. The lender does not approve the Preliminary Settlement Statement in writing as provided above. Any fees are collected or disbursed by the Title Company and the fees are not shown on the Final Settlement Statement prepared by the Title Company and executed by the Makers and/or Grantor. A Preliminary Settlement Statement was sent to the lender and the fees on the Final Settlement Statement {executed by the Makers and/or Grantors} exceed the amount of fees shown on the Preliminary Settlement Statement sent to the lender prior to the execution of the Promissory Note and Deed of Trust. (6) Blanks in an Instrument - Insuring Provision 1(f) of T-42.1 Language of insuring provision: Blanks (other than signature lines, if any, for execution by the lender) in the following instruments left to be filled in when executed by the owner in an office of the Company or its Title Insurance Agent: (i) an instrument prepared by the Company or its Title Insurance Agent, (ii) the purported written acknowledgment as to the fair market value, (iii) the insured mortgage, (iv) the promissory note secured thereby, or (v) affidavits of compliance with Section 5O(a)(6), Article XVI, Texas Constitution. i. Suggested Escrow Officer/Closer Transactional Responsibilities After the documents described in the insuring provision [ 1(f)] above have been executed by the Grantors and Makers, carefully review each document for blanks. Pay extra attention to the Acknowledgment of Fair Market Value form to make sure that: (i) the blank for the $dollar$ value is completed prior to execution of the form; and (ii) it is dated the same date as the Promissory Note and Deed of Trust; and, (iii) it is executed by the identical Grantors who executed the Deed of Trust

55 Deem a blank to be any space on a document which is designed to have information inserted into it in order to express the full and complete intent of the parties as to the overall language appearing on the document. Examples of blanks which must be completed: General document terms such as: names, dates, addresses, phone numbers, fax numbers... Loan terms such as: interest rates, amounts, percentages... Examples of blanks which do NOT need to be completed at the time of document execution: Blanks for signature by the lender Blanks for recording information. Blanks for completion by government officials. Blanks in the Settlement Statement which do not need a number inserted to correctly reflect the mathematical settlement of the transaction. NOTE: If the HUD Statement correctly reflects the mathematical disbursement of the transaction, then the blanks on the settlement statement are not blanks left to be filled in because nothing needs to be inserted in the blank to express the mathematical facts of the transaction funds disbursement. 46 ii. Circumstances Requiring the Deletion of Insuring Provision 1(f) of T-42.1 No T-42 Endorsement was issued. {If no T-42 Endorsement is issued, the title company should not issue a T-42.1 Supplemental Equity Endorsement.} If a T-42 Endorsement is issued, it is issued with insuring paragraph 2(f) deleted. The Deed of Trust and Promissory Note are NOT executed at the Office of a Title Company as defined in Part F(1)(a)(3)(iii) of this section. There are blanks in an instrument left to be filled in when executed by the Grantors at an Office of a Title Company, and: The instrument was prepared by the Title Company; or The instrument is: (a) The Acknowledgment of Fair Market Value; (b) the Deed of Trust; (c) the Promissory Note; or (d) Affidavit(s) of Compliance With The Home Equity Laws. There are blanks in an instrument left to be filled in {when executed by the Grantors} at the time of delivery to the Title Company of any of the following documents: (a) The Acknowledgment of Fair Market Value; (b) the

56 Deed of Trust; (c) the Promissory Note; (d) Affidavit(s) of Compliance With The Home Equity Laws. (7) Attachment of Appraisal or Evaluation - Insuring Provision 1(g) of T-42.1 Language of insuring provision: The failure of the written document purporting to be a written acknowledgment as to the fair market value of the land to have attached, at the time of execution of such written document by the owner, a purported appraisal or a purported evaluation of the fair market value of the land. However, the Company does not insure that the purported written acknowledgment or the purported appraisal or purported evaluation complies with Subsection (a)(q)(ix) or Subsection (h) of Section 50, Article XVI, Texas Constitution or any laws or regulations relating to the subject matter of said subsections. i. Suggested Escrow Officer/Closer Transactional Responsibilities Ascertain that the Loan Closing Instructions indicate whether an Appraisal is required or whether only an Evaluation of Fair Market Value is required. Locate the required Appraisal or Evaluation of Fair Market Value in the loan document package. Locate the form entitled something like Written Acknowledgment of Fair Market Value in the loan package. Physically attach the Written Acknowledgment of Fair Market Value to either the: Appraisal {if the lender has required an appraisal} or Evaluation of Fair Market Value Pay extra attention to the Acknowledgment of Fair Market Value Form to make sure that: (i) the blank for the $dollar$ value is completed prior to execution of the form; and (ii) it is dated the same date as the Promissory Note and Deed of Trust; and, (iii) it is executed by the identical Grantors who executed the Deed of Trust. 47 ii. Circumstances Requiring the Deletion of Insuring Provision 1(g) of T-42.1 No T-42 Endorsement was issued. {If no T-42 Endorsement is issued, the title company should not issue a T-42.1 Supplemental Equity Endorsement.} If a T-42 Endorsement is issued, it is issued with insuring paragraph 2(f) deleted.

57 48 The Deed of Trust and Promissory Note are NOT executed at the Office of a Title Company as defined in Part F(1)(a)(3)(iii) of this section. The Loan Closing Instructions do not require an Appraisal or Evaluation of Fair Market Value. If the lender does not furnish to the Title Company, prior to execution of the Deed of Trust and Promissory Note, the following: The Written Acknowledgment of Fair Market Value and one of the following: A document purporting to be an Appraisal or A document purporting to be an Evaluation of Fair Market Value. (8) Signature of Acknowledgment of Fair Market Value - Insuring Provision 1(h) of T-42.1 Language of insuring provision: The failure of the written document purporting to be an acknowledgment as to the fair market value to be executed by the owner on the date that the insured mortgage and promissory note secured thereby are executed by the owner. i. Suggested Escrow Officer/Closer Transactional Responsibilities Ascertain that the Loan Closing Instructions indicate whether an Appraisal is required or whether only an Evaluation of Fair Market Value is required. Locate the required Appraisal or Evaluation of Fair Market Value in the loan document package. Locate the form entitled something like Written Acknowledgment of Fair Market Value in the loan package. Physically attach the Written Acknowledgment of Fair Market Value to either the: Appraisal {if the lender has required an appraisal} or Evaluation of Fair Market Value Have the parties named on the Written Acknowledgment of Fair Market Value execute the form and take their acknowledgment if the form provides for an acknowledgment. Make sure the Written Acknowledgment of Fair Market Value is executed on the same day as the Promissory Note and Deed of Trust.

58 Pay extra attention to the Acknowledgment of Fair Market Value Form to make sure that: (i) the blank for the $dollar$ value is completed prior to execution of the form; and (ii) it is dated the same date as the Promissory Note and Deed of Trust; and, (iii) it is executed by the identical Grantors who executed the Deed of Trust 49 ii. Circumstances Requiring the Deletion of Insuring Provision 1(h) of T-42.1 No T-42 Endorsement was issued. {If no T-42 Endorsement is issued, the title company should not issue a T-42.1 Supplemental Equity Endorsement.} If a T-42 Endorsement is issued, it is issued with insuring paragraph 2(f) deleted. The Deed of Trust and Promissory Note are NOT executed at the Office of a Title Company as defined in Part F(1)(a)(3)(iii) of this section. The Loan Closing Instructions do not require an Appraisal or Evaluation of Fair Market Value. No Acknowledgment of Fair Market Value is delivered to the title company prior to execution of the Promissory Note and Deed of Trust. The Acknowledgment of Fair Market Value is not executed by the Grantors on the same day as the Promissory Note and Deed of Trust are executed. (9) No Land in Excess of Homestead Allotment - Insuring Provision 1(i) of T Language of insuring provision: Part of the land described in Schedule A not being the homestead of the owner. i. Comments Concerning The Homestead Related Coverage Under T-42.1 This coverage is one which is both: (i) unique in its assurance of a negative legal characteristic {i.e. that no part of the insured land is NON- HOMESTEAD}; and, (ii) labor intensive to provide. This coverage is labor intensive in terms of the need to gather facts about the character and use of the land {which facts lie totally outside of the typical public record search at the county clerk s office} and then applying complex legal rules to the non-public record facts. This new coverage relates to a new legal risk created by the home equity amendment to the Texas Constitution. The new legal risk makes a home equity lien invalid if the lender has taken additional collateral. Additional collateral is any collateral in addition to the borrower s homestead. So additional collateral would include any land described in the Deed of Trust in excess of:

59 The ten acre urban homestead if the land has an URBAN CHARACTER The one hundred acre rural homestead of a single person if the land has a RURAL CHARACTER. The two hundred acre rural homestead of a family if the land has a RURAL CHARACTER. The threshold question for the lender and title company is whether the land has an urban character or a rural character. The answer to this question is often simple. On the urban side of the equation, the answer is simple in the context of a single family residence located in a fully developed platted residential subdivision located in a city or town where the subdivision is surrounded by other similar subdivisions or commercial uses. On the rural side of the equation, the answer is simple where the land is a farm located way out in the country and is fully surrounded by other farmland. The question of urban/rural character of the land becomes very complex in the area called the urban/rural fringe. In the urban/rural fringe, land has mixed character and the determination of urban or rural character is a fact question which may only be absolutely determined by a jury trial. Title company underwriting requirements in this area should be, of necessity, rather strict and inflexible because a district court jury is in the position, following a trial, to second guess the title insurance underwriting characterization of the land {such as finding a tract larger than one acre to be urban rather than rural} and thus cause a policy limits loss for which there is no loss recovery due to the non-personal liability character of the home equity promissory notes. Use of the Exhibit A Questionnaire form entitled Owner/Borrower Questionnaire for Rural Homestead Characterization is suggested. 50 ii. Typical Title Examiner/Chief Title Officer Responsibilities Square Footage Calculation for Each Parcel Examined: For all title orders which are for either a Traditional Home Equity Loan or a Home Equity Cash-Out Refinance Loan it is necessary to determine the square footage for underwriting purposes only. This may be accomplished by one of two methods: FIRST METHOD: Some recorded subdivision plats contain lots which are ALL unquestionably less than ten acres or 435,600 square feet. In these cases, the following language is suggested for Schedule C of the Commitment for Title Insurance:

60 51 Provided that the identical land description on Schedule A of this Commitment for Title Insurance is used in the deed of trust to be insured, the Company has made a title insurance underwriting determination that it will provide coverage insuring against part of the land described in Schedule A not being the homestead of the owner in accordance with Insuring Provision 1(i) of the T-42.1 Supplemental Coverage Equity Loan Mortgage Endorsement and the provisions of Procedural Rule P-47.B(9) SECOND METHOD: For land which does not fall within the unquestionably less than one acre category, it will be necessary to determine the square footage of the land under examination. Use of one of the following Procedures is suggested: PROCEDURE #1: Using a computer program which calculates square footage, enter the courses, distances, curve data and any other information the program requires to compute the square footage. PROCEDURE #2: Refer the matter to a surveyor who has agreed to perform square footage calculations. This is probably best accomplished by placing the following requirement on Schedule C of the Commitment for Title Insurance: The Company requires a certification, by a Texas Registered Public Surveyor, of the number of square feet contained in the land described in Schedule A of this Commitment for Title Insurance. This certification should be submitted to the examination department of the Company so that the Company may make a title insurance underwriting determination regarding the eligibility of the Schedule A land for coverage insuring against part of the land described in Schedule A not being the homestead of the owner in accordance with Insuring Provision 1(i) of the T-42.1 Supplemental Coverage Equity Loan Mortgage Endorsement and the provisions of Procedural Rule P-47.B(9) For land that the title company or surveyor determines to be ten acres or less {435,600 Square Feet or less} it is suggested that the language set forth above in Part (F)(1)(e)(9)(ii) be included on Schedule C of the Commitment for Title Insurance. For Land that is in excess of ten acres {more than 435,600 Square Feet} please place the following language in Schedule C of the Commitment for Title Insurance: The Company requires additional information concerning the character and use of the land described on Schedule A hereof. This additional information is necessary so that the examination department of the Company may make a title insurance underwriting determination regarding the eligibility of the Schedule

61 A land for coverage insuring against part of the land described in Schedule A not being the homestead of the owner in accordance with Insuring Provision 1(i) of the T-42.1 Supplemental Coverage Equity Loan Mortgage Endorsement and the provisions of Procedural Rule P-47.B(9). The borrowers are requested to complete the attached application [see Exhibit A ]. 52 iii. Suggested Escrow Officer/Closer Transactional Responsibilities Verify that the vesting deed description and legal description in the Commitment for Title Insurance are identical. If the Commitment legal description and the Deed legal description are not identical, the following inquires should be made: Ask the lender and proposed borrower(s) what land is intended to be described in the Deed of Trust to be insured? Make sure both parties are in agreement. Does the land described in the Commitment for Title Insurance include the residence or business improvements intended to be used as collateral? A prior survey should be a good tool to use to determine if the land includes the intended residential and/or business improvements. If the proper land has been examined and included in the commitment, review Schedule C for: The authorization to provide coverage under insuring provision 1(i) of T-42.1 Supplemental Coverage Equity Loan Mortgagee Endorsement {see sample commitment language in Part (F)(1)(e)(9)(ii); or, The requirement for additional information from the proposed lender and borrowers if the land is in excess of one acre {see sample language in Part (F)(1)(e)(9)(ii). If additional information is required, gather the documentary evidence by using the affidavit attached as Exhibit A. If Schedule C of the Commitment for Title Insurance contains the okay to insure language found under Part (F)(1)(e)(9)(ii) above, the title company should be in the position to provide the coverage set forth in Insuring Provision 1(i) of T The title company will require Comprehensive Home Equity Loan Affidavit which sets forth facts supporting the coverage decision. NOTE: Duplexes, Triplexes and Fourplexes may be insurable with Insuring Provision 1(i) of the T-42.1Supplemental Equity

62 53 Endorsement included. A Comprehensive Home Equity Loan Affidavit is essential to this coverage because the affidavit will contain provisions indicating that leased or partially leased land has not been abandoned as homestead. Title companies will generally not rely upon the square footage calculations of the taxing authority {or Central Appraisal District} to determine that the land is 435,600 square feet or less. These figures are unreliable and do not comply with Procedural Rule P-47.B.(9)(b). iv. Circumstances Requiring the Deletion of Insuring Provision The land is more than ten acres and written approval is not obtained from the Underwriting Department of the title insurer. The Comprehensive Home Equity Loan Affidavit is not executed and acknowledged by the Grantors. One of the following is not obtained: (i) the surveyor s certificate requested under Part (F)(1)(e)(9)(ii) above; or, (ii) the square footage calculation required in Part (F)(1)(e)(9)(ii) above (10) No Other Land with a Home Equity Mortgage - Insuring Provision 1(j) of T-42.1 Language of insuring provision: Title to other land which, according to the public records, appears to be vested in the name of the owner as shown on Schedule A and which is not described in Schedule A and which is located in the same county in which the land described in Schedule A is located, being subject at Date of Policy to a mortgage executed by the owner, recorded in the public records, which discloses that it secures an extension of credit made pursuant to Subsection (a)(6) of Section 50, Article XVI, Texas Constitution. i. Suggested Escrow Officer/Closer Transactional Responsibilities Review the Loan Application to ascertain if the Grantor(s): (i) list any other land (i.e. land other than the land to be described in the Deed of Trust); or, (ii) list an other Home Equity Loan. If they list other land, a limited title search should be conducted on the other land for a Home Equity Loan. If they list another Home Equity Loan, obtain a copy of the Deed of Trust and have a limited title search conducted on the land described in the Deed of Trust. The title company may need the Makers and/or Grantors to sign a consent to authorize the lender to release a copy of the loan application to you. Obtain a Comprehensive Home Equity Loan Affidavit from the Grantors.

63 54 ii. Typical Title Examiner/Chief Title Officer Responsibilities If the Grantors do own other land, perform a limited title search [in the county where the Schedule A land is located and also in any adjoining county if the municipality coverage described in 10-F below is to be given] for any Deed of Trust, or other voluntary lien instrument, securing a Home Equity Loan. The search may begin with January 1, 1998 and need NOT go behind that date. The following language will appear in Schedule C if a Deed of Trust securing a Home Equity Loan is found on the other land: Requirement for Release of Home Equity Deed of Trust on Other Land and Delay of Closing until Elapse of 12 Months: Deed of Trust executed by to, Trustee, dated, filed for record on, and recorded in Volume, Page, of the Records of County, Texas, securing in the payment of one note of even date therewith in the principal sum of $. This instrument discloses that it secures an extension of credit made pursuant to Sub-Section (a)(6) of Section 50, Article XVI, Texas Constitution against land other than the land described on Schedule A hereof {hereinafter the Other Home Equity Security Instrument }. This Other Home Equity Security Instrument is recorded within one year prior to the effective date of this Commitment for Title Insurance. With respect to this Other Home Equity Security Instrument, the following requirements apply: (i) it must be released; and, (ii) the closing for the new home equity loan under this Commitment for Title Insurance may not occur until a date which is one year from the date of funding of the Home Equity Security Instrument. Otherwise, the Company is required by Procedural Rule P-47.(b) (10) to delete insuring provision 1(j) of the T-42.1 Supplemental Coverage Equity Loan Mortgage Endorsement. iii. Circumstances Requiring the Deletion of Insuring Provision If the Makers or Grantors own other land with a Home Equity Loan. The Grantors will not sign a Comprehensive Home Equity Loan Affidavit. iv. Optional Coverage for Land Located in Municipality Where Municipal Boundaries Cross County Lines If the land is located in a City, Town or Village {hereinafter a Municipality } and if the boundaries of the municipality cross into one or more other counties, then coverage 1(j) of the T-42.1 Supplemental Coverage Endorsement may be amended to add the CAPITALIZED language:

64 55 Title to other land which, according to the public records, appears to be vested in the name of the owner as shown on Schedule A and which is not described in Schedule A and which is located in the same county in which the land described in Schedule A is located OR IN AN ADJOINING COUNTY, being subject at Date of Policy to a mortgage executed by the owner, recorded in the public records, which discloses that it secures an extension of credit made pursuant to Subsection (a)(6) of Section 50, Article XVI, Texas Constitution. No additional underwriting requirements apply. (11) No Other Land With Released or Paid Off Home Equity Mortgage Within Past Twelve Months- Insuring Provision 1(k) of T-42.1 Language of insuring provision: Title to other land which, according to the public records, appears to be vested in the name of the owner as shown on Schedule A and which is not described in Schedule A and which is located in the same county in which the land described in Schedule A is located, having been subject to a mortgage executed by the owner, recorded in the public records, which disclosed that it secured an extension of credit made pursuant to Subsection (a)(6) of Section 50, Article XVI, Texas Constitution, that was closed within one year prior to Date of Policy. i. Suggested Escrow Officer/Closer Transactional Responsibilities Review the Loan Application to ascertain if the Grantor(s) list any other land other than the land to be described in the Deed of Trust. If they list other land, a limited title search should be conducted on the other land for a Home Equity Loan which has been secured, by the other land during the past 12 months. The title company may need the makers to sign a consent to authorize the lender to release a copy of the loan application to you. A Comprehensive Home Equity Loan Affidavit from the Makers/Grantors will typically be required. ii. Suggested Title Examiner/Chief Title Officer Responsibilities If the Escrow Officer/Closer s review of the loan application indicates that the Grantors do own other land, a limited title search should be performed [in the county where the Schedule A land is located and also in any adjoining county if the municipality coverage described in (xi)(d) below is to be given] for any Deed of Trust, or other voluntary lien instrument, securing a Home

65 Equity Loan, which has been either released or renewed and extended, with the past twelve months. The following language will appear in Schedule C of the Commitment for Title Insurance if a released or renewed and extended lien is found within the past 12 months: Requirement for Elapse of 12 Month Period from the Date of Recording of Previously Released Home Equity Deed of Trust on Other Land : Deed of Trust executed by to, Trustee, dated, filed for record on, and recorded in Volume, Page, of the Records of County, Texas, securing in the payment of one note of even date therewith in the principal sum of $ ; together with Release of Lien, dated, recorded in Volume, Page, of the Records of County, Texas. This instrument discloses that it secures an extension of credit made pursuant to Sub-Section (a)(6) of Section 50, Article XVI, Texas Constitution against land other than the land described on Schedule A hereof {hereinafter the Other Home Equity Security Instrument }. This Other Home Equity Security Instrument is recorded within one year prior to the effective date of this Commitment for Title Insurance. With respect to this Other Home Equity Security Instrument, the closing for the new home equity loan under this Commitment for Title Insurance may not occur until a date which is one year from the date of funding of the Other Home Equity Security Instrument. Otherwise, the Company is required by Procedural Rule P-47.(b) (11) to delete insuring provision 1(k) of the T-42.1 Supplemental Coverage Equity Loan Mortgage Endorsement 56 iii. Circumstances Requiring the Deletion of Insuring Provision If the Makers or Grantors own other land with a Home Equity Loan which has been released or renewed/extended with the past twelve months.. The Grantors not sign a Comprehensive Home Equity Loan Affidavit. iv. Optional Coverage for Land Located in Municipality Where Municipal Boundaries Cross County Lines If the land is located in a City, Town or Village {hereinafter a Municipality } and if the boundaries of the municipality cross into one or more other counties, then coverage 1(k) of the T-42.1 Supplemental Coverage endorsement may be amended to add the CAPITALIZED language: Title to other land which, according to the public records, appears to be vested in the name of the owner as shown on Schedule A and

66 f. Miscellaneous Issues which is not described in Schedule A and which is located in the same county in which the land described in Schedule A is located, OR IN AN ADJOINING COUNTY, having been subject to a mortgage executed by the owner, recorded in the public records, which disclosed that it secured an extension of credit made pursuant to Subsection (a)(6) of Section 50, Article XVI, Texas Constitution, that was closed within one year prior to Date of Policy. Generally no additional underwriting requirements will apply. (1) Rate Rule R-8 and Home Equity Cash-out Refinance Loans In a letter dated January 21, 1998, Merritt Hopson, then acting as Title Section Manager for the Texas Department of Insurance, stated that the appropriate credit under Rate Rule R-8 should be granted if: (i) a prior mortgagee policy was issued on the lien securing the note to be paid off ("satisfied") with the proceeds of the Home Equity Loan; and, (ii) the credit is based upon the unpaid principal balance of the existing loan according to the date of the existing mortgagee policy. If there was no prior mortgagee policy, or if more than seven years elapsed, no credit under Rate Rule R-8 is available. The insurance department has strongly suggested that the title company should investigate to determine if there is a prior mortgagee policy so that appropriate credit may be provided to the borrower. Since most consumers do not know about our credits, the title company should investigate carefully to determine if credit is available. (2) Using Powers of Attorney In many cases, it is acceptable to use a power of attorney in transactions to be insured. Some companies are requiring that the power of attorney be executed on or after and that it be very specific. At a minimum, the power of attorney should provide that the agent has authority to: (i) borrow; and, (ii) secure the borrowed funds with a lien against real estate. At the time of closing, the title company should verify that the principal is alive and has not revoked the power of attorney {an estoppel letter is good evidence of non-revocation}. The T-42 Endorsement provision (f) is available when a Power of Attorney is used. It is not necessary to delete insuring provisions a through h of the T-42.1 Supplemental Equity Endorsement if a Power of Attorney is used. (3) Mail-out Transactions Mail-out transactions are insurable provided that the T-42 Endorsement does not include optional insuring provision (f). By not including optional insuring provision (f), the risk of loss for mail-out transactions remains with the lender. The title company must delete insuring provisions a through h of the T-42.1 Supplemental Equity Endorsement if the transaction involves a mail out. 57

67 58 (4) Urban Business Homestead And Urban Residential Homestead Considerations The Texas Constitution was amended to increase the Urban Homestead to ten acres and to eliminate the non-contiguous business homestead tract. If the borrower has a non-contiguous business tract consult underwriting counsel for the title company. (5) Texas Home Equity Right of Recission and Federal Right of Recission Many transactions will be subject to the Federal three business day right of recission under Truth in Lending Regulations in addition to the home equity three calendar day right of recission under the Texas Constitution. The Federal right of recission is often longer that the Texas right of recission. Typically, the lender s instructions will require the expiration of both the federal and state right of recission. The title company should not disburse the loan proceeds until the date that the lender indicates disbursement is appropriate under the loan closing instructions or other written instruction from the lender. g. Exhibits (1) Attached as Exhibit A is a questionnaire form developed for determining if land exceeding ten acres may reasonably be characterized as rural rather than urban. G. TITLE INSURANCE COVERAGES AND REFINANCE TRANSACTIONS UNDER TEXAS CONSTITUTION SECTION 50(e) The new constitutional requirements for refinance transactions have created a multifaceted dilemma or predicament for lawyers attempting to advise their lender or title company clients. The lawyer must ask: (i) what is a refinance cost; (ii) what is a reasonable refinance cost; (iii) what is a cost necessary to refinance; and, (iv) are these issues covered by the mortgagee policy or excluded from coverage by the consumer credit law exclusion from coverage? 1. Refinance Dilemma Analogy The current refinance dilemma reminds the author of the Gordian Knot legend. In the legend, a complex knot tied by King Gordius was prophesied to be undone only by a future master of Asia. Alexander the Great, failing to untie it, cut the knot with his sword. The Gordian Knot represents the perplexing problem. To cut the Gordian Knot is to find a quick efficient solution for a perplexing problem. In my opinion, the current refinance dilemma under Section 50(e) of the Texas Constitution has all the complexities of the legendary Gordian Knot. We need to cut the Gordian Knot and find a quick efficient solution to the refinance dilemma. But how??? 2. Purpose The purpose of this section is to include a general title insurance discussion of coverages and underwriting considerations for refinance loan transactions where the lender wants to: (i) include loan costs and related fees in the principal balance of the new loan; and, (ii) also include these costs and related fees in the amount of insurance on a mortgagee policy of title insurance; and (iii) obtain a mortgagee policy or binder without exception for the invalidity of the insured deed of trust by reason of the inclusion of "additional funds" prohibited under new Sections 50(e) and 50(f) of the Texas Constitution.

68 59 3. Legislative Background When the Texas Legislature adopted the language for the constitutional amendment {H.J.R. No. 31}, and sent it to the voters for approval, the plain meaning of the language used by the legislature in H.J.R. 31 appeared to affect Texas homestead law in a very broad and sweeping manner. There have been no Court of Appeals decisions construing this new constitutional language. In addition to the widely publicized home equity amendments, unknown to most Texas votes, the constitutional amendment also included language which added Sections 50(e) and 50(f), dealing with refinance transactions, to the Texas Constitution. The language of Sections 50(e) and 50(f) is very relevant to understanding what appears to be a paradigm shift in the constitutional validity of liens securing additional funds. The Constitution now provides: "50(e)" A refinance of debt secured by a homestead and described by any subsection under Subsections (a)(1)-(a)(5) that includes the advance of additional funds may not be secured by a valid lien against the homestead unless: (1) the refinance of the debt is an extension of credit described by Subsection (a)(6) of this section; or (2) the advance of all the additional funds is for reasonable costs necessary to refinance such debt or for a purpose described by Subsection (a)(2), (a)(3), or (a)(5) of this section. "50(f)" A refinance of debt secured by the homestead, any portion of which is an extension of credit described by Subsection (a)(6) of this section, may not be secured by a valid lien against the homestead unless the refinance of the debt is an extension of credit described by Subsection (a)(6) of this section. The language clearly indicates that a lien securing "additional funds" is not a valid lien against homestead unless: (I) the refinance is a home equity loan (i.e. a Subsection (a)(6) loan); or, (ii) all the additional funds are for reasonable costs necessary to refinance. The legislative history of Sections 50(e) and 50(f) indicates that the legislature did not intend to change the historical practice of including closing costs in a refinance transaction. However, the plain language of Section 50(e) does appear to change historical practice. Only if the language of Section 50(e) is determined to be ambiguous by the Texas Supreme Court will the legislative history become admissible evidence for determining the meaning of new Section 50(e). 4. Scope of Application New Section 50(e) applies to any "refinance" loan transaction involving homestead property. This would include, but is not limited to, the following loan types: (i) refinance of purchase money loans; (ii) refinance of ad valorem taxes; (iii) refinance of a federal tax lien; (iv) refinances of owelty liens; (v) refinances of a mechanic lien contract/construction loan; and, (vi) refinances of existing home equity loans into new home equity loans. Section 50(e) does not appear to apply to new purchase money loans which are secured by a vendor s lien and additionally secured by a deed of trust. If the land is non-homestead, the Section 50(e) would not apply. 5. Past Title Insurance Practices On loans secured by insured deeds of trust involving homestead property, the title insurance industry has historically permitted the inclusion of loan costs and/or fees which would not technically be a valid lien against homestead property. Historically, these costs and fees have

69 been included in the amount of insurance on Schedule "A" of the mortgagee policy provided that the vast majority of funds secured by the insured lien secured debt which clearly constituted a valid lien against homestead property. The title insurance industry relied, in part, on favorable case law such as Miller et. al. v. Gibralter Savings and Building Association 132 S.W.2d 606; Freytag v. American Federal Bank FSB 155 B.R. 150 {see also the unpublished decision of United States Court of Appeals for the 5 th Circuit 49 F3d 728}. Title companies also relied upon the "Partial Invalidity Clause" {see clause recited in (g)(2) below} which provided that invalid debt against the homestead would be deemed to be paid in the first few loan payments. 60 The addition of Section 50(e) and 50(f) to the Texas Constitution appears to significantly change Texas homestead law as it relates to refinance transactions. Now the constitution says {indirectly} that unreasonable or unnecessary refinance costs will invalidate the entire deed of trust lien on a homestead. The constitution does not define what "refinance costs" are; nor does the constitution provide evidence of what "reasonable" means; and neither does the Constitution state what a cost necessary to refinance is. Therefore, from an underwriting standpoint, the lender and title insurer need to determine the following three elements: What is a refinance cost? and What is a reasonable refinance cost? and What is a cost necessary to refinance? 6. Reasonable Refinance Costs Here is one title attorney s conservative paradigm which may be used to determine what is a refinance cost: Some underwriters have concluded, from an underwriting risk standpoint, that ONLY the following items are "refinance costs" which may be included in the amount of insurance for a mortgagee policy issued on a refinance loan secured by a deed of trust on homestead property: a. Commercially reasonable Loan Origination Fee; and, b. Commercially reasonable Loan Discount {Buydown} Points; and, c. Commercially reasonable Mortgage Insurance Premium {i.e. FHA, VA or Conventional}; and, d. Up to 5% {five percent} of the loan amount to include the following "refinance cost" items: application fee, appraisal fee, credit report fee, tax search fee, notary fee, courier fee, document preparation fee, funding fee, survey fee, recording fee, escrow fee, pest inspection fee, insurance premiums, and title insurance premiums. Also, pre-paid mortgage interest {and pre-paid insurance premiums} may be included in the five percent figure. Note: Reserves Deposited With the New Lender Some title insurers do not consider "reserves deposited with the new lender" as

70 a "refinance cost" because the borrower will receive {from the lender being paid off} a cash refund after closing if "escrow account reserve items" are included in the principal amount of the new refinance loan. This is very similar to a cash out loan and may present an unacceptable business risk under Sections 50(e) and 50(f). Therefore, some title companies will not include "reserves deposited with the new lender" {such as tax, insurance and annual assessment escrow impounds} in the new refinance loan amount. 61 Note: Payoff of the Existing Loan with the Old Lender Sometimes, when the existing loan is paid off by the title company, the payoff arrives at the old lender s office a few days before it was calculated to arrive. This results in an over payment of the old loan and a few days of "per diem" interest must be refunded to the borrower by the old lender after the loan is paid off. The view of most title insurers is that, provided that the title agent or direct operation has relied on the old lender s written payoff statement, and provided that the closer has included a reasonable and typical amount of per diem interest so that the payoff will not arrive with insufficient funds to pay the old lender, most insurers will not treat the refund of a few days of per diem interest from the old lender to the borrower as creating an "additional funds" problem. The refund should come from the old lender and not from the title company. Here is one method to determine if a fee is commercially reasonable: a. For Loan Origination Fee: Some insurers will recognize, for underwriting purposes, that origination fees are reasonable if the origination fee does not exceed {by more than 2.5%} the average origination fees reflected in the most recent "business section" of any one of the major Texas newspapers. b. For Buy Down Points and Discount Points: Some title insurance companies will recognize, for underwriting purposes, that buy down points/discount points are reasonable if the lender states, in writing, that the buy down points reflect a bonafide reduction in the loan interest rate from "market rate interest" to the "buy down interest" rate. The lender may state this in letter form or place a recital in the loan closing instructions. c. For Mortgage Insurance Premium: Some companies will recognize, for underwriting purposes, that mortgage insurance premiums are reasonable if the Texas Department of Insurance promulgated premium is paid by the borrower from loan proceeds. d. For Other Refinance Costs: Some insurers will recognize, for underwriting purposes, that the "other costs" shown under item (f)(4) above are reasonable if: (i) the Five percent cap is not exceeded; and, (ii) no fees other than those specified under item (f)(4) above are included. 7. General Underwriting Requirements Under the guidelines of some title insurers, eligible Refinance Costs and Fees {as defined in Section f above} are subject to the following general underwriting requirements:

71 a. Lender Approval. The lender must approve the inclusion of the refinance costs, fees and points in the written loan instructions. b. Partial Invalidity Clause. If not already pre-printed on the deed of trust form to be insured, the substantial equivalent of the following language {which has been approved by HUD} is suggested for the deed of trust: "Partial Invalidity. In the event that any portion of the sums intended to be secured by this security instrument cannot lawfully be secured hereby, payments in reduction of such sums shall be applied first to those portions not secured hereby." c. Subrogation Language. On refinance transactions, the new insured deed of trust should contain "renewal and extension" language which should be similar to the following: "All or a portion of the proceeds of the note secured by this deed of trust represents funds advanced by Beneficiary to Grantor and that Grantor used in part to discharge a prior note in the original principal sum of $ which is dated, executed by and payable to the order of. The prior note is secured by a deed of trust on the property from to, Trustee, which is dated and recorded in Volume, Page of the Real Property Records of County, Texas {and if applicable, describe vendor's lien}. Grantor acknowledges that the lien(s) securing the prior note is valid, that it subsists against the property, and that by this instrument it is renewed and extended in full force until the note is paid {even if the prior lien is released and not assigned to the Beneficiary}." d. Absolutely No Cash Back to Borrower. For title insurance purposes, the borrower(s) shall not leave closing with any loan proceeds {not even a penny}. If the closer is confronted with a situation where the lender wants the borrower to receive cash back in a typical refinance loan transaction {ie. the transaction is not a home equity loan or reverse mortgage loan} some companies require that the closer obtain the lenders written approval to include the below exception. 62 "Invalidity of the insured mortgage by reason of the inclusion of additional funds prohibited under Article XVI, Section 50(e) and/or Section 50(f), of the Texas Constitution." The former industry practice of allowing a principal reduction at closing (i.e. taking the "cash back" portion which would be paid to the borrower and applying it instead to reduce the principal of the loan at closing) may no longer be a good business risk. The only option available to avoid placing the above exception in the Mortgagee Policy {if the loan would result in "additional funds" or "cash back to the borrower"} is as follows: (1) All loan documents are returned to the lender for re-drafting in order to reduce the loan amount so that the borrower does not receive any "cash back" or "additional funds". e. Release or Assignment of Prior Lien. On refinance transactions, if a new lender is involved, it is a good business practice to obtain an "assignment of lien" for the old deed of trust/mechanic's lien contract being renewed. In cases where the old lender refuses to given an "assignment of lien" it is acceptable to nearly all title insurers to record a "release of lien" for the old deed of trust/mechanic's lien contract being renewed. 8. Reminder Concerning Valid Loans on Homestead The following is a general reminder of the loan types that are insurable on homestead property. a. Refinance Transactions. On refinance transactions, the amount of insurance may also include the unpaid principal balance {and accrued interest} necessary to pay off:

72 63 (1) Vendor's Lien and/or Deed of Trust Lien(s) securing purchase money; (2) Mechanic's Lien Contract for improvements; (3) Ad Valorem Taxes against the homestead property; (4) Federal Tax Liens; (5) Owelty Lien; and/or, (6) An existing deed of trust securing a valid renewal of item "i" and/or item "ii" and/or item "iii" and/or item "iv" and/or item "v". b. Purchase Money Loan Transactions. On purchase money loans where a vendor s lien is reserved in the deed from the seller, and the buyer/borrower is simultaneously executing a Deed of Trust lien as additional security, most title companies indicate the amount of insurance may include the principal balance of the purchase money note which may include any loan costs which the lender advances. This may also include the "reserves deposited with the new lender." The constitutional restrictions concerning "reasonable closing costs" and "no additional funds" do not appear to apply to purchase money loans. c. Mechanic Lien Contract Loan Transactions. On mechanic lien contract transactions, where the mortgagee policy or binder will insure only the mechanic lien contract on Schedule "A" {and not insure a deed of trust given in renewal and extension of the mechanic lien contract} most insurers agree that the amount of insurance may include the principal balance of the mechanic lien note which may include any loan costs which the lender advances. This may also include the "reserves deposited with the lender." The constitutional restrictions concerning "reasonable closing costs" and "no additional funds" do not appear to apply to purchase money loans. 9. Rate Rule Reminders a. All Transactions. Under Rate Rule R-4, when requested by the lender, the mortgagee policy may be issued in an amount equal to the original principal amount of the loan not to exceed 25% of the loan principal amount. The lender is entitled to ask for this 125% coverage regardless of whether refinance costs and fees have been included in the basic loan amount. b. Refinance Transactions. On refinance transactions, the appropriate Rate Rule R-8 credit must be given regardless of which insurer issued the prior mortgagee policy. The fact that the prior mortgagee policy was issued for the simultaneous rate {or the fact that the prior mortgagee policy was issued for R-8 credit}, does not prevent the application of the R-8 credit to the refinance transaction. Please refer to Rate Rule R-8 for specific eligibility requirements. Premium credit under Rate Rule R-18 will generally not be given unless the new loan complies with Rate Rule R-18 and the prior mortgagee policy was issued upon the same title insurance company.

73 10. A More Liberal Underwriting Paradigm For Refinance Costs Includable in Mortgagee Policy Amount of Insurance Some title companies have determined that they will rely upon the language in the legislative history that Section 50(e) was not intended to change existing practices or case law concerning the inclusion of refinance costs in the principal amount of the refinance loan. Set forth in this section are refinance costs and fees which some underwriters have determined are includable in the mortgagee policy amount of insurance. These items include: a. General Parameters: The following items may be included without dollar or percentage limitations: (1) The reserves for taxes, insurance and home owner association fees deposited with the new lender as escrow reserves. (2) The mortgage insurance premium {FHA, VA or conventional}. (3) Prepaid items {such as prepared insurance premiums and prepaid mortgage interest} may be included. b. Additional Items Which May Be Included Based Upon Percentage Limitations: Set forth below is a table which outlines the criteria established for Lender Controlled Charges and Third Party Fees which are attributable to the refinance. The mortgagee policy may be issued without the special lien invalidity exception {see Section IV, Paragraph 1 below} if the fee structure is equal to {or less than} the following percentages: 64 Description Loan Amount Loan Amount 0-99, ,00.00 and over Lender Controlled Charges For purposes of illustration, lender controlled charges include items such as: discount points, origination fee, buy down points, underwriting fee, processing fee, flood certification, inspection fee, tax service fee, loan delivery fee, administration fee, funding fee and loan submission fee. Third Party Fees Third party fees include such items as: appraisal, credit report, survey, attorney s fees, messenger fees, title insurance premium, escrow fee, recording fees, messenger fees, tax certificates and copies. 3% 2% 4% 3% 11. No Cash Back to Borrower on Traditional Refinance Transactions a. Excess Cash at Closing: Occasionally, the amount of the new loan slightly exceeds the amount of funds necessary

74 to pay off the old loans and pay all costs associated with the new refinance transaction. In this case, the borrower should not be permitted to obtain cash back at closing. There are two methods which the escrow officer may use in order to avoid the borrower obtaining cash back at closing. The methods for insuring without the lien invalidity exception are listed below: (1) Redraft Loan Documents The best procedure is for all loan documents to be returned to the lender for re-drafting in order to reduce the loan amount so that the borrower does not receive any "cash back" or additional funds. (2) Principal Reduction At Closing A secondary alternative is to simply take the amount which would be cash to borrower at closing and show it as a principal reduction of the refinance loan on the HUD-1 or HUD-1A statement. This will result in the borrower receiving zero" cash at closing. b. Borrower Wants Reimbursement for Prepaid Refinance Costs Where lender/borrower are insistent on the borrower receiving a refund of prepaid closing costs, escrow officers may use the following procedure: (1) Show the payment to the borrower on the Line(s) in the 1300 Section of the HUD-1 {or lines 1501 to 1515 of the HUD-1A} as a refund of {describe prepaid credit report ; or prepaid application fee ; or prepaid appraisal fee...} (2) The title company escrow check payable to the borrower should state {either on the front or back of the check}: Refund of {describe prepaid credit report ; prepaid application fee ; or prepaid appraisal fee...} (3) Line 303 of the HUD Settlement Statement {or line 1604 of the HUD 1-A} will then show no cash back to the borrower at closing. 12. Home Equity Cash Out Refinances Note that cash out/refinances, where the borrower is actually obtaining a home equity loan {a portion of which is paying off a prior loan on the homestead}, are not subject to Section 50(e). These loans must comply with Section 50(a)(6). 13. How the Section 50(e) Amendment May Affect Title Insurance Coverages a. Texas Department of Insurance Commissioner s Bulletin B The 3% Safe Harbor Archetype? On April 24, 1998, the Texas Department of Insurance issued Commissioner s Bulletin B , Title Bulletin No. 159, where the Department indicated that 3% might be a safe harbor for bona fide expenses connected with a refinance transaction. The Department was careful, however, to indicate that it lacks specific authority to define the constitutional terms. 65

75 66 The text of the bulletin is set forth below: The Texas Department of Insurance has received several recent inquiries about newly amended Sec. 50, Article XVI, Texas Constitution, as adopted by the Texas voters November 4, Under Section 50(e) of the Constitutional Amendment: A refinance of debt secured by a homestead and described by any subsection under Subsections (a)(1) - (a)(5) that includes the advance of additional funds may not be secured by a valid lien against the homestead unless: (1) the refinance of the debt is an extension of credit described by Subsection (a)(6) of this section; or (2) the advance of all of the additional funds is for reasonable costs necessary to refinance such debt or for a purpose described by Subsection (a)(2), (a)(3), or (a)(5) of this section. Reasonable costs necessary to refinance is not defined in Section 50. In closing any refinance transaction under Section 50(e)(2) where reasonable costs necessary to refinance the existing debt are included in the new loan there is a potential risk to the lender that the costs may be claimed to be unreasonable or unnecessary. If a court later determines that the additional funds were not reasonable costs necessary to refinance, there is a potential that the lien may be voided. It has been reported to us that some title companies are representing to lenders that reasonable costs necessary to refinance can be stated as a percentage of the original loan amount. We believe the final determination of the meaning of this phrase will be made by either the Attorney General or by judicial decision. While this agency lacks specific authority to define these terms, the Constitutional Amendment itself establishes a three percent (3%) cap for origination expenses for a home equity loan. Texas Constitution Art. XVI, 50(a)(6)(E). The reasonable costs necessary to refinance provision in Section 50(e)(2) of the Constitutional Amendment is separate from the three percent (3%) cap in Section 50(a)(6)(E) that applies to new cash-out home equity loans. This indicates, however, that three percent (3%) might be a safe harbor for bona fide expenses connected with a refinance loan. Accordingly, until more definitive guidance comes from the Texas Legislature, the Attorney General or a court of competent jurisdiction, the Texas Department of Insurance will not object to a company utilizing an underwriting guideline which limits amounts included in the new loan for reasonable and necessary expenses of up to three percent (3%) of the amount of the loan being refinanced. Agents and underwriters are strongly urged to monitor legal developments to ensure that they make any changes necessary to adjust to the evolving law in this area.

76 Are Section 50(e) Issues Covered Title Insurance Risks? a. Business Difficulties Created by Insurance Department Bulletin (1) Is Section 50(e) a consumer Credit Protection Matter? The Insurance Department has informally raised the issue of whether or not the Section 50(e) risks was excluded from coverage as a consumer credit law under Exclusion from Coverage No. 5 of the promulgated mortgagee policy of title insurance. i. In the author s opinion, it is unlikely that a Texas court would conclude that Section 50(e) is a consumer protection matter. Please consider the following sub-points: Homestead risks have traditionally been treated as covered claims; with the exception of cases where the Lender appears to have made an off record agreement with the borrower {which agreement was not disclosed to the title company} that the borrower would falsely designate homestead property as non-homestead property for the purpose of obtaining the loan. The T-2 Mortgagee Policy, when the T-42 Home Equity Endorsement is attached, specifically modifies the Consumer Credit Protection Law exclusion to include Subsections (a)(6) and (g) of Section 50, Article XVI, Texas Constitution as an exclusion. The T-42 Endorsement does not specifically change the definition to add Section 50(e) or Section 50(f); but it would be argued that it was not necessary for the T-42 to mention 50(e) and 50(f) in the home equity context. If Section 50(e) and Section 50(f) are not excluded by the specific and narrow definition in the new T-42 Endorsement; are Sections 50(e) and 50(f) excluded under the broader T-2 Mortgagee Policy definition? Note that the broad definition of Consumer Credit Protection Law applies to the T-2 Mortgagee Policy form when the T-42 Endorsement is not attached. The narrow definition for Consumer Credit Protection Law applies only when the T-42 Endorsement is attached to the T-2 Mortgagee Policy in the case of a home equity {i.e. Section (a)(6) loan}. Would a court consider it material or relevant that the standard T-2 exclusion was not amended? If an underwriter has issued specific underwriting guidelines appearing to address coverage of the Section 50(e) and Section 50(f) matters, will a court permit the insurer to invoke a broad exclusion {and deny coverage} when specific underwriting requirements have been imposed? It seems incongruous to take a position that: (i) the refinance risk was a covered title matter prior to due to favorable case law and the legal supportability of the partial invalidity clause theory; and, (ii) after that the same risk is now not covered due to the fact that the law now seems to dictate that the lien would be totally invalid and not just partially invalid.

77 Another business/legal consideration is whether or not the consumer Credit Protection Law exclusion would be deemed to be ambiguous under a certain set of facts. Of course, it is black letter law that ambiguity is construed against the insurance company. 68 ii. At some point in time, if there is a temporary restraining order issued against the lender {restraining foreclosure of the insured deed of trust based on section 50(e) of the Texas Constitution}, the lender will tender defense to the title insurance company. At this point, should the title insurance company decline to defend on the basis that the Consumer Credit law exclusion applies? If the insurer declines to defend, the insurer loses control of the litigation between the lender and borrower. If the insurer does not defend the lawsuit, the insurer s experience in defending homestead type claims is not available to the court making the decision. If the lender s defense counsel is not seasoned, bad case precedent may result. If the insurer accepts the tender of defense under a reservation of rights, the insurer runs the risk of incurring: (i) litigation expense; and, (ii) a potential policy limits loss if the court determines that the lender s lien was invalid in the litigation between the lender and the borrower. A second lawsuit would be necessary between the insurer and the lender to determine the applicability of the Consumer Credit law exclusion. This results in a multiplicity of litigation with the potential for inconsistent results. If the insurer accepts the tender of defense without a reservation of rights, it is likely that the insurer has waived the applicability of the Consumer Credit law exclusion. (2) Lending Community Reaction to Commissioner s Bulletin Several discussion drafts of the Commissioner s Bulletin {in which the issue of the Consumer Credit Exclusion applicability to refinance transactions is mentioned} were circulated among members of the lending and title insurance industries. The comments of Robin Gillespie, Vice President and Regional Counsel of Fannie Mae, which were filed with the Texas Department of Insurance, are illustrative of the problems created by the earlier Texas Department of Insurance draft: We are writing to express concern regarding the February 9, 1998 draft bulletin being considered for publication regarding title insurance on liens securing certain refinance loans that include additional advances for closing costs under Section 50(e) of the Texas Constitution. We believe, based on the legislative history, that Section 50(e) was adopted to confirm and support continuation of the historic lending practice of including closing costs in refinance loans secured by a borrower s homestead. We are worried that the bulletin may actually undercut this objective, to the detriment of consumers and the mortgage lending industry, without advancing the interests of the title industry.

78 Although the proposed bulletin does not state that Section 50(e) is a consumer law provision, it implies that it is such a provision and that, therefore, any title policy insuring a refinance loan would exclude coverage for lien validity in the event the additional advances for costs were found not to satisfy the reasonable costs necessary criterion of Section 50(e). We believe that the bulletin is not necessary because, as the bulletin points out, if in fact Section 50(e) is a consumer law provision, then Item 5 of the Exclusions From Coverage in the Texas Mortgagee Title Policy will be effective, without any further act, to exclude coverage if the lien proves invalid due to unreasonable or unnecessary costs having been financed. Also, as the proposed bulletin states, there is no promulgated endorsement for waiving Item 5. Thus, it appears that if Section 50(e) is a consumer law provision, then coverage will be subject to the Item 5 exclusion. Further, we fear that if the bulletin is issued it would actually harm both consumers and the mortgage industry, without adding substantive protection for title insurers against any new type of risk. The bulletin may create confusion by implicitly suggesting that there is no coverage at all available for refinance liens that include advances for costs even if those costs are of the type and amount that have been traditionally insured. That well could have a chilling effect on the willingness of lenders to advance closing costs as they have done historically and as consumers have come to expect; alternatively, lenders might choose to pay the costs themselves and charge a higher rate of interest another bad result for consumers. Additionally, there is a real risk that secondary market investors will be unwilling to purchase refinance loans if they perceive that they lack adequate title insurance coverage. These effects would be particularly unfortunate now, when unusually low rates have generated high consumer demand and a refi boom that is contributing significantly to housing affordability in Texas. Moreover, we believe it is most likely that Section 50(e) will be held by the courts to be merely an affirmation and express authorization of the historic practice of advancing and securing closing costs in connection with a refinance loan, as opposed to being a consumer protection law. Although it has been commonplace for many years for lenders to finance closing costs in connection with refinance loans, and for title insurers to issue coverage on the financed amounts, up until this point there has not been definitive legal authority supporting the validity of the lien securing the financed costs. Surely Section 50(e) was meant to ensure that past lending and title insurance practice regarding refinance loans can continue in the future, not to change the practice in a manner adverse to consumers. It is incongruous, and we believe the practice in a manner adverse to consumers. It is incongruous, and we believe unintended, that a provision of law intended to validate a practice that benefits consumers should be turned instead against them. We understand that the legislative history surrounding Section 50(e) supports this interpretation. As we understand it, during the course of hearings on home equity loans, a concern was raised that refinance loans 69

79 securing closing cost advances might be construed as cash out equity loans. We understand Section 50(e) was proposed in response to that concern both to confirm prior refinance practice and to ensure its viability in the future. By approving Section 50(e), surely voters did not intend to promote a change in lending practice that would result in less title insurance coverage being available than was unavailable for their benefit in the past. If Section 50(e) is looked at as a means of preserving the status quo regarding refinance lending practices and as a means of distinguishing refinance loans securing closing costs from home equity loans, then in that context it is clear that the reasonable costs necessary clause in Section 50(e) is included simply to describe the permitted use of the additional secured advances that are made to the borrower. Again, this appears to us to be an effort to codify past practice, in which lenders and title insurers have made case-by-case determinations on the nature and amount of closing costs that would be financed on a secured basis without risk that any consumer law protection could apply. To summarize, we believe that, in light of the uncertainties involved and general apprehension in the mortgage lending industry occasioned by the recent Constitutional Amendment, the issuance of the bulletin would have a detrimental effect on the mortgage industry and consumers. It would make it more difficult for Texas homeowners to refinance their mortgages, while not adding any substantive protection for title insurers against any new type of risk. H. TITLE INSURANCE COVERAGES AND UNDERWRITING APPROACHES RELATING TO CONSTRUCTION TRANSACTIONS ON HOMESTEAD AFTER AMENDMENT TO TEXAS CONSTITUTION 50(a)(5) This section applies to loan transactions in cases where the title company is requested to issue a Mortgagee Policy of Title Insurance, or Interim Construction Binder, where: (i) homestead property is involved; and (ii) construction work on the homestead is to occur and the lender will be securing its loan to the borrower with a contractual lien {i.e. mechanic s lien contract or simultaneous deed of trust given in renewal of a mechanic s lien contract of the same date} describing the homestead. The transaction type described in this paragraph is hereinafter referred to as a Mechanic Lien Contract Transaction(s). 1. Scope of Application New underwriting requirements apply to all Mechanic Lien Contract Transactions which close on or after January 1, These requirements apply unless the land to be insured is clearly nonhomestead. If the transaction is a construction loan, and if the land is owned by a natural person(s) {i.e. someone other than a business entity such as: a corporation, a partnership, a limited partnership, or a limited liability company...} counsel should assume that the land on which the construction is to occur {which is the land to be insured} is homestead unless the owner/borrower is able to demonstrate that he/she owns real estate {other than the land to be insured} which fully utilizes their constitutional homestead allotment. The constitutional homestead allotment is: (i) ten acres 70

80 of urban property; or (ii) one hundred acres of rural property for a single person; or (iii) two hundred acres of rural property for a family. If the parties claim that the land is non-homestead, and the parties claim that consequently the new constitutional requirements do not apply, the title company must investigate to determine the homestead {or non-homestead} nature of the land to be insured. In order to show that the land to be insured is non-homestead, and to evidence that the borrower owns other land which utilizes their homestead allotment, a Homestead Designation/Disclaimer Affidavit is necessary. Due to unfavorable case law concerning homestead affidavits, it is recommended that the affidavit be attested to by at least two independent witnesses who will verify: (i) the reputation of the homestead affiant for truth and veracity; and, (ii) verify that the homestead affiant does, in fact, live upon the land being designated as homestead. If counsel has reason to believe that the borrower lives on the land to be insured, or if the borrower does not own other land which qualifies as homestead, the transaction should not be insured unless the lender agrees in writing to accept it s mortgagee policy or binder with the special Schedule B Exception set forth in paragraph VII(d)(2)(i) below. 2. Two Categories of Mechanic Lien Contract Transactions The constitutional amendment creates two classifications in the Mechanic Lien Contract situation. The first classification is what may be labeled as a Non-Affected Homestead Transaction. The second category is referred to as an Affected Homestead Transaction. The distinction between the two categories is important because the steps required to achieve a valid lien, for title insurance purposes, are different for each classification. a. Non-Affected Homestead Transaction If the unimproved homestead land will have work and/or material used in constructing new improvements, then it is a Non-Affected Homestead Transaction. Please see the definition of land which is currently improved and the definition of land which is unimproved in Sub- Section C" below. A homestead which is unimproved is a Non-Affected Homestead Transaction because the improvements to be constructed would clearly be new improvements to the currently unimproved land. Being classified as a Non-Affected Homestead Transaction means that only the four traditional homestead lien validity requirements {See (1), (2), (3) and (4) below} apply. The four requirements {reference Texas Property Code Section } for Non-Affected Homestead Transactions are: (1) The person who is to furnish material or perform labor, and the owner of the land must execute a written contract setting forth the terms of the agreement. (2) The contract must be executed before the material is furnished or the labor is performed. (3) If the owner is married, the contract must be signed by both spouses. (4) The contract must be filed with the county clerk of the county in which the homestead is located. b. Affected Homestead Transaction If the transaction is classified as an Affected Homestead Transaction then {in addition to elements (1), (2), (3) and (4) above), the following additional constitutional requirements will apply: 71

81 72 (5) Twelve (12) day cooling off period before the contract for work and material is executed by owner/borrowers. (6) The contract must contain a right of recission in favor of the owner/borrower. (7) There is a three (3) day right of recission after document execution. (8) The contract is not valid unless it is executed at: i. The office of the third party lender extending credit for the contract work. ii. iii. The office of an attorney at law. The office of a title company. c. How to Determine if it is an (i) Affected Homestead Transaction; or (ii) Non-Affected Homestead Transaction The underwriting determination, of whether the transaction is an Affected Homestead Transaction {or a Non-affected Homestead Transaction} is made by applying the following two test elements to the facts: (1) TEST ELEMENT NUMBER ONE: Is the land currently unimproved? i. Unimproved land includes only: raw land; or raw land which has been platted; or raw land which has been platted and which has existing infrastructure {such as streets and utilities} in place. (2) TEST ELEMENT NUMBER TWO: Is the land currently improved? i. Improvements include: land with any structure located upon the land at the date of execution of the mechanic lien contract. land which must have an old or deteriorated structure removed before construction can begin. NOTE: If the land has an old foundation which must be removed, as part of the construction project, treat the land as improved. If the land only has items like old fences and old utilities, which must be removed in order to construct a house, deem the land to be unimproved.

82 73 If the land is currently unimproved, for underwriting purposes, most title companies will treat it as a Non-Affected Homestead Transaction. As a Non-Affected Homestead Transaction, only the four requirements of Paragraph (2)(a)(1) through (2)(a)(4) above, will apply. If the land is currently improved, for underwriting purposes, most title companies will treat it as an Affected Homestead Transaction. As an Affected Homestead Transaction, the eight requirements of Paragraph (2)(a)(1) through (2)(b)(8) above, will apply. 3. Legislative Background and Constitutional Language The changes to Mechanic Lien Contract Transactions resulted from a last minute amendment to the Home Equity Bill. The constitutional language is not well drafted. It has created a significant amount of uncertainty among lawyers who represent lenders, builders and title insurance companies. A review of the new language in Subsection 50(a)(5) is necessary. The constitutional language quoted below is taken directly from the joint resolution for the constitutional amendment. The language quoted below is redlined as follows: (i) underlined text is new language; (ii) existing text is in regular type; and (iii) deleted text is overstruck and bracketed. The amended constitutional language reads as follows: SECTION 1. Section 50, Article XVI, Texas Constitution, is amended to read as follows: Sec. 50. (a) The homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts except for: [Note: Text of Subsections (1) through (4) is omitted] (5) [, or for] work and material used in constructing new improvements thereon, if contracted for in writing, or work and material used to repair or renovate existing improvements thereon if: S S S [and in this last case only when] the work and material are contracted for in writing, with the consent of both spouses, in the case of a family homestead, given in the same manner as is required in making a sale and conveyance of the homestead; the contract for the work and material is not executed by the owner or the owner s spouse before the 12th day after the owner makes written application for any extension of credit for the work and material, unless the work and material are necessary to complete immediate repairs to conditions on the homestead property that materially affect the health or safety of the owner or person residing in the homestead and the owner of the homestead acknowledges such in writing; the contract for the work and material expressly provides that the owner may rescind the contract without penalty or charge within three days after the execution of the contract by all parties, unless the work and material are necessary to complete immediate repairs to conditions on the homestead property that materially affect the health or safety of the owner or person residing in the homestead and the owner of the homestead acknowledges such in writing; and

83 74 S the contract for the work and material is executed by the owner and the owner s spouse only at the office of a third-party lender making an extension of credit for the work and material, an attorney at law, or a title company 4. Underwriting Requirements The following underwriting requirements are typical for Mechanic Lien Contract Transactions. When reading these requirements, please note that capitalized terms are defined terms. Please review the defined terms in Sections I and III above. a. Non-affected Homestead Transactions Traditional Texas mechanic lien rules apply. The new constitutional requirements {Section (b)(1)(a) through (b)(2)(h) do not apply. No new or different procedures for Non-Affected Homestead Transactions. b. Affected Homestead Transactions (1) Special Exception Language If the transaction does not meet the underwriting requirements, the Mortgagee Policy {or Binder} must be issued with the following special exception in Schedule B of the insuring form: "Invalidity or unenforceability of the insured mortgage by reason of the failure, of any party to the loan transaction described on Schedule A hereof, to comply with Article XVI, Section 50(a)(5) of the Texas Constitution In all cases, the lender must approve in writing, prior to closing, the inclusion of the above special exception language. If the lender will not approve the exception, do not close the transaction. (2) Builder Financed Transactions If no third party lender financing is involved, the title company should not insure the transaction unless the proposed insured approves the insuring form with the special exception {See (4)(b) above} (3) Three Day Right Recission i. The title company simply follows the lender s written loan closing instructions concerning the three day right of rescission. Most title companies do not impose any underwriting requirements concerning the new three day right of rescission because a right of rescission is likely excluded from coverage as a consumer credit protection or truth in lending law. ii. The title company representative should verify that the mechanic lien contract contains language expressing the general intent that the owner may rescind the transaction without penalty or charge within three days of the execution of the mechanic lien contract. If language expressing this intent is not in the mechanic lien contract, the exception shown in Paragraph 4(b)(1) above is necessary.

84 75 (4) The Location of Executing the Mechanic Lien Contract Requirement i. Execution at the Title Company If the mechanic lien contract is executed at the office of the title company, most companies will issue the insuring form without including the special exception shown under Paragraph A above. ii. Execution At Lender s or Attorney s Office If the mechanic lien contract is purportedly executed at the lender s office {or an attorney s office}, the special exception from Paragraph A above may be included in the insuring form unless the borrower and contractor sign separate affidavits setting forth specific facts describing the date, time and location of the execution of the mechanic lien contract. The affidavits must contain a separate acknowledged statement of a third party {such as the notary who took the owner/borrower s acknowledgment or a licensed Texas attorney} that the mechanic lien contract was executed as stated in the affidavit. It is okay for the contractor to execute at a different location that the owner/borrower provided that both executions are at one of the three permitted locations. iii. Execution at Another Location and Powers of Attorney If the mechanic lien contract is executed at any location other than the locations described in (4)(i) or (4)(ii) above, most title companies will include the special exception shown under Paragraph 4(b)(1) above. A mail out transaction requires the 4(b)(1) exception unless: (i) the mailing is to a Texas title company, a Texas attorney or the office of the lender; and, (ii) the affidavits described in (4)(ii) above are obtained. (5) Twelve Day Cooling Off Period i. The title company should require that the lender submit a written certification stating the date upon which it received a completed loan application from the owner/borrower. ii. Calculate the Twelve Day Period Conservatively Do not count the day the lender received the application. Count twelve Calender days The mechanic lien contract may be executed on day thirteen Example: Loan application completion date certified by lender: January 2, 2000 Count twelve full days: January 14, 2000 Mechanic Lien Contract Execution Date should be: January 15, 2000

85 76 (6) Emergency Situations Exception The constitution provides that the three day right of recession, and the twelve day cooling off period, may be waived if three conditions are satisfied: i. Immediate repairs are necessary to the homestead; and ii. iii. The failure to repair the items materially affects the health or safety of the owner or a person residing in the homestead; and The owner of the homestead, and the person residing in the homestead, acknowledge in writing the need for the repairs and the material affect on health or safety if repairs are not made. The emergency exception is very narrow. It appears to cover only repair -- not replacement. An example of emergency repairs may include something like a broken air conditioner in Amarillo in August. Most title companies will include the special exception shown in Paragraph A unless affidavits from the owner and person residing in the homestead are submitted to it for approval. (7) Curing of Constitutional Defects If work has not commenced under the mechanic lien contract, it appears that most of these defects may be cured by the following steps: i. The parties enter into a written rescission agreement which rescinds and cancels the non-compliant mechanic lien contract. ii. The parties enter into a new contract following the expiration of the twelve day cooling off period and comply with requirements B through E above. I. TEXAS RECORDING LAWS 1. Types of Notice. A mortgagee or purchaser may be considered to have notice of adverse liens or claims to title in three ways: (1) constructive notice, which is notice by recording in the county clerk s office; (2) notice by possession, since the mortgagee or purchaser has a legal duty to investigate the possession of the land to determine the rights of those persons actually in possession (such as a contract purchaser, tenant, or easement holder); and (3) actual notice, which includes what a mortgage or purchaser, or its agent or attorney, actually knows or could determine by reasonable investigation based on what it actually knows. If the mortgagee or purchaser has notice of an adverse lien or claim, it takes its deed or lien subject to that adverse lien or claim. 2. Types of Recording Laws. There are three types of recording laws in the United States: race, race-notice, and notice. The race system, which does not apply in Texas, provides that the first person to file or record an instrument, such as a mortgage, prevails. The race system applies in only a few states, such as North Carolina. The race-notice system, which does not apply in Texas, provides that a subsequent buyer or lienholder must acquire an interest without notice of the prior unrecorded deed or lien and must file or record before filing or recordation of the prior unrecorded deed or lien. The race-notice system applies in a majority of states, such as New York and California. The notice system

86 provides that a subsequent buyer or lienholder must acquire an interest without notice of the prior unrecorded deed or lien, but does not have to file or record before the filing or recordation of the prior unrecorded deed or lien, so long as the subsequent buyer or lienholder acquires an interest before the filing of the prior deed or lien. The notice system applies in many states, such as Texas and Florida. Under the Texas notice system of recording, the purchaser or lienholder must file its instrument in order to be protected against a later buyer or lienholder. If the deed or mortgage is not recorded, then it will still be effective against the seller or mortgagor, but it will not be effective against a subsequent innocent purchaser, mortgagee, judgment lien, federal tax lien, or bankruptcy trustee of the mortgagor or seller. A buyer or mortgagee is an innocent buyer or mortgagee without notice if the prior instrument is not filed of record, the buyer or mortgagee pays or loans current value acts in good faith and does not have actual notice of the prior instrument. The buyer or mortgagee is considered to be on notice of matters or rights (such as rights of tenants or contract purchasers) of persons in actual possession of the land. Because of the recording laws, it is important in every jurisdiction that the lender s mortgage be filed of record as promptly as is possible. 3. Notice of Bankruptcy. An innocent buyer for value (such as a third party purchaser at foreclosure) whose deed is recorded before a copy or notice of bankruptcy petition by the seller is recorded will have good title against the bankruptcy trustee. An innocent lender whose mortgage is recorded before a copy or notice of bankruptcy petition by the mortgagor is recorded does not have a valid lien against the bankruptcy trustee, unless the bankruptcy court grants equitable protection to the lender. The court might do this to protect a lender, which advance purchase money funds, but may not do so to a lender that made a home equity loan. 4. Place of Filing and Recording. In order for a deed or mortgage to be record notice, it must be filed with the county clerk in the county in which the land is located. It is record notice from the moment accepted by the county clerk, even if it is recorded on a later date. The clerk notes at the foot of the record the date and time the instrument was filed. Some records are maintained in separate books, such as deed and mortgage records. The clerk may maintain records on microfilm. Microfilm records shall be divided into several records, including Official Public Records of Real Property, and may consolidate its records into the Official Public Records. Records not maintained on microfilm also may be maintained in the same manner. The clerk also maintains an alphabetical index and crossindex of the names of the parties to the instruments. Instruments such deeds and mortgages may be filed at branch offices. 5. Method of Filing. An instrument is filed by presentation at the clerk s office. A county clerk may accept instruments by electronic filing and may record the instruments electronically if the filing or recording complies with the rules adopted by the Texas State Library and Archives Commission. Instruments may be filed electronically by (1) an attorney licensed in this state; (2) a bank, savings and loan association, savings bank, or credit union doing business under laws of the United States or this state; (3) a federally chartered lending institution, a federal government-sponsored entity, an instrumentality of the federal government, or a person approved as a mortgagee by the United States to make federally insured loans; (4) a person licensed to make regulated loans in this state; (5) a title insurance company or title insurance agent licensed to do business in this state; 77

87 or (6) an agency of this state. Rules have not yet been adopted. It is expected that county clerks in some metropolitan counties will accept electronic filing initially. 6. Required Form of Instrument. In order to be record notice ( constructive notice ), the instrument such as a mortgage must be acknowledged (or proved by a jurat) signed by the mortgagor or grantor. If it is not properly acknowledged by the mortgagor or grantor, it is not record notice, even if the county clerk accepts the instrument and filing fees. The instrument must contain a correct legal description of the land. If it does not contain a correct legal description of the land, a correction and refiling of the deed or mortgage is effective record notice only from the refiling. If a mortgagee erroneously files a release of mortgage, the mortgage is no longer constructive notice. The statutory forms of acknowledgment include the following: a. Short Form Acknowledgment: 78 State of County of This instrument was acknowledged before me on (date) by (name or names of person or persons acknowledging). (Signature of officer) (Title of Officer) My commission expires: b. Ordinary (Long Form) Acknowledgment: The State of County of Before me (here insert the name and character of the officer) on this day personally appeared, known to me (or proved to me on the oath of or through (description of identity card or other document)) to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he/she executed the same for the purposes and consideration therein expressed. (Seal) Given under my hand and seal of office this day of, A.D.,. (Signature of officer) (Title of Officer) My commission expires: Because of the greater possibility of error in the Long Form Acknowledgment, most lenders prefer to use the Short Form. An acknowledgment in another state may be completed by a notary public qualified in that state. If the state (outside of Texas) in which the notary public acts does not require a notary a seal of office, the acknowledgment may be completed without a seal. Persons authorized to complete an acknowledgment outside of the United States include a minister, commissioner or charge d affaires of the United States, a consul-general, consul, viceconsul, commercial agent, vice-commercial agent, deputy consul, or consular agent of the United

88 States, or a notary public authorized to administer oaths in the jurisdiction where the acknowledgment is taken. An acknowledgment completed by a notary outside of the United States. An acknowledgment by a notary public in a foreign language must have an English translation and apostille. It is customary to include an apostille with an acknowledgment taken by a foreign notary public. 7. Filing Fees. The statutory recording fee for an instrument is $3 for the first page and $2 for succeeding pages. The Records Management and Preservation Fee is $5 for each instrument. A county may require payment of a security fee of $1 per instrument for filing. The clerk charges double the statutory recording fee for that page if the names are not printed or typed below the signatures. If more than 5 names must be indexed the clerk charges 25 cents for each additional name. If the grantee's address is not shown the clerk charges the greater of $25 or twice the statutory recording fee. 79 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 1. ABUTTER S RIGHTS OF ACCESS (see ACCESS) 2. ACCESS (see EASEMENT) Require that the title company issuing a policy on commercial property to add the following to the legal description (if the title company considers the risk acceptable): "together with abutter s rights of access to and from the physically open and publicly maintained street known as." Require insurance of appurtenant easement in Schedule A; do not rely solely on insurance of legal right of access in policy. Verify that no commitment or policy exceptions will except to prior liens or past year s taxes on the easement tract(s). Require that the commitment acknowledge satisfaction of the requirement in Schedule C concerning access (at paragraph 2 "Satisfactory evidence must be provided that... there is legal right of access to and from the land."} [Note Binder (Form 13) Schedule C, paragraph 4 will contain similar requirement, so that the Binder will not provide coverage as to access.] Do not allow exception to lack of right of access, pursuant to P-37; object to requirement for legal right of access and any exception to access in commitment; require seller/borrower to secure satisfactory access to delete exception and require insurance of specific easement. 3. ADDITIONAL ADVANCE (see INCREASED COVERAGE)

89 80 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 4. ADDITIONAL INSURED (see INSURED) 5. ADJUSTABLE RATE MORTGAGE (see VARIABLE RATE MORTGAGE) 6. AFFIDAVIT If owner of land died and no probate has occurred, consider affidavit of heirship (including recitals concerning size of estate, estate tax liability, outstanding debts, whether need of or intent to secure administration, marital history, issue, whether any will or probate) and deed from heirs or deed from spouse of community property as unqualified community survivor. To delete or limit parties in possession exception (to specific list of tenants, etc.), offer affidavit relating to possession, survey, and rent rolls. To satisfy requirement for proof of payment of bills, offer an affidavit of debts and liens; if necessary, provide list of contractors, final waivers, and indemnity as to mechanic s liens for specific work and/or period of work (avoid open ended indemnity that does not relate to period or type of improvements). To secure Mortgagee Policy for lender when issue of non-homestead, offer affidavit reciting location and ownership of home, what urban area located in, state that the encumbered land is not the homestead and state that the other land is homestead, if necessary state why the land is not business homestead (e.g. not in same urban area as residential homestead; not business, etc.). Generally determine that Affidavit of Debts and Liens and any indemnity is not broader than warranty deed. To prove that judgment or tax liens are not against seller/borrower by offering Not Same Person affidavit. To satisfy requirement of proof of marital history, offer affidavit of marital history and status. Note any divorce since title acquisition may create need for copy of divorce decree and settlement agreement and/or deed. To remove Oil and Gas Lease after primary term, offer affidavit of nonproduction (which should address all land covered by the lease, not simply the land involved in current transaction). If affidavit includes social security number of borrower/seller, consider prohibition of recordation/block out/separate disclosure without recordation of number.

90 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 7. ALLOCATION (see COINSURANCE) Pursuant to the allocation of liability clause relating to multiple sites covered by one policy as stated in Section 8, Conditions and Stipulations of Owner Policy (T-1) [the Residential Owner Policy has no such clause], require the limit of liability as to separate parcels not used as one site as follows, at no additional charge: "The liability of the Company, exclusive of the costs which the Company is obligated to pay under the Conditions and Stipulations of this policy, shall not exceed the amount of $ as to [Parcel/Tract] 1, and shall not exceed the amount of $ as to [Parcel/Tract] 2." 8. APPLICATION Furnish the following to expedite commitment: contract, legal description, copy of recorded deed or recording information, current tax receipts, any probate information, any divorce information, tax parcel number(s), address, loan servicer and loan number. 9. APPORTIONMENT (see ALLOCATION, see COINSURANCE) The Owner Policy (T-1) contains an Apportionment clause at Section 8, Conditions and Stipulations, that allocates liability among two or more tracts not used as one site, at values as of Date of Policy if not otherwise agreed. You may require an allocation of liability among multiple sites. The Residential Owner Policy (T-1R) does not contain an apportionment clause. The Mortgagee Policy (T-2) does not contain an apportionment clause. 10. ARBITRATION If you do not want an arbitration clause in the Mortgagee Policy (T-2), return executed Deletion of Arbitration Provision or separately require before issuance of policy that the Mortgagee Policy include the following (at no charge): "Section 13 of the Conditions and Stipulations is hereby deleted." [Note arbitration is not compulsory if policy is over $1,000,000 or insured is individual in current policies.] If you do not want arbitration clause in the Owner Policy (T-1), return executed Deletion of Arbitration Provision or separately require before issuance of policy that the Owner Policy include the following at no charge): "Section 14 of the Conditions and Stipulations is hereby deleted." [Note arbitration is not compulsory if policy over $1,000,000 or insured is individual in current policies.] Arbitration clause may not be deleted from Residential Owner Policy (T- 1R), but that policy does not provide for compulsory arbitration. 81

91 82 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 11. AREA AND BOUNDARY (see SURVEY) 12. ASSIGNMENT If insured mortgage is assigned, require that title company (through title insurer that issued Mortgagee Policy [T-2]) issue an assignment endorsement (Endorsement Instruction III) to Mortgagee Policy (T-2) pursuant to P-9(b)(1) [on one-to-four family residential property only to GNMA, Fannie Mae, VA or HUD) or P-9(b)(2) [on other land to any assignee] and R-11(a). Request commitment, in order to review proposed exceptions on Assignment Endorsement form set forth in Endorsement Instruction III, which downdates the policy. Pursuant to P-9(b)(1), require the Assignment Endorsement to "show [insure] the current owner of the fee simple title to the property in the said Endorsement." If mortgage covered by Binder during construction (if a Binder (T-13) has been issued), require the title company to issue a new Binder to downdate and describe the assignment of mortgage. 13. AUTHORITY Verify with title company, prior to closing, the evidence it requires to determine authority of seller/borrower; require commitment to specify if possible [e.g. corporate articles, bylaws, board resolution, stockholder resolution, good standing certificate; partnership agreement, partner approval, limited partner consent; articles of organization, regulations, operating agreement, member/manager approval, good standing certificate; power of attorney, proof that principal signed, proof that principal competent at execution, proof that principal still alive and has not revoked; affidavits that documents complete or power of attorney still effective and not revoked]. 14. BALLOON MORTGAGE If the insured mortgage covers residential real property and contains a balloon rider (such as to Fannie Mae or FHLMC), require a Balloon Mortgage Endorsement (T-39), pursuant to P-9(b)(10) and R-11(h). 15. BEACH (see WATER)

92 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 16. BINDER (see ASSIGNMENT, see MECHANIC S LIENS, see MODIFICATION) After Binder is issued, verify Binder still effective pursuant to R-13 and P- 16 [one year for original Binder, subject to maximum six extension endorsements for six months each pursuant to Endorsement Instruction I]. Determine whether to issue Binder (T-13) or Mortgagee Policy (T-2) [Note premium for Binder less expensive pursuant to R-13 than Mortgagee Policy pursuant to R-4; also note time limit in Binder pursuant to R-13. Require deletion of Schedule C, paragraph 1(a) ["Evidence satisfactory to the Company that...no materials have been furnished or any labor performed in connection with the construction contemplated hereunder prior to the execution, acknowledgment and delivery of the lien instrument described under SCHEDULE A hereof, if the land described under SCHEDULE A forms any part of the homestead of the owner"] if (1) the property is not homestead (by deletion the Company does not insure priority, it just insures against invalidity because it is homestead and work may have begun before execution); or (2) the property is homestead, but the Company receives satisfactory proof that no work began before execution of contract. 17. BUILDING SETBACKS (see ENCROACHMENT) CERTIFICATIONS Pursuant to P-35, you may not require a guaranty, affirmation, indemnification, or certification of any fact, insurance coverage, or conclusion of law, except that the transaction has closed, an insured closing letter, or certification of copies of documents. You may provide closing instructions and condition disbursement and delivery upon compliance. You may require the title company to acknowledge receipt of the instructions. 19. CLOSING INSTRUCTIONS (see Exhibit "MASTER CLOSING INSTRUCTIONS") Prohibit disbursement and delivery (condition closing) by written instructions unless the conditions of letter will be met: (1) exceptions other than specified exceptions in commitment must not appear in policy; (2) the insured estate or interest must be shown vested as instructed; (3) the specified party(ies) must be shown as insured; (4) the date of policy must be date of recording of stated instrument; (5) amount of insurance must be stated amount; (6) the outstanding mortgages must be released of record; (7) area and boundary exception must be amended to read "shortages in area" (if applicable); (8) specified express insurance must be included [this must be specific and the instruction should offer the specific proposed language as to particular matter]; (9) stated endorsement(s) must be issued; (10) reinsurance acceptance letters from stated reinsurers for stated amounts (or reinsurance agreements) must be available at closing

93 84 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 20. CLOSING PROTECTION (see INSURED CLOSING SERVICE) 21. COINSURANCE POLICY (see APPORTIONMENT) Coinsurance with the insured under Owner Policy (T-1), pursuant to Section 7(b) applies (1) if the policy is issued for less than the lesser of value of land or 80% of consideration paid for land or (2) if subsequent improvements increase value by at least 20% over Amount of Insurance; this clause may not be deleted, but you can require that policy be for such amounts (under R-3, policy may not be insured for less than value or sales price) and you can secure Increased Value Endorsement (T-34) pursuant to P-9(a)(2) and R-3(c) if value increase or improvements are added, or you can turn in prior Owner Policy after improvements are added and get credit for new Owner Policy under R-3. There is no coinsurance clause with the insured under the Residential Owner Policy (T-1R). There is no coinsurance clause with the insured under the Mortgagee Policy (T-2); Section 9(b) of the Conditions and Stipulations provides that insurance liability is reduced pro tanto by payment, satisfaction or release of the insured mortgage. To avoid the effect of this clause, you may require (if possible) that the Amount of Insurance be in the aggregate amount of the loan and that one policy be issued covering all tracts. If the debt is secured by other collateral (e.g., land outside Texas, or personalty), you may request that the Mortgagee Policy (T-1) describe the mortgage and debt secured by the insured mortgage and then add ", to the extent said indebtedness is the last remaining indebtedness after payment in part of the principal of the indebtedness secured by the insured mortgage in excess of the Amount of Insurance." Coinsurance with other title insurers may be required if you wish for several title insurers to issue policies for a portion of the transaction liability. If you make such requirement, the coinsurers are not required to conduct multiple (separate) examinations of title, as provided in Article 9.34, Insurance Code. The title policies must contain the following language pursuant to P-6 (and the policy premium is higher unless the aggregate liability exceeds $15,000,000): "This policy is issued contemporaneously with Policy No. of (Name of Title Insurance Company(ies) for $. The liability of the Company hereunder is limited to (proportion) of any loss, but said liability shall not exceed the face amount of this policy." You may not require that the policies contain "joint" liability for any portion of the insurance.

94 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 22. COMMITMENT (see SURVEY) Verify the commitment is effective: (1) it must be countersigned, (2) the proposed insured s name must appear in Schedule A, (3) the policy amount must be shown in Schedule A, and the commitment must be dated within 90 days of the current date. Review the Schedule A to determine that the named owner is consistent with the proposed transaction. Review the legal description and compare with survey description. Review all Schedule B Exceptions: require legible copies and require location of each exception on survey and by reference to survey location on revised commitment. Object as necessary pursuant to contract to Schedule B exceptions and Schedule C requirements. Require the title company to confirm (preferably by revised commitment) documents that will satisfy Schedule C requirements. Review ownership of title insurance agency disclosed on Schedule D. Require updated commitment before closing. At closing, request that the title company "mark up" the commitment to show the (1) ownership based on closing, (2) amount of insurance, (3) effective date [closing date], (4) interest insured, (5) current legal description-incorporating survey description as applicable, (6) modified Schedule B exceptions (deleting those not relevant, locating those relevant pursuant to survey as applicable), (7) deletion of Schedule C requirements (including number 4 "Any defect, lien or other matter that may affect title to the land or interest insured, that arises or is filed after the effective date of the Commitment."). 23. COMPLETION ENDORSEMENT (see MECHANIC S LIENS) CONDOMINIUMS (see MAINTENANCE LIENS) Require that the condominium description in the Owner Policy (T-1), Residential Owner Policy (T-1R), or Mortgagee Policy (T-2) Schedule A refer to and insure any assigned parking, patio, or balcony appurtenant to the unit. Require that the condominium description in the Owner Policy (T-1), Residential Owner Policy (T-1R), or Mortgagee Policy (T-2) state that "said Condominium Regime formed in accordance with the provisions of Sections -, Property Code, governing Condominiums."

95 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 25. CONTIGUITY (see SURVEY) Require the title company to insure that two (or more) parcels are contiguous by (1) using a perimeter description, if the land consists of multiple adjacent parcels, in order to insure against gaps; or (2) by amending area and boundary exception pursuant to P-2 and R-16 and by stating after description of land in Schedule A, "the boundary of Parcel being contiguous to the boundary of Parcel along the entire boundary of Parcel "; or (3) by requiring express insurance pursuant to P-39(b) second paragraph) "Any adverse right, claim or interest to strips, gores or tracts of land between Parcel and Parcel. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." 26. CONTRACT (see TREC) After receipt of commitment, review the real estate contract to determine those exceptions and requirements as to which you must object and the procedure for objection. 27. CONTRACT FOR DEED (see OPTION) CREDITORS RIGHTS The title company may not delete the creditors rights exclusion that appears in the Owner Policy (T-1) at Exclusion 5, in the Residential Owner Policy at Exclusion 6, and in the Mortgagee Policy at Exclusion 8. These exclusions apply only to stated matters (fraudulent transfers, etc.) that arise out of the transaction creating the interest insured. 29. DATE OF POLICY Pursuant to Bulletin 152, the Date of Policy must be the date of recording of the instrument creating the interest or as of the date of examination. Verify that the policy shows the date of recording of the instrument and is dated as of that date. 30. DEED Generally the title company will accept a special warranty deed or general warranty deed (in accordance with the contract). Verify that any other deed provided by contract (such as a deed without warranties or quit claim deed) will be acceptable; because the recording statute will not protect a buyer under a quit claim deed, such deed may not be acceptable. 31. DIRECT ISSUE (see HOME OFFICE ISSUE) 32. DISCLOSURE (see KNOWLEDGE) Verify that the title company will prepare the following disclosures or prepare same on behalf of the seller: MUD notice, if applicable; restriction disclosure (in certain cities without zoning).

96 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 33. DOWNDATE (see MECHANIC S LIENS) Downdate Endorsements are not available on Texas Policies, except during construction (on the Mortgagee Policy (T-1), Binder (T-13), and Owner Policies (T-1, T-1R)). 34. EARNEST MONEY (REPORT BOUNCED CHECKS) EASEMENT (see ENCROACHMENT, see SURVEY, see TAXES) Require that the commitment, Binder (T-13), Owner Policy (T-1), and/or Residential Owner Policy (T-1R) describe and insure any appurtenant easement as an insured interest and describe the easement location. An insured easement may include an easement(s) under a Reciprocal Easement Agreement Require that the insured easement be described as "exclusive", if true. Require that the insured access easement be described as "said easement for ingress and egress being adjacent to [describe insured fee or leasehold tract that is adjacent (contiguous) to the easement] and abutting and providing access to and from [describe public road or street, if any, abutting the road], a physically open public street." Require that the title company provide express insurance against an easement not in use (such as a blanket easement not located on the land) [pursuant to P-39(b) second paragraph if the title company considers the risk acceptable, at no extra charge]: "[Describe the easement; there should be no other Schedule B exception to the easement]. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." If the title company will not provide broad insurance against enforcement of the easement, request insurance against interference with existing improvements [pursuant to P-39(b) second paragraph, at no extra charge]: "Any right to use or maintenance that easement described in Schedule B, paragraph [here refer to paragraph in Schedule B which excepts to easement in issue], to the extent such right of use or maintenance results in damage to [describe existing improvements in specific or general terms]. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land."

97 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 36. ENCROACHMENTS (see EXPRESS INSURANCE, see FOUNDATIONS, see SURVEY, see WATER) Insure on owner policy (T-1 or T-1R) or mortgagee policy (T-2) or Binder (T-13) against encroachments shown on survey [pursuant to P-39(a) if "area and boundary" exception amended, "current survey" furnished, 15% of basic premium paid if owner policy, and title company considers risk acceptable]: "Encroachment by [here refer to improvement that encroaches, such as office building, garage, house, etc.] on, over or into that [here refer to item subject to encroachment, such as easement, property line, private set back line, public set back line]. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of a final, non-appealable judgment of a court of competent jurisdiction that orders the removal of this improvement because it encroaches over or into [here refer to item subject to encroachment, such as easement, property line, private set back line, public set back line]. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to require the removal of this improvement because it encroaches as herein stated." 37. ENVIRONMENTAL PROTECTION LIEN ENDORSEMENT Texas rules do not allow an environmental protection lien endorsement to be issued to the Owner Policy (T-1), Residential Owner Policy (T-1R), or Binder (T-13). Require the Environmental Protection Lien Endorsement (T-36) to the Mortgagee Policy (T-2), if the land is primarily residential (e.g. residences, condominiums, apartments, land restricted or zoned residential), whether improved or unimproved, pursuant to P-9(b)(9) and R-11(g). 38. EQUITY KICKER (see VARIABLE RATE) ERRORS If the Mortgagee Policy (T-2), Binder (T-13), Owner Policy (T-1), or Residential Owner Policy (T-1R) contains errors, the errors can be corrected by a T-3 (multi-purpose) Endorsement, pursuant to Endorsement Instruction V, at no extra charge. 40. EXCEPTIONS You may object to "general exceptions" that are not promulgated (such promulgated exceptions include the mechanic s lien exception during construction pursuant to P-8, the parties in possession exception pursuant to P-3, and the promulgated "waters" and "marital rights" exceptions. The title company may make "special exceptions" pursuant to P-5 with the knowledge of the insured.

98 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 41. EXPRESS INSURANCE (see EASEMENT, see ENCROACHMENT, see INSURING AROUND, see SURVEY) You may require express insurance against encroachments pursuant to P-39(a) if (1) the title company amends the area and boundary exception pursuant to P-2, and (2) the title company considers the risk acceptable (since express insurance is not mandatory). Examples of matters that may be acceptable risks include encroachments over 50% or less of easements, encroachments of 1 foot or less over building lines, encroachments over building lines for more than four years, encroachments over property lines for more than 10 years. Encroachments may be viewed as less significant when a Mortgagee Policy (T-2) is issued than when an Owner Policy (T-1) or Residential Owner Policy (T-1R) is issued. The express insurance may be as follows: "Encroachment of [describe the improvement encroaching] over or into [describe nature of encroachment-over property line, over easement, over building line]. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of a final, non-appealable judgment of a court of competent jurisdiction that orders the removal of this improvement over or into [describe nature of encroachment over property line, over easement, over building line]." You may require express insurance against a possible defect in title if the title company considers the risk acceptable. If the risk may result in loss of title (such as where an option, a contract for deed, a possible claim of superior title, a gap in the chain of title with extended adverse possession, or a lis pendens claiming title) and if the title company considers the risk acceptable (such as where it considers an indemnity, an appealable order, an affidavit of use and occupancy, an escrow of funds, or a combination acceptable), then the title company may provide express insurance. Such express insurance may be as follows: "Claim of title reflected by [refer to suit, gap in chain of title, contract for deed, or option]. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of a final, non-appealable judgment of a court of competent jurisdiction that divests the insured of its interest as insured because of this right, claim, or interest. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to divest the insured of its interests as insured because of this right, claim, or interest." You may require insurance against enforcement of a possible defect in title if the title company considers the risk acceptable. Such possible defect may include an easement not apparently in use, a possibly expired oil and gas lease, or unenforceable restrictions or other encumbrances on the title. Such express insurance may be as follows: "[here describe the adverse matter, such as an oil and gas lease, restriction, or blanket easement]. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." 89

99 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST You may request express insurance against an outstanding lien if the title company considers the risk acceptable and if the title company complies with P-11 (concerning insuring around). If the lien may be foreclosed judicially (such as a paving lien, a mechanic s lien, or an ad valorem tax lien not subject to summary seizure sale), the title company may provide express insurance as follows: "[here describe the lien]. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of a final, non-appealable judgment of a court of competent jurisdiction that orders foreclosure of said lien on the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to foreclose said lien on the land." If the lien may be foreclosed nonjudicially (such as a federal tax lien, judgment lien, or deed of trust), the title company may provide express insurance as follows: "[here describe the lien]. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of a foreclosure of said lien on the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to foreclose said lien on the land and to take action in accordance with the terms of the policy if the holder of the lien commences a foreclosure action based on said lien." If the title company secures consent of the insured to the exception and the express insurance, you may be able to secure agreement by the title company that such express insurance will be provided on future policies (subject to limits such as single risk, no prior claim or pending claim on issue) FANNIE MAE If you represent a lender on residential transactions, consider verification of the requirements of Fannie Mae for acceptable title insurers. Fannie Mae Acceptable Title Insurance Coverage requires that title insurers that issue title policies for mortgages secured by one-to-four family properties have acceptable ratings from one of several designated rating agencies or that the title insurer be fully covered by reinsurance with a company that satisfies Fannie Mae rating requirements (on an Assumption of Liability Endorsementwhich is not promulgated in Texas). Satisfactory ratings include "Financial Stability Rating" of "S" (Strong) or better or "Statutory Accounting Rating" of "C" (Average) or better from Demotech, Inc.; "BBB" or better rating from Duff and Phelps Credit Rating Company; "C" or better from Lace Financial Corporation; "BAA" or better rating from Moody s Investors Service; or "BBB" or better rating from Standard and Poor s, Inc. 43. FORFEITURE AND REVERSION (see Restrictions)

100 91 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 44. FORMS (see Part C. Table of Endorsements and Coverages ) 45. FOUNDATIONS (see ENCROACHMENT, see EXPRESS INSURANCE, see SURVEY) Require that Binder s (T-13) or Mortgagee Policy s (T-2) area and boundary exception be amended if available current survey shows foundations (note this may imply loss of priority of mortgage-which the Binder and the Mortgagee Policy insuring a construction loan mortgage do not insure against). If foundation may violate restrictions, require the title company to provide express insurance [pursuant to P-39(b) second paragraph, if the title company considers the risk acceptable]: "Any claim that the location of the foundations on the land violates those covenants, conditions, and restrictions set forth in [here refer to restriction document or paragraph in restriction document]. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." 46. FUTURE ADVANCE (see REVOLVING CREDIT) 47. FUTURE INSURANCE (see EXPRESS INSURANCE, see INSURING AROUND) If the title company secures consent of the insured to the exception and insuring around pursuant to P-11 (and possibly express insurance pursuant to P-39), you may be able to secure agreement by the title company that such insuring around (and possibly express insurance will be provided on future policies (subject to limits such as single risk, no prior claim or pending claim on issue). 48. GAP COVERAGE (see COMMITMENTS) This coverage relates to matters arising or filed after the date of the commitment and before Date of Policy. Title companies generally provide this coverage when closing transactions. You may provide express closing instructions prohibiting additional exceptions if the title company closes the transaction, disburses and records. You may require that the title company mark up the commitment at closing and delete Schedule C, paragraph 4 "Any defect, lien or other matter that may affect title to the land or interest insured, that arises or is filed after the effective date of this Commitment." 49. GOOD FUNDS You must verify the amount of funds that must be provided at closing and provide good funds for such amount in form acceptable to the title company. The parties to the transaction (including the buyer, lender, etc.) must provide "good funds" pursuant to P-27 and Article 9.39A, Insurance Code, before the title company may disburse funds. Examples of good funds include cashier s

101 ATTORNEY S TITLE CHECKLIST Yes No Attorney Checklist checks, wired funds, collected funds, personal checks not exceeding in the aggregate $1,500 (or such lesser amount the title company may acceptsometimes title companies will not accept personal checks in this amount), teller s checks, state of Texas warrants, U.S. Treasury checks, and checks drawn on a financial institution pursuant to an immediately available funds procedure agreement (T-37). 50. HEIRSHIP (see AFFIDAVITS) HOMESTEAD (see AFFIDAVIT, see BINDER, see REFINANCE) 52. HOME OFFICE ISSUE You may require that a title company convenient to you (but not licensed in the county in which the land is located) close the transaction and furnish the title policy. This may be done through a Home Office Issue by the title insurance company, with a portion of the premium paid to the title company providing the title evidence and a portion of the premium paid to the title company closing the transaction, pursuant to P-22, P-24, P-25, P-26, and Article 9.34, Insurance Code. You may require that a transaction covering tracts in multiple counties be insured by one policy; to do this, the title insurer generally must do a direct (home office) issue. By issuing one Mortgagee Policy (T-2), the insured assures itself that the full amount of insurance is available for any tract (but in no event will liability exceed the Amount of Insurance) and generally secures a policy for a lower aggregate amount of premium (even after consideration of an additional chain charge under R-9). 53. IMPROVEMENTS (see LEASES, see MECHANIC S LIENS) 54. INCREASED COVERAGE (see VARIABLE RATE MORTGAGE) Require an increase in Owner Policy (T-1) or Residential Owner Policy (T-1R), by requiring an Increased Value Endorsement (T-34) pursuant to R-3(c) and P-9(a)(2) [regardless of whether subsequent improvements were added]. Require a new Owner Policy (T-1) or Residential Owner Policy (T-1R) if subsequent improvements are added and original policy is surrendered, pursuant to R-3. Require Mortgagee Policy (T-2) to be increased to up to 125% of the principal amount of loan to include legal interest (capitalized or otherwise) pursuant to R-4. If mortgagee is modified to secure additional advance, require a separate new Mortgagee Policy (T-2) to insure the mortgage as it secures the additional advance.

102 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 55. INDEMNITY (See AFFIDAVIT) You may be able to convince a title company to accept an indemnity to insure against a defect or other matter; if the matter is an enforceable lien, the title company must comply with P-11 (e.g. escrow or other adequate indemnity, and disclosure). If a title company has insured without exception to a valid defect or encumbrance on the title, the title company may agree to reissue, indemnify another title company, or take other action under the policy and in accordance with Article 9.57, Insurance Code. It has been the position of the Commissioner of Insurance that the title company cannot require the insured to close with it on a resale or refinance if the insured is unwilling to do so; instead the title company must then provide an indemnity that the second title company finds acceptable or take other action. 56. INFLATION (see INCREASED COVERAGE) INSPECTION, WAIVER OF (see PARTIES IN POSSESSION) You may decline to accept the waiver of inspection (which allows the title company to add an exception for "rights of parties in possession" as provided in P-3, which applies to parties whose rights are not evidenced by recorded documents). To do this, you should advise the title company in advance in order to avoid a postponement of the closing. The title company may require an inspection and may charge you for the reasonable and actual costs (and except to matters disclosed by the inspection). 58. INSURED The Owner Policy (T-1) may show additional insureds, such as purchasers under contracts for deed, optionees, principals of the owner (such as a partner, stockholder, or member). The Mortgagee Policy (T-2) may show additional insureds, such as guarantors or mortgage insurers. Bulletin No. 157 allows the Mortgagee Policy to show the insured as "[name of original mortgagee], and each successor in ownership of the indebtedness secured by the insured mortgage, except a successor who is an obligor under the provisions of Section 12(c) of the Conditions and Stipulations." 59. INSURING AROUND (see EXPRESS INSURANCE) A title company may insure around outstanding recorded enforceable liens if it complies with P-11 (which requires sound underwriting, such as an escrow of funds, bond, financial institution indemnity if acceptable to the title company). The title company may then omit the exception or expressly insure pursuant to P-39(c), but must secure consent of the insured to insure. If the title company secures consent of the insured to the exception and insuring around pursuant to P-11 (and possibly express insurance pursuant to P-39), you may be able to secure agreement by the title

103 ATTORNEY S TITLE CHECKLIST Yes No Attorney Checklist company that such insuring around (and possibly express insurance will be provided on future policies (subject to limits such as single risk, no prior claim or pending claim on issue). 60. INSURED CLOSING SERVICE If you represent a lender, require an insured closing service. Pursuant to Article 9.49, Insurance Code, a Title Insurance Company may issue an Insured Closing Service letter to named lenders covering settlement funds lost after receipt by the named Texas agent or Texas direct operation as a direct, proximate result of fraud or dishonesty of that person; if the named lender secures a commitment, the Company will replace settlement funds lost as a direct, proximate result of the failure of the agent or direct operation to comply with certain written closing instructions. The Title Insurance Company may not charge for the Insured Closing Service and there is no deductible (unlike the Purchaser/Seller Insured Closing Service Letter). If you represent a seller or buyer, and the sales price exceeds $250,000, request a Purchaser/Seller Insured Closing Service Letter. Article 9.49, Insurance Code, authorizes the Insurance Commissioner to promulgate a charge, but no such charge has been promulgated. This letter replaces settlement funds lost after receipt of the funds by a named agent or direct operation The Texas Title Insurance Guaranty Act (Article 9.48, Insurance Code) covers escrow funds lost, not exceeding $250,000. Verify that your client (lender, buyer, seller) is the named party on the letter, that the agent receiving the funds is the named agent, that the letter has not been canceled by letter to your client (or secure a new letter), and that your client has accepted the letter by signature and return to the title insurance company as required by the Insured Closing Service Letter [the letter is not effective until then]. If you want the title insurance company or agent to deposit funds in a specific bank, you or your client must so provide in your instructions; otherwise the letter will not protect such funds lost as a result of the failure, insolvency, or suspension of the bank. 61. KNOWLEDGE If you have knowledge of a possible adverse matter affecting the title before issuance of a policy to your client, you should consider (1) disclosure in writing of the matter to both the title insurance agent and the title insurance company, and (2) acknowledgment by the title insurance company (not simply the title insurance agent) of disclosure of the matter and that the matter will not be excepted or excluded, and (3) possible express insurance under P-39 against the matter. Be aware, however, that the title policy will provide that the title insurance company may take alternative actions in the event of a claim and that the title policy does not insure the marketability of the title. Since the matter may remain, it could result in additional damages not covered by the title policy and it could impede a sale. 94

104 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 62. LEASES (see PARTIES IN POSSESSION) If the title policy will insure a lease, the title company must attach a leasehold endorsement (Leasehold Owner Policy Endorsement to Owner Policy-Form T-1-pursuant to P-9(a)(1); Residential Leasehold Endorsement to Residential Owner Policy-Form T-1R-pursuant to P- 9(a)(1); Leasehold Mortgagee Policy Endorsement to Mortgagee Policy- Form T-2-pursuant to P-9(b)(3)), at no additional charge. You may require that the policy state that the terms of the Leasehold Endorsement only apply to the Leasehold (and not the other tracts, such as fee simple in improvements). You may require that the improvements, if separately owned, be insured as "fee simple in the improvements (as described in )" [subject to the terms of the conveyance of the improvements, lease, and other applicable exceptions]. If you are able to secure a satisfactory estoppel letter from the lessor, you may require express insurance as to prior default [pursuant to P-39(b)]: "Any right or claim of breach of [here refer to the lease or to specific paragraphs as to which estoppel was given on unqualified basis] prior to Date of Policy. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of a final, nonappealable judgment of a court of competent jurisdiction that divests the insured of its interest as insured because of this right, claim, or interest. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to divest the insured of its interests as insured because of this right, claim, or interest." You may require that interests affecting the fee, which are subordinate to the lease in question, not be shown on the policy insuring the leasehold. If your policy will insure the fee, subject to a leasehold, require that any matters affecting only the lease so note ["applicable only to leasehold estate "]. 63. LICENSE If you receive a license beneficial to the land (such as right to cross railroad, encroachment, etc.), request the title company insure the license (if assignable to the insured, where not newly created to that party). If the agreement has characteristics of an easement (not revocable, etc.); it may be insurable. 64. LIENS If the commitment reflects dated liens (e.g. deed of trust more than 4 years past maturity, judgment lien recorded more than 10 years previously, state tax lien recorded more than 3 years previously, paving lien assigned and more than 4 years past due; mechanic s lien recorded more than 2 years previously; federal tax lien assessed more than 10 years and 30 days previously or which states last day for refiling has passed), you may be able to have underwriter counsel for the title company waive the lien. 95

105 96 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 65. LOCATION (see SURVEY) 66. MAINTENANCE LIENS (see SUBORDINATE LIENS AND LEASES) Require that the Owner Policy (T-1), Residential Owner Policy (T-1R), or Mortgagee Policy (T-2) limit the maintenance lien exception to "securing assessments for [here refer to period for which assessments will not be paid at closing] and subsequent (months/years), not yet due and payable." Require that the title company closing the transaction verify that all prior maintenance assessments are paid. In connection with a Mortgagee Policy (T-2), require that the title company (where possible) insure that the maintenance lien is subordinate by (1) only showing exception under Schedule B, paragraph 1 (which insures "The following restrictive covenants of record itemized below, but the Company insures that any such restrictive covenants have not been violated so as to affect, and that future violation thereof will not affect, the validity or priority of the mortgage hereby insured:"; or (2) by retaining the standard exception as to subordinate liens and leases (Schedule B, number 4 "Liens and leases that affect the title to the estate or interest, but that are subordinate to the lien of the insured mortgage"; or (3) by showing the maintenance lien as exception and add the following pursuant to P- 11(b)(8)-"Company insures the insured against loss, if any, sustained by the insured under the terms of the Policy if this item is not subordinate to the lien of the insured mortgage." 67. MANUFACTURED HOUSING Require the title company to issue the Manufactured Housing Endorsement (T-31) to the Mortgagee Policy (T-2), pursuant to P-9(b)(7) and R-11(e) [available only on Mortgagee Policy], if the title is canceled and if a certificate of attachment will be issued. Determine whether a manufactured housing purchase lien was or will be evidenced by a mechanic s lien contract; if not, the title company may not be willing to insure on a refinance, because of concern that the lien will not be valid against homestead. 68. MARITAL STATUS (see AFFIDAVIT) Request that the marital status of the mortgagors be recited on the Mortgagee Policy (T-2). Note that the marital rights exception [appearing only in the Owner Policy (T-1) and Residential Owner Policy (T-1R) in Schedule B, paragraph 3 "Homestead or community property or survivorship rights, if any, of any spouse of any insured"] may not be deleted. This exception does not appear in the Mortgagee Policy (T-2) and does not affect an insured which is not a natural person (since such person would not have a spouse, the exception would not apply).

106 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 69. MECHANICS LIEN (see AFFIDAVIT, see INSURING AROUND) Allow mechanic s lien exception and Limited Liability exception in Owner Policy (T-1) or Residential Owner Policy (T-1R) only if policy is issued in an amount to include the cost of immediately contemplated improvements, pursuant to P-8: "Any and all liens arising by reason of unpaid bills or claims for work performed or materials furnished in connection with improvements placed, or to be placed, upon the subject land. However, the Company does insure the insured against loss, if any, sustained by the insured under this Policy if such liens have been filed with the County Clerk of County, Texas, prior to the date hereof." and "Liability hereunder at the date hereof is limited to $. Liability shall increase as contemplated improvements are made, so that any loss payable hereunder shall be limited to said sum plus the amount actually expended by the insured in improvements at the time the loss occurs. Any expenditure made for improvements, subsequent to the date of this policy, shall be deemed made as of the date of this policy. In no event shall the liability of the Company hereunder exceed the face amount of this policy. Nothing contained in this paragraph shall be construed as limiting any exception or any printed provision of this policy." During construction, require Downdate Endorsement as to recorded liens and matters on Owner Policy (T-1) or Residential Owner Policy (T-1R), pursuant to P-9(a)(3) and R-15, in the form set forth in Endorsement Instruction VIII. Upon completion of improvements, owner s acceptance, and satisfactory evidence that all bills for labor and material have been paid in full, require the mechanic s lien exception and Limited Liability clause be deleted from the Owner Policy (T-1) or Residential Owner Policy (T-1R) pursuant to P-8 and Endorsement Instruction II, at no charge. Allow mechanic s lien exception and Pending Disbursement clause in Mortgagee Policy (T-2) only if policy is issued prior to completion of improvements made under a mortgage given in whole or in part for the cost of the improvements, pursuant to P-8: "Any and all liens arising by reason of unpaid bills or claims for work performed or materials furnished in connection with improvements placed, or to be placed, upon the subject land. However, the Company does insure the insured against loss, if any, sustained by the insured under this Policy if such liens have been filed with the County Clerk of County, Texas, prior to the date hereof." and "Pending disbursement of the full proceeds of the loan secured by the instrument set forth under Schedule A hereof, this policy insures only to the extent of the amount actually disbursed, but increases as each disbursement is made in good faith and without knowledge of any defects in, or objections to, the title up to the face amount of the policy. Nothing contained in this paragraph shall be construed as limiting any exception under Schedule B, or any printed provision of this policy." During construction, require Downdate Endorsement as to recorded liens and matters on Mortgagee Policy (T-2), pursuant to P-9(b)(4) and R-11(c), 97

107 ATTORNEY S TITLE CHECKLIST Yes No Attorney Checklist in the form set forth in Endorsement Instruction VII [the policy does not insure priority over subsequently recorded mechanic s liens]. Upon completion of improvements, owner s acceptance, and satisfactory evidence that all bills for labor and material have been paid in full, require the mechanic s lien exception and Pending Disbursement exception be deleted from the Mortgagee Policy (T-2) pursuant to P-8 and Endorsement Instruction II, at no charge. 70. MERS If you represent the lender and the loan will be registered on the MERS system, the loan must be assigned to MERS. You should confirm requirements for (1) execution of the mortgage assignment, (2) reference on the Mortgagee Policy (T-2) or assignment endorsement to the assignment, and (3) appropriate name of the insured, and incorporate these matters in the closing instructions. This is the new Mortgage Electronic Registration Systems, Inc. MERS acts as the mortgagee of record for mortgage loans registered on the computer system maintained by MERS. MERS tracks servicing and beneficial ownership rights and allows transfers of servicing and ownership without recordation of mortgage assignments. A mortgage registered on MERS secures a mortgage identification number, and the lender assigns the mortgage of record to MERS. Subsequent transfers of servicing contracts are executed electronically through MERS. Title companies can use a telephone access or membership access to determine the current servicer for payoff. 71. MINERALS (see AFFIDAVIT) Determine whether surface rights to the minerals have been waived or limited. If so, have the exception refer to the documents if title company will agree: "all surface rights to said oil, gas and other minerals waived by." If mineral exceptions do not reflect current ownership of the minerals (and generally they do not), it may be necessary to secure an abstractor s certificate as to current ownership. It is possible to insure separate mineral interests under the Texas Forms, but it is not generally done. Request express insurance as to damage from surface use [pursuant to P-39(b) second paragraph if title company finds risk acceptable, more likely if in city, ordinance limits drilling, no production in area, improved residential or commercial, small acreage]: "Any right to use the surface of the land for the extraction and development of the minerals excepted in Paragraph(s) [here refer to paragraphs that separately except to minerals, royalties, oil and gas leases, etc.]. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured under the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." If title company will not provide broad express insurance as to use of the 98

108 ATTORNEY S TITLE CHECKLIST Yes No Attorney Checklist surface, ask for the following: "Any right to damage existing buildings on the land pursuant to the use of the surface of the land for the extraction and development of the minerals excepted in Paragraph(s) [here refer to paragraphs that separately except to minerals, royalties, oil and gas leases, etc.]. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured under the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." If the title commitment shows a general exception to minerals, request that a revised commitment show specific recorded conveyances and reservations. In most counties this will be possible. 72. MISTAKES (see ERRORS) MODIFICATION (see REVOLVING CREDIT, see VARIABLE RATE) Require insurance that modification was properly made at time of issuance of Mortgagee Policy (T-2) by describing modification in Schedule A, paragraph 4 (description of mortgage). Require insurance relating to modification after issuance of Mortgagee Policy (T-2) by requiring issuance of Mortgagee Policy of Title Insurance P-9.b.(3) Endorsement Form (T-38), pursuant to P-9(b)(3) and R-11(b) [if no new note, deed of trust or lien or power of sale, principal other than previously contemplated advances, or collateral] [note that this form does not insure validity of modification or downdate policy]. Require commitment to insure modification after issuance of Binder (T- 13) by requiring new Binder during continued construction pursuant to R- 13 and P MULTIPLE MORTGAGES Require that the Mortgagee Policy (T-2) or Binder (T-13) describe multiple mortgages (e.g. pari passu mortgages, multiple loans by one lender on same land, or collateral assignments securing one loan), if the title company considers the mortgages sufficiently related so that they concern one loan (or related loans) pursuant to R-4 or P-16, subject to any applicable additional chain charge under R MULTIPLE TRACTS (see ALLOCATION, see APPORTIONMENT, see HOME OFFICE ISSUE) 76. NEGATIVE AMORTIZATION (see VARIABLE RATE) If the mortgage provides for negative amortization or addition of interest to principal (whether interest based on formula, interest or other payments however denominated based on cash flow or share of appreciation or profits), require that the Mortgagee Policy be issued for 125% of principal, pursuant to R-4.

109 100 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 77. NON-PRODUCTION (see AFFIDAVIT, see MINERALS) 78. NOT SAME PERSON (see AFFIDAVIT) 79. OIL AND GAS (see AFFIDAVIT, see EXPRESS INSURANCE, see MINERALS, see EXCEPTIONS) 80. OPTION (see EXPRESS INSURANCE) If you are securing an option (or contract) to purchase the title to the land, you may require that the title company insure (1) fee simple (owned by the optionor or seller), and (2) the option (or contract) to purchase the title to the land (as reflected by the recorded option or contract, or memorandum of contract or option). If you want insurance that an option or contract is not enforceable against your rights in the land, require that the title company insure against the option or contract by express insurance [pursuant to P-39(b), if the title company considers the risk acceptable]: (1) "Option (or contract) to purchase the title to the land pursuant to Option Agreement (or Contract to Purchase) recorded. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." or (2) Option (or Contract) to purchase the title to the land pursuant to Option Agreement (or Contract to Purchase) recorded. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of a final, non-appealable judgment of a court of competent jurisdiction that divests the insured of its interest as insured because of this right, claim, or interest. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to divest the insured of its interests as insured because of this right, claim, or interest." 81. OWNER POLICY You may require issuance of the Owner Policy (T-1) on Residential Real Property (as defined in P-1(u)) if the insured is not a natural person as provided in Article 9.07A, Insurance Code. A natural person may require a Residential Owner Policy (T-1R) if unimproved land will be improved by a residence, according to proposed rules. An entity may prefer an Owner Policy (T-1) because it contains a broader definition of "insured" that contemplates a variety of entities. An individual may prefer the Residential Owner Policy (T-1R) because it does not contain a coinsurance clause or apportionment clause.

110 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 82. PARTIES IN POSSESSION (see INSPECTION, WAIVER OF, see LEASES) If the land is subject to leases, you may be able to limit the parties in possession exception to "rights of tenants in possession, as tenants only, under unrecorded leases." 101 You may be able to limit the exception to rights of named tenants listed on rent rolls with a satisfactory certification (perhaps combined with an inspection by the title company) with an exception to "rights of the following tenants in possession, as tenants only, under unrecorded leases:." If the land consists of apartments, you may be able to limit the exception to "rights of tenants in possession, as tenants only under unrecorded written apartment leases not exceeding [e.g., one year]." 83. POWER OF ATTORNEY (see AUTHORITY) If you will rely on a power of attorney, verify before closing (1) it is acceptable to other parties to transaction (such as lender), (2) it is acceptable to title company, and (3) what proof the title company requires (such as evidence of competence of principal at time of execution, verification about time of closing that principal is alive and has not revoked, affidavit by agent that power of attorney remains effective and has not been revoked). 84. PRO FORMA According to Bulletin 154, a title company may not issue "preliminary title policies," "specimen policies," or "pro forma" title policies. 85. PRORATIONS Verify that all rents, taxes, and assessments are properly prorated by title company. 86. RATES (see Part C. Table of Endorsements and Coverages ) 87. REFINANCE (see RATES) You may be able to secure title company approval to insure on a refinance of valid liens on homestead, together with all points (including discount points, origination fee, and VA funding fee), all prepaid interest, mortgage insurance premium, and other reasonable closing costs (e.g. amounts up to 5-10% of the loan). Title companies have not objected to "refunds" of advance deposits or small cash advances; however, this type of advance may result in the loan being treated as an "equity mortgage". You may be able to secure title company approval to insure priority of a refinance of valid liens against land, without exception to subsequent mortgages or other liens, if additional advances to the borrower are limited.

111 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 88. REINSURANCE (see FANNIE MAE) You may determine the limits of insurance retention for a title insurance company, provided your limits do not exceed the company s self imposed limits or state single risk limits (50% of surplus, absent department approval). If you require or secure reinsurance, you may require reinsurance acceptance letters (or agreements) at closing. In Texas, reinsurance must be assumed by the ALTA Facultative Reinsurance Agreement (4-6-90) (Form T-18.1), which provides for direct access. 89. RELEASE If the insured mortgage is partially released after issuance of Mortgagee Policy (T-2), require the title company that issued policy to issue Mortgagee Policy of Title Insurance P-9.b.(3) Endorsement Form (T-38) [which does not downdate the policy], pursuant to P-9(b)(3) and R-11(b). 90. REQUIREMENTS Verify those requirements that remain unsatisfied before closing; secure instructions from title company as to means to satisfy (preferably by amended commitment). 91. RESOLUTIONS (see AUTHORITY) RESTRICTIONS (see EXPRESS INSURANCE, see SUBORDINATIONS) Insure that no enforceable reverter or forfeiture provision exists and insure that maintenance lien subordinate: The Mortgagee Policy, Schedule B, paragraph 1, states (at no charge): "The following restrictive covenants of record itemized below, but Company insures that any such restrictive covenants have not been violated so as to affect, and that future violations thereof will not affect, the validity or priority of the mortgage hereby insured:" [This insures against forfeiture, reversion and priority liens, if not separately excepted. Issue: is there a separate exception for a maintenance lien. If so, is it insured as being subordinate.] Insure that maintenance lien is subordinate: [pursuant to P-11(b)(8), at no charge, show the maintenance lien and then add the following if the title company is satisfied that the maintenance lien is subordinate] "Company insures the insured against loss, if any, sustained by the insured under the terms of the Policy if this item is not subordinate to the lien of the insured mortgage." Insure against existing violation of restrictions: [pursuant to P-39(b) second paragraph, at no charge] "Any rights to enforce those covenants, conditions and restrictions set forth in [here except to the restriction document or to specific paragraph(s) of the restriction document-if only some paragraphs can be analyzed- if title company receives satisfactory evidence of current compliance, by certifications of association, developer and/or owner, by survey and/or by inspection] because of violations on or

112 ATTORNEY S TITLE CHECKLIST Yes No Attorney Checklist prior to Date of Policy on the land of said covenants, conditions and restrictions (except those covenants, conditions and restrictions relating to environmental protection, as to which no insurance is provided by this paragraph-this clause may apply if covenants, conditions and restrictions have terms such as nuisance or "compliance with law" provisions). Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." 103 Insure against violation of restrictions [pursuant to P-39(b) second paragraph, at no charge] because of specific current or proposed use: "Any present or future rights to enforce those covenants, conditions and restrictions set forth in [here except to the restriction document or to specific paragraph(s) of the restriction document, if title company is satisfied that specific use does not violate, or that risk of enforcement is acceptable] because [here describe the specific use, specific existing improvement, or type of improvement] (present or future) violates said covenants, conditions and restrictions (except those covenants, conditions and restrictions relating to environmental protection, as to which no insurance is provided by this paragraph-this clause may apply if covenants, conditions and restrictions have terms such as nuisance or "compliance with law" provisions). Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." Insurance against enforcement of restrictions [pursuant to P-39(b) second paragraph, at no charge]: "Any present or future rights to enforce those covenants, conditions and restrictions set forth in [here except to the restriction document or to specific paragraph(s) of the restriction document, if title company is satisfied that restriction(s) is not enforceable, or that risk of enforcement is acceptable] (except those covenants, conditions and restrictions relating to environmental protection, as to which no insurance is provided by this paragraph-this clause may apply if covenants, conditions and restrictions have terms such as nuisance or "compliance with law" provisions). Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." Insurance against enforcement of right of reverter [pursuant to P-39(b) second paragraph, at no charge] : "Any present or future right of reverter, right of reentry or any right or power of termination set forth in [here except to the reverter document or to specific paragraph(s) of the document, if title company is satisfied that risk of enforcement is acceptable]. Company insures the insured against loss, if any, sustained by the insured under the

113 ATTORNEY S TITLE CHECKLIST Yes No Attorney Checklist terms of this Policy by reason of the enforcement of said rights as to the land. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to enforce said rights as to the land." 104 May insure that restrictions do not contain option or easement, by stating: "excluding any easement" or "excluding any option to purchase." May insure enforceability of restrictions as to specific tracts if (1) describe encumbered tracts in Schedule A, and (2) the policy describes the insured interest as "Covenants described in [here describe the instrument or paragraphs of instrument, if any, that title company may be willing to insure, subject to exceptions it considers appropriate, will be enforceable on commercial property] encumbering [describe restricted property] and enforceable by the owner of [describe benefitted tract]." or describes the insured interest as "Rights and privileges set forth in [Reciprocal Easement Agreement, or other document]." 93. REVERSION (see RESTRICTIONS) 94. REVOLVING CREDIT If a commercial or residential mortgage (on non-homestead property) secures a future advance or revolving credit loan, require that the title company issue a Revolving Credit Endorsement (T-35) to the Mortgagee Policy (T-2), pursuant to P-9(b)(8) and R-11(f). If a modification of an insured mortgage modifies or creates a revolving credit or future advance loan, secure a Mortgagee Policy of Title Insurance P-9.b.(3) Endorsement Form (T-38), pursuant to P-9(b)(3) and R-11(b), and then secure a Revolving Credit Endorsement (T-35), pursuant to P- 9(b)(8) and R-11(f). 95. RIGHT OF FIRST REFUSAL (see OPTION) 96. ROLLBACK (see TAXES) 97. RULES (see Part C. Table of Endorsements and Coverages ) 98. SEPARATE PROPERTY (see MARITAL STATUS) Generally, it is not customary to insure that title is vested in a person as that person s "separate property." 99. SHORTAGES IN AREA (see SURVEY) 100. SIMULTANEOUS ISSUE (see Exhibit "Endorsements and Coverages")

114 105 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 101. SINGLE RISK (see FANNIE MAE, see REINSURANCE) 102. SUBDIVISION Subdivision map act endorsements (insuring against subdivision map act violations) are not available in Texas. Exclusion 1(a) [of the Owner Policy (T-1) and the Mortgagee Policy (T-2)] and Exclusion 1(c) of the Residential Owner Policy (T-1R) exclude coverage SUBROGATION You may attempt to limit the title company s (and successor in ownership) subrogation rights by requesting (1) an Owner Policy (T-1) to the seller pursuant to R-21; (2) the seller be shown on the Owner Policy (T-1) as an additional insured (usually not acceptable to the buyer); or (3) the deed contain limits on subrogation (if acceptable under the contract) SUBORDINATE LIENS AND LEASES Pursuant to P-11(b)(8) (at no charge), require deletion on Mortgagee Policy of Schedule B, Paragraph 4 ("4. Liens and leases that affect the title to the estate or interest, but that are subordinate to the lien of the insured mortgage.") Pursuant to P-11(b)(8) (at no charge), require that any lien or lease excepted in the Mortgagee Policy (T-2) (if you seek insurance as a first lien, superior to liens and leases) show the lien or lease and then add: "Company insures the insured against loss, if any, sustained by the insured under the terms of the Policy if this item is not subordinate to the lien of the insured mortgage." Require that the Binder show all subordinate liens in Schedule B-Part 2 (as subordinate), pursuant to P SUBORDINATIONS If insured mortgage is subordinated to another interest after issuance of Mortgagee Policy (T-2), require the title company that issued policy to issue Mortgagee Policy of Title Insurance P-9.b.(3) Endorsement Form (T-38) [which does not downdate the policy], pursuant to P-9(b)(3) and R-11(b) SURVEY (see ENCROACHMENT, see WATER) If survey is acceptable to title company before closing, have the commitment so note (Exception number 2 will be amended to read "shortages in area" provided the applicable premium is paid") Amend Schedule B, paragraph 2 ["Any discrepancies, conflicts, or shortages in area or boundary lines, or any encroachments or protrusions, or any overlapping of improvements"] to read "shortages in area" on owner policy (T-1, T-1R), mortgagee policy (T-2), or binder (T-13). Must comply with P-2 (current survey: no definition except residential refinance) and R- 16 (15% of basic premium on owner policy; no charge on mortgagee policy (T-1) or binder (T-13)).

115 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST 106 Providing a "current survey" under P-2 is not defined, except residential refinance. On residential refinance, survey of 7 years or less, with affidavit, is current survey under P-2(b). Title company may agree to accept older survey on residential refinance. Title company may agree for (purchase money) mortgagee policy to take dated survey on residential resale with affidavit. Sometimes title company may take older survey on other land, with affidavit and inspection on mortgagee policy. You may be able to secure an updated survey from the surveyor who performed the prior survey for a reduced cost. Require title company to amend easement exceptions to refer to "as located on that survey [identify survey; identify location]" if easement is located. Require legal description by metes and bounds to refer to the survey: "and being the same land described on that survey [identify survey]" if survey is acceptable. Request title company to identify address (location) of commercial property by stating "and the improvements affixed thereto that by law constitute real property and that include [describe general type of building, such as "office building"] known as [refer to address of property]", if survey is acceptable and shows improvements and address SURVIVORSHIP Survivorship rights are not customarily insured. The Owner Policy (T-1) and Residential Owner Policy (T-1R) except in Schedule B, paragraph 3 to "...survivorship rights, if any, of any spouse of any insured." Some companies may provide such insurance at time of purchase of the land from a third party, if the proper agreement is made, and exception to the terms of the statute is included TAXES (see EASEMENT) Require copies of tax search/certificate secured by title company. If Owner Policy (T-1), Residential Owner Policy (T-1R), or Mortgagee Policy insures an easement, require insurance that future taxes on the servient estate are subordinate to the easement: (1) require the tax exception to state that it applies only to the leasehold or fee tract by adding "applicable only to tract(s) [refer to leasehold or fee tracts and not to easement tract, if taxes and assessments paid for year that easement recorded and for prior years]", or (2) require express insurance such as by adding "Standby fees, taxes and assessments by any taxing authority for years prior to, on or after [year of policy] against the fee simple to that land encumbered by the easement [describe the insured easement tract or refer to same]. Company insures the insured against loss, if any, sustained by the insured under the terms of this Policy by reason of a final, nonappealable judgment of a court of a competent jurisdiction that divests the insured of its interest as insured because of this right, claim, or interest. Company agrees to provide defense to the insured in accordance with the terms of this Policy if suit is brought against the insured to divest the

116 ATTORNEY S TITLE CHECKLIST Yes No Attorney Checklist insured of its interests as insured because of this right, claim, or interest." 107 Verify that prorations for current year s taxes are based on estimate of current year s taxes. Require that current year s taxes be insured against if tax bills have been sent. [Note bulletin 153 prohibits escrow for current year s taxes if tax rolls not yet certified.] Such insurance is accomplished by excepting in tax exception only to next year s taxes. If you are securing a Mortgagee Policy (T-2) or Binder (T-13), require the title company to insure that the taxes excepted (whether current year or next year) are not yet due and payable pursuant to P-29 and R-24 as follows: "Company insures that standby fees, taxes and assessments by any taxing authority for the year are not yet due and payable." [If a portion of the current year s taxes are not yet due, require that the insurance be bifurcated, to insure as that those taxes are not yet due and that other taxes for next year are not yet due.] [This cannot be done in Owner Policy (T-1) or Residential Owner Policy (T-1R).] If you are securing a Mortgagee Policy (T-2) or Binder (T-13), require the title company to delete the roll back tax language in its tax exception ["and subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership."] pursuant to P-20 and R-19. You may be able to secure such deletion from some title companies even if the land is specially assessed for open space use. If you believe that the taxes for the current year have been paid but are unable to prove such payment (or funds have not cleared), request that the title company escrow taxes for that period pursuant to P-11 until it establishes that payment has been made. If your client is selling land that is receiving a homestead tax exemption (for persons over 65 or disabled) as a successor to a person who was entitled to such exemption, but the client is not entitled to the exemption (for the current and/or prior years), consider disclosure of this fact to the title company; if this is discovered at closing it may delay completion of the transaction. If the borrower is subject to tax abatement, require copies of the tax abatement agreements prior to closing for review TREC (see CONTRACT) The TREC contract form generally provides that the Owner Policy to the buyer may contain "the promulgated exclusions (including existing building and zoning ordinances and the following exceptions: (1) Restrictive covenants common to the plated subdivision in which the Property is located. (2) The standard printed exception for standby fees, taxes and assessments.

117 Yes No Attorney Checklist ATTORNEY S TITLE CHECKLIST (3) Liens created as part of the financing described in Paragraph (4) Utility easements created by the dedication deed or plat of the subdivision in which the Property is located. (5) Reservations or exceptions otherwise permitted by this contract or as may be approved by Buyer in writing. (6) The standard printed exception as to discrepancies, conflicts, shortages in area or boundary lines, encroachments or protrusions, or overlapping improvements. (7) The standard printed exception as to marital rights. (8) The standard printed exception as to waters, tidelands, beaches, streams, and related matters Within 20 days after the Title Company receives a copy of this contract, Seller shall furnish to Buyer a commitment for Title Insurance (the Commitment) and, at Buyer s expense, legible copies of restrictive covenants and documents evidencing exceptions in the Commitment other than the standard printed exceptions...if the Commitment is not delivered to Buyer within the specified time, the time for delivery shall be automatically extended up to 15 days. Buyer shall have 5 days after the receipt of the Commitment to object in writing to matters disclosed in the Commitment. Buyer may object to existing building and zoning ordinances and items 6(A)(1) through (8) above if Buyer determines that any such ordinance or items prohibits the following use or activity:." 110. TRUTH IN LENDING Truth in Lending Endorsements are not available in Texas. Exclusion 5 of the Mortgagee Policy (T-1) excludes liability for Truth in Lending. Pursuant to P-13, the title company cannot determine compliance with Truth in Lending UCC (see SUBORDINATIONS) It is common for UCCs that are additional security to the lender to be shown in Schedule A or insured as subordinate in Schedule B USURY The Mortgagee Policy (T-2) does not insure against usury; usury is excluded by Exclusion UTILITIES (see EASEMENTS) 114. VARIABLE RATE (see NEGATIVE AMORTIZATION) If the commercial or residential mortgage insured by a Mortgagee Policy (T-2) secures a variable rate mortgage (based on index or formula, share of cash flow, share of appreciation, or share of profits), require that the title company issue an Adjustable Mortgage Loan Endorsement (T-33), pursuant to P-9(b)(6), R-4, and R-11(d). [Note the Adjustable Mortgage Loan Endorsement refers

118 ATTORNEY S TITLE CHECKLIST Yes No Attorney Checklist only to priority relating to adjustments of interest; if the additional payments are not "interest", then the endorsement may not be construed as insuring priority of such amounts. In that case, it is possible (if you are satisfied as to usury issues, since the Policy will not insure against usury) for the policy to acknowledge in Schedule B that "For purposes of this Policy and the Adjustable Mortgage Endorsement only, interest shall include the following: [describe additional payments due to lender that are contingent]." The endorsement does not insure the priority of additions of interest to principal by its express terms, but does insure against loss of priority of the lien as security for the principal together with interest, so that the priority of interest should be insured.] If a modification of mortgage secures a variable rate mortgage, require the title company to issue a Mortgagee Policy of Title Insurance P-9.b.(3) Endorsement Form (T-38), pursuant to P-9(b)(3) and R-11(b), and then issue an Adjustable Mortgage Loan Endorsement (T-33), pursuant to P-9(b)(6), R-4, and R-11(d), and then increase the amount of the Mortgagee Policy (T-2), pursuant to R-4, if applicable WATER (see ENCROACHMENT, see EXPRESS INSURANCE, see SURVEY) You may not require deletion of the Water Exception (Schedule B, number 4) from the Owner Policy (T-1) or Residential Owner Policy (T-1R). 109 Require limit of Water exception in Mortgagee Policy (T-2) or Binder (T- 13) to those matters applicable to the land, as indicated by survey; otherwise require deletion of Water exception. If land along or near water course or beach, request express insurance against possible encroachment into open beach easement or pursuant to P-39(a) [if current survey furnished and area and boundary exception amended pursuant to P-2 and R-16, if title company considers risk insurable]: "Any encroachment at Date of Policy of [describe existing improvements on land] over or into [describe possible public rights, such as "that area seaward of the line of vegetation...]." 116. ZONING Zoning endorsements are not available in Texas. Exclusion 1(a) [Owner Policy (T-1) and Mortgagee Policy (T-2)] and Exclusion 1 [Residential Owner Policy (T-1R)] exclude zoning coverage.

119 OWNER/BORROWER QUESTIONNAIRE FOR RURAL HOMESTEAD CHARACTERIZATION For Home Equity Real Property Collateral Exceeding Ten Acres T-42.1 Endorsement Coverage Paragraph 1(i) The Lender has requested certain title insurance coverages which necessitate a title insurance underwriting investigation of matters outside the scope of a typical public records search at the county courthouse. As part of the investigative process, the Borrower and Co-Borrower are requested to answer the questions on this form. In this Owner/Borrower T-42.1 Questionnaire, the term Homestead Real Property means the land referenced in Section V below which the Borrower {and Co-Borrower, if applicable} is {are} mortgaging to the Lender to secure the Home Equity Loan. The title company will complete Section I entitled Title Company Information. The Borrower {and Co-Borrower if applicable} should complete the remainder of the T-42.1 Owner/Borrower Questionnaire. The Title Insurance Agent or Direct Operation, and the Title Insurance Company, referenced below, will be relying on the answers you give to enable the Title Insurance Company to provide the coverages requested by the Lender. It is very important that you truthfully and accurately answer these questions. I. TITLE COMPANY INFORMATION [To be completed by the Title Company] 110 Guaranty File Number Title Insurance Company Name of Title Insurance Agent or Direct Operation Proposed Mortgagee Policy of Title Insurance Amount of Insurance $ Name of Proposed Mortgagee Policy of Title Insurance Named Insured II. LENDER AND LOAN INFORMATION Address Phone ( ) Fax ( ) Loan Number Name of Lender Address of Lender Loan Amount $ G Home equity cash-out loan only G Cash-out and refinance of prior loan Name of Loan Officer Loan Officer Phone ( ) Fax ( ) III. LOAN PROCEEDS INFORMATION Please indicate the proposed use of the Loan Proceeds (Check each box applicable and indicate approximate payoff.) G Payoff of existing purchase money loan secured by Homestead Real Property Payoff Amount $ G Payoff existing construction loan secured by Homestead Real Property Payoff Amount $ G Payoff of existing refinance loan secured by Homestead Real Property Payoff Amount $ G Payoff of existing home equity loan secured by Homestead Real Property Payoff Amount $ G Payoff of other loans or credit cards NOT secured by Homestead Real Property Payoff Amount $ G Cash equity to Borrower(s) Payoff Amount $ TOTAL $ Should nearly equal the loan amount \February 7, 2001 (1:39PM) Owner/Borrower T-42.1 Questionnaire

120 111 IV. Borrower BORROWER INFORMATION Co-Borrower Borrower s Name (include Jr. or Sr. if applicable) Co-Borrower s Name (include Jr. or Sr. if applicable) Drivers License No. Home Phone (include area code) Age Drivers License No. Home Phone (include area code) Age Married Unmarried (single, divorced or widowed) Married Unmarried (single, divorced or widowed) Separated Separated Are you an owner of the Homestead Real Property? Yes No Is anyone other than yourself and the Co-Borrower an owner of the Homestead Real Property? Yes No If you answer yes, please provide the following information on all Non- Borrower owners: Are you an owner of the Homestead Real Property? Yes No Is anyone other than yourself and the Borrower an owner of the Homestead Real Property? Yes No If you answer yes, please provide the following information on all Non- Borrower owners: First Non-Borrower s/owner s Name (with Jr. or Sr. if applicable) Second Non-Borrower s/owner s Name (with Jr. or Sr. if applicable) Drivers License No. Home Phone (include area code) Age Drivers License No. Home Phone (include area code) Age Married Unmarried (single, divorced or widowed) Married Unmarried (single, divorced or widowed) Separated Separated Non-Borrower s/owner s Present Address (street, city, state, ZIP) Second Non-Borrower s/owner s Present Address (street, city, state, ZIP) Own Rent No. Yrs. Own Rent No. Yrs. V. HOMESTEAD REAL PROPERTY (Land to be Used as Security for Home Equity Loan) This section applies ONLY to your land which will be used to secure your home equity loan. Please respond to each section with complete information. If you need additional space to respond, please use the Continuation Sheet. Street Address Legal Description Lot Block Subdivision Name Plat Recording Information County Name (or attach metes and bounds field note description) Indicate your use of the Homestead Real Property Home only Business only Home and business Farm and home Ranch and home Other Is the Homestead Real Property located in City Name of City Town Name of Town Village Name of Village County Name of County Other Describe Extra Territorial Jurisdiction of \February 7, 2001 (12:07PM) Owner/Borrower T-42.1 Questionnaire

121 112 Describe the improvements to the Homestead Real Property (check all that apply) One to Four Family Residential Structure Paved Driveway Gravel Driveway Dirt Driveway Other Driveway Barn Describe Use Livestock Facilities Describe Other Describe street which serves as access to the Homestead Real Property (indicate all that apply) Paved Gravel Maintained by city, town or village County maintained Other Other Does the Homestead Real Property have the following (indicate Yes / No) Yes No paved sidewalks by street Yes No storm sewer (surface water) service Yes No curbs and guttering by street Yes No street lights along street serving Homestead Real Property Do you pay municipal / city real estate taxes on the Homestead Real Property? Yes No If the Homestead Real Property is located in or near a city, town or village, indicate if the Borrower and Co-Borrower are permitted under local election procedures to vote in the city, town or village elections. Yes No Borrower may vote in city, town, village elections Yes No Co-Borrower may vote in city, town, village elections Mail Delivery Home mail box delivery by postal service letter carrier Rural route Post office box Other DESCRIPTION OF SERVICES TO HOMESTEAD REAL PROPERTY WATER Municipal Water Service Provider Private Well on Land Cooperative Association Provider Water District or Water Authority Provider Other Name of Provider SEWAGE Private septic system Sewage is piped into waste water treatment system provided by municipality or county Other Name of Provider GAS Gas meter connected to municipal commercialresidential gas distribution system Butane / propane / natural gas provided by truck delivery to on site storage tanks Other Name of Provider POLICE PROTECTION City, Town or Village Police County Sheriff Texas Rangers Other ELECTRIC Rural Electric Cooperative Provider Private Commercial / Residential Electrical Provider Municipal Electric Supplier Name of Provider FIRE PROTECTION City County Rural Fire Prevention District Volunteer Fire Department Other \February 7, 2001 (12:07PM) Owner/Borrower T-42.1 Questionnaire

122 113 VI. DESCRIPTION OF LAND IMMEDIATELY CONTIGUOUS / ADJOINING THE HOMESTEAD REAL PROPERTY This section applies ONLY to the land which physically abuts the Homestead Real Property. Please indicate below the use/character of the land which is contiguous/adjoining/touching the Homestead Real Property to the North, South, East and West. DESCRIBE USE OF LAND ADJOINING THE HOMESTEAD REAL PROPERTY TO THE NORTH Street Alley One to four family residential Commercial retail / office Industrial Farm or ranch Park or greenbelt Undeveloped raw land Other DESCRIBE USE OF LAND ADJOINING THE HOMESTEAD REAL PROPERTY TO THE EAST Street Alley One to four family residential Commercial retail / office Industrial Farm or ranch Park or greenbelt Undeveloped raw land Other DESCRIBE USE OF LAND ADJOINING THE HOMESTEAD REAL PROPERTY TO THE SOUTH Street Alley One to four family residential Commercial retail / office Industrial Farm or ranch Park or greenbelt Undeveloped raw land Other DESCRIBE USE OF LAND ADJOINING THE HOMESTEAD REAL PROPERTY TO THE WEST Street Alley One to four family residential Commercial retail / office Industrial Farm or ranch Park or greenbelt Undeveloped raw land Other VII. DESCRIPTION OF NEIGHBORHOOD VICINITY \February 7, 2001 (12:07PM) Owner/Borrower T-42.1 Questionnaire

123 114 In Section VI above, you were asked to indicate the character of land which was immediately contiguous / adjoining / touching your Homestead Real Property. In this section, you are asked to provide a general description of the neighborhood vicinity. This section asks for your opinion of the character of the land uses in what is characterized as the neighborhoodvicinity. Please complete the table located below with your best estimate of the appropriate percentage for each category listed {please see categories 1 through 7 on the table located next}. You are asked to give your best reasonable good faith estimate of the percentage of occurrence of the seven use factors, shown on the table, in your neighborhood/vicinity. For purposes of this response, deem the neighborhood/vicinity to be the circular area within 2000 yards of the center of the Homestead Real Property. To estimate a 2000 yard radius, draw an imaginary circle around your Homestead Real Property which extends the length of twenty football fields in each direction as in Figure One. Please checkmark one of the response boxes on each line of the seven categories below. # Land Use characterization for neighborhood vicinity 0-9% Almost Never 10%-24% Minority 25%-49% Very Frequent 50%-75% Majority 75%-89% Vast Majority 90%-100% Almost Totally 1 One-to-Four family residential 2 Multi-family condo / apartments 3 Parks or Greenbelt 4 Commercial Retail / Office 5 Industrial 6 Undeveloped raw or vacant land 7 Farming or ranching Describe any other factors which you believe make the Homestead Real Property have a rural character. IX. ACKNOWLEDGMENT AND AGREEMENT \February 7, 2001 (12:07PM) Owner/Borrower T-42.1 Questionnaire

124 115 The undersigned specifically acknowledge(s) and agree(s) that: (1) the loan referenced by this Owner/Borrower T-42.1 Questionnaire will be secured by a deed of trust or security instrument on the Homestead Real Property; (2) all statements made in this Owner/Borrower T-42.1 Questionnaire are made for the purpose of obtaining title insurance coverage from the Title Insurance Company for the benefit of the Lender or Proposed Mortgagee Insured under the T-42.1 Supplemental Coverage Equity Loan Mortgage Endorsement; (3) separate consideration for this agreement is acknowledged and confessed by virtue of the Title Insurance Company providing one or more of the home equity coverages under the T-42.1 Supplemental Coverage Equity Loan Mortgage Endorsement to the Lender or Proposed Mortgagee Insured; (4) this Owner/Borrower T-42.1 Questionnaire is not an instrument for purposes of Section 50(a)(6)(Q)(iii), Texas Constitution concerning instruments in which blanks are left to be filled in; (5) verification or re-verification of any information contained in the Owner/Borrower T-42.1 Questionnaire may be made at any time by the Title Insurance Company, Title Insurance Agent or Direct Operation; (6) the Title Insurance Company, Title Insurance Agent and Direct Operation, their successors and assigns, will rely on the information contained in the Owner/Borrower T-42.1 Questionnaire and I/we have a continuing obligation to amend or supplement the information provided in this Owner/Borrower T Questionnaire if any of the material facts which I/we have represented herein should change prior to closing. Certification: I/We certify that the information provided in this Owner/Borrower T-42.1 Questionnaire is true and correct as of the date set forth opposite my/our signature(s) on this Owner/Borrower T-42.1 Questionnaire and acknowledge my/our understanding that any intentional or negligent misrepresentation(s) of the information contained in this Owner/Borrower T-42.1 Questionnaire may result in civil liability and/or criminal penalties including, but not limited to, fine or imprisonment or both under the provisions of Title 18, United States Code, Section 1001, et. seq. and liability for monetary damages to the Title Insurance Company, Title Insurance Agent, their successors and assigns, and any other person who may suffer any loss due to reliance upon any misrepresentation which I/we have made on this Owner/Borrower T-42.1 Questionnaire. Borrower s Signature Date Co-Borrower s Signature Date X X Please attach copies of the most recent statements from: G G G G water service provider sewage service provider natural gas - butane - propane service provider electricity service provider \February 7, 2001 (12:07PM) Owner/Borrower T-42.1 Questionnaire

125 116 CONTINUATION SHEET / OWNER BORROWER QUESTIONNAIRE Use this continuation sheet if you need more space to complete the Owner/Borrower Questionnaire. Mark B for Borrower or C for Co-Borrower. This Continuation Sheet may also be used to set forth the full legal description of the Homestead Real Property if additional space is needed. Borrower s Name Co-Borrower s Name Guaranty File No. Loan No. I/We fully understand that it is a Federal crime punishable by fine or imprisonment, or both, to knowingly make any false statements concerning any of the above facts as applicable under the provisions of Title 18, United States Code, Section 1001, et. seq. Borrower s Signature Date Co-Borrower s Signature Date X X \February 7, 2001 (12:07PM) Owner/Borrower T-42.1 Questionnaire

126 Texas Title Insurance and Real Estate Questions Steve Lawrence, President Steven G. Lawrence, P.C., a Texas Corporation [email protected] Nationwide Toll Free Alternate Phone Nationwide Toll Free Fax Alternate Fax Mailing Address: P.O. Box 1009, Allen, Texas Express Delivery: 121 South Tennessee Street, McKinney, Texas Steve Lawrence is a Licensed Texas Attorney (since 1979) and is Board Certified by the Texas Board of Legal Specialization in: (i) Residential Real Estate Law; and, (ii) Commercial Real Estate Law. February 8, 2001 (11:01AM)