Bulletin: VA000004

Dear Associates:

As you are probably aware, new laws will become effective on June 1, 1992, which impact residential construction and create the concept of the "mechanic's lien agent". This Bulletin will highlight those changes for you and outline revised Stewart Title Guaranty Company's underwriting policies in appropriate situations.

Owner/Builder Affidavit

The owner/builder of new construction must provide an affidavit to the purchaser at closing which certifies: 1) that all mechanics or materialmen have been paid in full or 2) that all persons who so worked or provided materials who have not been paid are identified by name, address and amount payable. There is a "catch" to this affidavit, in that the persons identified are those "in privity of contract" with the owner/builder. That means that information as to second or third tier mechanics or materialmen may not be identified. Failure to provide the affidavit or willful material misrepresentation which causes a financial loss to any party is a crime.

This statute applies whether or not a mechanic's lien agent has been designated. The duty to provide the affidavit is solely that of the builder. A form for such affidavit is available through the reference section at the end of this bulletin. Advise your builder customers to seek advice of their counsel as to the impact of the statute on their operations.

Mechanic's Lien Agent

Changes to Virginia's mechanic's lien law, generally Chapter 1 of Title 43 of the Code of Virginia creates the position of "mechanic's lien agent" (hereinafter "the MLA"). Defined in Section 43-1, the MLA is a person designated in writing by the owner of real property as MLA and who accepts such appointment in writing (MLA 1). The designated MLA is publicly ordained by having its name, address and telephone spread on the building permit for a one-or two-family residence. The building permit is supposed to state "None Designated" if no MLA has been appointed by the owner. Section 43-4.01.

New Code Section 43-4.01 defines the duties of the MLA and the consequences of failing to give notice to the MLA of work done or materials supplied by contractors or suppliers. Subsection A requires the building permit to be continuously posted on the job site. Subsection B requires a party performing labor or furnishing materials to the job site to give written notice of same and the party's demand to be paid for same to the MLA by physical delivery or certified or registered mail.

The notice must contain: 1) name, address, and phone number of claimant; 2) building permit number; 3) property description as listed on permit; 4) statement seeking payment for work done or material furnished. Proof of delivery of the notice is required.

Subsection C limits the lien rights afforded to mechanics and suppliers. A claimant must provide the written notice of Subsection B to the MLA within thirty (30) days of the first day the claimant works or within thirty (30) days of the issuance of the building permit if the claimant provided labor or materials prior to the issuance of a permit. A claimant who fails to give notice on a timely basis loses his lien rights. The lien rights can be revived by giving a later written notice, but such only applies to the work done on and after the notice is given to the MLA.

Subsections D, E and F state that the MLA's only duties are to receive the Subsection B notices and to furnish such notices to a settlement agent if requested. The MLA may enter into a disbursement agreement, by which the MLA receives monies and disburses payments to the claimants who have provided notices. The statute acknowledges that the MLA may charge reasonable fees to serve as a receiver of notices and/or as disbursing agent.

What the MLA Provision Does and Does Not Do

The MLA program does provide a means of identifying the laborers and suppliers on a specific job site. It does not change the priority given to mechanics and materialmen. That is, if appropriate notice is given, then an unpaid mechanic who provides labor to the job, will have priority over the construction lender, purchaser, or permanent lender. On those jobs in which an MLA is designated, the effective time for exposure to unfiled liens is reduced from 120 plus days to thirty.

If no MLA is designated on a residential project, then the former law is unchanged. Also, the MLA plan has no applicability to commercial construction and to multiple-family housing (e.g., apartments). Stewart Title Guaranty takes the position, at this time, that the MLA provisions DO NOT apply to residential condominium projects.

You Serving as an MLA

As a title insurance agent you are qualified by the statute to serve as an MLA. Your Agency Underwriting Agreement does not contemplate you serving in such capacity. Stewart, however, takes the position that you may serve as an MLA so long as you do not represent to any party -- builder, lender, or purchaser -- that your service as MLA is pursuant to any authority to so act given by Stewart.

Stewart Title Guaranty Company
Mechanic's Lien Coverage Policies and Procedures
Issued March 26, 1992; Revised April 1995

The Mechanic's Lien law in Virginia essentially states that a mechanic's or materialmen's lien is superior to a construction or permanent loan Deed of Trust, even if the loan Deed of Trust was recorded before the mechanic's lien. This means that if a loan policy provides mechanic's lien coverage (i.e., deletes the mechanic's lien General Exception), and mechanics/materialmen are not paid and eventually statutorily perfect their liens, Stewart Title Guaranty Company will face a loss. In the Commonwealth of Virginia, therefore, Stewart Title Guaranty Company's basic underwriting guideline is that coverage is NOT provided. Accordingly, each policy issued involving any type of new construction (including remodeling) should contain the following Exception in Schedule B.

Any lien, or right to a lien, for services, labor or material heretofore or hereafter furnished.

However, many of our customers and clients require that mechanic's lien coverage be provided, (i.e., delete the Exception) from the loan policy. In order to get authorization from the Company to grant such coverage, every agent must comply with the procedures outlined in this manual.

Please note: In no event will mechanic's lien coverage be provided on an Owner's Policy during the construction period and only in rare instances, with the Company's explicit approval, will mechanic's lien coverage be given in an Owner's Policy issued subsequent to the completion of the improvements.

CONSTRUCTION LOAN PROCEDURES

1. STEP ONE

a. Obtain financial statements from borrowers and any guarantors:

Corporate -

When owner/builder/general contractor are one and the same operating under corporate status, you must obtain corporate financials. If there is a parent company, get the corporate financials of the parent company. In addition, you must obtain the individual financial statements of the principals involved in the corporation

Limited Partnership -

Obtain financials of all principal(s) of the general partner(s), the general partner(s), and the limited partnership.

Individual -

When an individual is building, gather financial statements on the individual whether building the home for family use or for sale.

If the individual has hired a general contractor, you must obtain the financials for the general contractor too.

b. Obtain documents concerning the project

Loan Commitment
Construction Loan Agreement
Financial Statements (per A.1 above)
Copy of contract with General Contractor
Construction Cost Breakdown
List of subcontractors/suppliers with phone numbers
Name and phone number of contacts at lending institution
Copies of any outsale contracts
General Contractor/Owner's history and current inventory (per A.3.a below)
Judgment/Lien search on General Contractor/Owner/Borrower

c. Familiarity with project

In ever case, prepare a written statement showing the general contractor's building history, experience, competence, reputation, and the results of your general index search (covering judgments, federal liens, bankruptcies, etc.) against all parties, both corporate and individual, who are to be involved in the transaction. Complete or secure a list of all projects that have been completed by the principals as well as those still in progress and the lender(s) involved in each of these projects.

You will need to know the kind of project that is to be insured. Requirements may be different depending on whether the project is an office building, shopping center, an apartment project or a condominium project. For instance, a condominium project generally has more risk for the Company because it may be completed in phases.

Gather as much information and knowledge as possible regarding the proposed transaction. Will there be a payment and performance bond? If so, a copy of the bond should be obtained. It is highly desirable that you, as agent, and Stewart Title Guaranty Company be named as additional obligees in the bond.

2. STEP TWO

a. Request for approval from STGC

Forward all items obtained under Step One to your Stewart Title District Office for approval. Use the "Request for Approval" to submit your package. Your request will not be reviewed until all items required for the approval have been submitted.

Do not issue a Ccommitment For Title Insurance until appropriate written approval is obtained.

In the event it is necessary to issue a commitment before all of the above documentation is received, contact your Stewart Title District Office for further guidance.

b. Written authorization from STGC

You may only extend affirmative mechanic's lien coverage AFTER you receive written permission to do so from the Stewart Title District Office.

You should anticipate that all approvals will require some form of disbursement control and/or lien waiver monitoring.

A modification to a construction loan policy is treated as a new extension of coverage, so Company authorization is required. If you receive a request to modify a construction loan policy, you must submit to the Stewart Title District Office for review a copy of the modification documents and updated financials.

3.STEP THREE

a. Issue Commitment

After receipt of written authorization, a commitment may be issued to the proposed insured. Commitment must include:

(a) All specific requirements itemized on your authorization. Please note: you must carefully read the authorization. Do not assume that the requirements are the same as the last time.

(b) Include the following language, with reference to the General Exception for Mechanic's Liens:

As to loan policy only:
Item #_____ will be deleted on the final policy.
Subject to the terms and provisions of the Pending Disbursement Clause and Disbursement Endorsement attached hereto.

b. Affirmative coverage language

You must use the exact PENDING DISBURSEMENT CLAUSE AND DISBURSEMENT ENDORSEMENT that are attached to your authorization. You may not use any other pending disbursement clause or disbursement endorsement.

This coverage cannot be modified by your agency.

4. STEP FOUR

a. Settlement

The Indemnity Agreement I (available through the reference section at the end of this bulletin) must be executed by all parties itemized on your authorization no later than settlement.

The original Indemnity Agreement I must be sent to your Stewart Title District Office with a copy retained in your file.

If required in your authorization, you must collect and remit to the Stewart Title District Office an extrahazardous risk fee of $1.00/$1000.00 based on the loan amount.

b. Post-settlement

In accordance with usual underwriting guidelines, all requirements set out in the commitment must be satisfied before you issue the final policy. Once you are satisfied everything is in order, you may issue the policy which must contain the Pending Disbursement Clause (see form referenced at the end of this bulletin).

Title policies must be issued promptly, so that all draw endorsements reference the policy number. Never issue draw endorsements to a commitment.

5. STEP FIVE

Construction Draws

Land Advance

This draw is usually provided at the time of settlement to apply to the cost of acquisition of the building lot(s). An endorsement showing this draw should be issued at the same time as the policy.

The date and time of this endorsement will be the same as the policy and you should utilize the Disbursement Endorsement (see form referenced at the end of this bulletin) included with your authorization.

Construction advances

Prior to clearance of a draw, you must have:

Copy of the written draw request from the builder
Satisfactory title bringdown
Fully executed Waiver(s) of Liens
Interim Affidavit and Agreement
Site inspections

Each time a draw request is made, you must do a bringdown from the date of the policy or last endorsement. Providing your bringdown discloses no intervening matters, an endorsement may be issued indicating the new draw amount and the total amount disbursed to date. Using the Disbursement Endorsement, "Total Disbursement" should be the same as the sum of the new draw amount plus all prior draws. In the event there is a discrepancy, you must check with the lender to determine the reason. Any discrepancy must be reconciled prior to the issuance of any Disbursement Endorsement.

Obtain Partial Waiver of Liens (see form referenced at the end of this bulletin) from each subcontractor/supplier providing labor and/or material through the previous draw.

Obtain Interim Affidavit and Agreement executed by the Owner and General Contractor (see form referenced at the end of this bulletin). The Interim Affidavit and Agreement is executed and sworn to by the owner/developer/general contractor stating that all subcontractors were properly paid.

You must contact a cross-section of the subcontractors who have executed the lien waivers to determine that they are actually being paid. A different cross-section should be utilized for each Disbursement Endorsement.

At regular intervals, you should inspect the job site to determine that work on the project is continuing. Since many lenders employ independent inspectors to determine the progress of construction, you may substitute a copy of the inspector's latest report.

Final Draw

Upon completion of the project you may be requested to issue a final endorsement removing the pending disbursement clause from the policy and increasing the amount of insurance to the full liability amount.

Before you issue such a final endorsement, you must:

Obtain the Commercial Affidavit (COMMAFF 6/93) (see form referenced at the end of this bulletin)

Obtain applicable Final Affidavit and Agreement (see form referenced at the end of this bulletin)

Obtain the final inspection

Obtain a Final Waiver of Liens (see form referenced at the end of this bulletin) from all subcontractors/suppliers. Verify by telephone that all subcontractors/suppliers have been paid in full.

OUTSALE OR PERMANENT LOAN PROCEDURES

In order to delete the standard mechanic's lien exception from a Lender's or Owner's Policy on an outsale or a permanent loan, you must:

STEP ONE

1. Furnish financials for Owner/Builder/General Contractor to STGC

2. Furnish a list of subs/suppliers (with telephone numbers) to STGC

3. Furnish Construction Cost Breakdown to STGC

4. Furnish completed "Request for Approval" (see form referenced at the end of this bulletin)

STEP TWO

1. Obtain written STGC authorization

2. Set out in your commitment additional requirements, if any, from your STGC authorization

STEP THREE

1. By time of settlement

Secure all final subcontractor/supplier lien waivers (see forms referenced at the end of this bulletin) for all who have supplied labor or material to the subject premises.

Verify by telephone with the subcontractors/suppliers that they have been paid in full for all labor or material furnished to the subject property.

2. At settlement

Pay at settlement any subcontractors/suppliers that have not yet been paid in full. These payments must be exchanged for final lien waivers (see form referenced at the end of this bulletin).

Obtain the appropriate Final Affidavit and Agreement (see form referenced at the end of this bulletin) executed by the Owner/General Contractor.

Obtain a Commercial Affidavit (COMMAFF 6/93) (see form referenced at the end of this bulletin)

Collect and remit the $1.00/$1000.00 extrahazardous risk fee to the Stewart Title District Office. NOTE: IF THE OWNER DECLINES MECHANIC'S LIEN COVERAGE, YOU MUST STILL COLLECT PREMIUM ON THE LOAN AMOUNT.

If these outsale requirements above cannot be fully satisfied, you MUST raise the standard mechanic's lien exception in both the Owner's and Lender's policies.

STEP FOUR

In the owner's policy, set out the special exception (see form referenced at the end of this bulletin) in lieu of the standard mechanic's lien exception.

In the loan policy, delete the standard mechanic's lien exception.

NOTE: FAILURE TO FOLLOW COMPLETELY THE ABOVE PROCEDURES MAY RESULT IN FINANCIAL LOSS TO THE COMPANY FOR WHICH YOU WILL BE HELD RESPONSIBLE.

STEWART TITLE GUARANTY COMPANY
MECHANIC'S LIEN COVERAGE
POLICIES AND PROCEDURES
" MLA - POSTED SITE"

Background

As a result of the creation of the mechanic's lien agent under Virginia's statutes, Stewart Title Guaranty Company is revising some of its requirements for affirmative mechanic's lien coverage on residential construction loans and newly constructed builder sales.

EXCEPT AS MODIFIED SPECIFICALLY HEREIN, THE REQUIREMENTS OF STEWART'S MARCH 26, 1992, Rev. 4/95 MEMO, "MECHANIC'S LIEN COVERAGE POLICIES AND PROCEDURES', MUST BE FOLLOWED ABSOLUTELY.

(Please contact your Stewart Division Manager or Agency Representative if you do not have the March 26, 1992, Rev. 4/95 Memo, the Exhibits attached thereto and Stewart's "Policy Statement as to Mechanic's Lien Coverage in Virginia".)

The mechanic's lien agent statute affects only those transactions involving one-or-two-family home construction. Stewart remains committed to issuing affirmative mechanic's lien coverage on commercial construction loans and outsales in which no MLA is designated; PROVIDED THAT THE REQUIREMENTS OF THE MARCH 26, 1992, Rev. 4/95 MEMO ARE STRICTLY FOLLOWED BY YOU. Consequently, the revisions outlined in this statement are limited to transactions involving an MLA.

If you are in doubt whether or not a transaction falls in one of the following scenarios, because it is unclear if the facts fit the MLA program, assume that the transaction does not fit the MLA program. Your underwriting should then follow the March 26, 1992, Rev. 4/95 Memo. Perhaps you have a builder who cannot produce a written acceptance of appointment, or maybe notices from laborers or suppliers to a designated MLA are not specific to a job site by reference to a building permit number. Such facts raise red flags; do not ignore them. Consult with your underwriter.

Remember:

Beginning June 1, 1992, the Affidavit of Payment (Form MLA 5) or a similar form must be provided to a new home purchaser by the builder whether or not an MLA has been designated.

Beginning July 1, 1992, the Notice of Availability of Owner's Title Insurance (Form MLA 3) must be collected from every residential sale whether or not the transaction involves new construction or an MLA.

For construction loans or outsale closings without an MLA, the guidelines of Stewart's March 26, 1992, Rev. 4/95 Memo still apply.