Guideline for NM 83 - Construction Loan - Loss of Priority and NM 83.1 Construction Loan - Loss of Priority - Direct Payment

Explanation:

Mechanic’s lien coverage during construction is an extra-hazardous risk.

NM 83 and 83.1 endorsements are designed for loan policies during construction in situations where the mortgage or deed of trust can never have priority over mechanic’s liens or where the mortgage or deed of trust has lost priority to mechanic’s liens (e.g., due to commencement of work prior to the recording of the mortgage or deed of trust). However, these endorsements may also be used for situations where the mortgage or deed of trust has priority over mechanic’s liens.

NM 83 and 83.1 endorsements are similar in that both endorsements insure against loss or damage by reason of: (a) the invalidity or unenforceability of the lien of the Insured Mortgage as security for each Construction Loan Advance made on or before the Date of Coverage; (b) the lack of priority of the lien of the Insured Mortgage as security for each Construction Loan Advance made on or before the Date of Coverage, over any lien or encumbrance on the Title recorded in the Public Records and not shown in Schedule B; and (c) the lack of priority of the lien of the Insured Mortgage, as security for each Construction Loan Advance made on or before the Date of Coverage over certain Mechanic's Liens, if notice of the Mechanic's Lien is not filed or recorded in the Public Records.

Coverage under NM 83 and 83.1 endorsements are subject to the Exclusions from Coverage in the Policy, the provisions of the Conditions, and the exceptions contained in Schedule B. Matters excluded include, but are not limited to, failure to withhold funds as required by law, any other failure to comply with applicable law, failure to pay retainage, approval of extras resulting in additional costs, disputes over services, failure to provide adequate funds, failure to fully disburse or to disburse to lien claimants, failure to require lien waivers from lien claimants, etc.

However, NM 83 and 83.1 endorsements differ in that:

NM 83 Endorsement (Construction Loan - Loss of Priority):

NM 83 endorsement insures only to the extent that the charges for the services, labor, materials or equipment for which the Mechanic's Lien is claimed were designated for payment in the documents supporting a Construction Loan Advance disbursed by or on behalf of the Insured on or before Date of Coverage.

NM 83 endorsement does not insure against loss or damage by reason of any mechanic's lien arising from services, labor, material or equipment:

A. furnished after Date of Coverage; or

B. not designated for payment in the documents supporting a Construction Loan Advance disbursed by or on behalf of the Insured on or before Date of Coverage

NM 83 endorsement does not require that the Company or its agent will be involved in disbursement of funds.

NM 83 endorsement is the form of construction loan endorsement required by Section 3.2.C (page 53) of the Department of Housing and Urban Development Federal Housing Administration Multifamily Program Closing Guide dated September 1, 2011.

NM 83.1 Endorsement (Construction Loan - Loss of Priority - Direct Payment):

NM 83.1 endorsement insures only to the extent that direct payment to the Mechanic's Lien claimant for the charges for the services, labor, materials or equipment for which the Mechanic’s Lien is claimed has been made by the Company or by the Insured with the Company's written approval.

NM 83.1 endorsement does not insure against loss or damage by reason of any mechanic's lien arising from services, labor, material or equipment:

A. furnished after Date of Coverage; or

B. to the extent that a Mechanic's Lien claimant was not directly paid by the Company or by the Insured with the Company's written approval.

NM 83.1 endorsement contemplates that the Company or its agent will be involved in the direct payment to specific mechanic’s lien claimants - either by making the payment or by approving it.

Underwriting Requirements:

1. This endorsement should be used only for a loan policy prior to or during construction.

2. This endorsement requires underwriter approval.

3. Prior to issuing this endorsement, review and comply with the applicable “Mechanic’s Lien Coverage During Construction” bulletin applicable to your state describing the requirements for requesting mechanic’s lien coverage on a loan policy prior to or during construction. This may require, among other requirements, documenting the current status of construction or absence thereof, proof of payment of all work performed to date, and credit enhancements, e.g., indemnities and financial statements, acceptable to the Company, etc.

4. Relationship to STGC Pending Disbursement Clauses:  In order to remove a general mechanic’s lien exception from a loan policy issued prior to and during construction, either of the following must appear in the policy: (a) an applicable STG Pending Disbursement Clause, inserted as an exception or added as an endorsement, or (b) an NM 83 or 83.1 Construction Loan Endorsement, unless approved by an underwriter.

The NM 83 and 83.1 Endorsements may be used instead of applicable STGC Pending Disbursement Clauses. The ALTA endorsements are not precisely comparable to the STGC Pending Disbursement Clauses. In general, you may use the following ALTA Construction Loan endorsements, where available and where approved by an underwriter, as follows:

A. You may generally use NM 83 Endorsement (Construction Loan - Loss of Priority) in lieu of STGC PDCX06.

B. You may use generally NM 83.1 endorsement (Construction Loan - Loss of Priority - Direct Payment) in lieu of STGC PDCX07.

C. You may generally use either NM 83 or 83.1 Construction Loan Endorsement in lieu of STGC PDCX08, if requested.

5. You should not delete the general mechanic's liens exception for "Any lien, or right to a lien, for services, labor, or material heretofore or hereafter furnished, imposed by law and not shown by the Public Records” without underwriter approval.

6. The NM 83 and 83.1 Construction Loan Endorsements are designed to be used solely with NM 84 Endorsement (Disbursement). If the policy contains an NM 83 or 83.1 Construction Loan Endorsement, do not use any other form of date down endorsement without underwriter approval. You must comply with the applicable guidelines for issuance of the NM 84 Disbursement Endorsement. Among other requirements, issuance of the NM 84 Endorsement will require a continuation of title and proof of payment to mechanic’s lien claimants. Such proof is usually provided by paid bills, receipts, lien waivers, etc. Refer to the Guidelines for the NM 84 endorsement (Disbursement).