Real Estate Title Clearance and Loan Closing

SUMMARY: The Rural Housing Service (RHS) and the Farm Service Agency

(FSA), collectively hereafter referred to as ``agency,'' amend the Real

Estate Title Clearance and Loan Closing regulation. This action makes

loan closing procedures consistent with the private sector for

commercial loans and makes loan closing requirements consistent with

local laws and procedures that are typical in the area where an agency

loan is made. The intended effect is to provide the public with easier

and less costly access to agency programs.

EFFECTIVE DATE: April 22, 1996.

FOR FURTHER INFORMATION CONTACT: Walter B. Patton, Senior Loan

Specialist, Rural Housing Service, USDA, Room 5334, South Agriculture

Building, 14th and Independence Ave. SW, Washington, DC 20250,

Telephone (202) 720-0099.

SUPPLEMENTARY INFORMATION:

Classification

This rule has been determined to be not significant for purposes of

Executive Order 12866 and, therefore, has not been reviewed by OMB.

Paperwork Reduction Act

The information collection requirements contained in this

regulation have been approved by the Office of Management and Budget

(OMB) under the provisions of 44 U.S.C. chapter 35 and have been

assigned OMB control number 0575-0147, in accordance with the Paperwork

Reduction Act of 1980. This final rule does not impose any new

information collection requirements from those approved by OMB.

Environmental Impact Statement

This document has been reviewed in accordance with 7 CFR part 1940,

subpart G, ``Environmental Program.'' It is the determination of the

agency that this action does not constitute a major Federal action

significantly affecting the quality of the human environment, and in

accordance with the National Environmental Policy Act of 1949, Pub. L.

91-190, an Environmental Impact Statement is not required.

Intergovernmental Consultation

This regulation is an instructional procedure and is not covered by

Executive Order 12372. Programs listed in the Catalog of Federal

Domestic Assistance are as follows: Catalog Nos. 10.405, Farm Labor

Housing Loans and Grants; 10.415, Rural Rental Housing Loans; and

10.416, Soil and Water Loans, are subject to the provisions of

Executive Order 12372, which require intergovernmental consultation

with State and local officials (7 CFR part 3015, subpart V, 48 FR

29112, June 24, 1983). Catalog Nos. 10.404, Emergency Loans; 10.406,

Farm Operating Loans; 10.407, Farm Ownership Loans; 10.410, Very Low to

Moderate Income Housing Loans, and nonprogram loans are excluded from

the scope of Executive Order 12372.

Civil Justice Reform

This final rule has been reviewed under Executive Order 12778,

Civil Justice Reform. In accordance with this rule: (1) all state and

local laws and regulations that are in conflict with this rule will be

preempted; (2) no retroactive effect will be given to this rule; and

(3) pursuant to section 212 of the Department of Agriculture

Reorganization Act of 1994, Public Law 103-354 (October 13, 1994),

administrative appeal proceedings must be exhausted before bringing

suit challenging actions taken under this rule.

Unfunded Mandates Reform Act of 1995

Title II of the Unfunded Mandate Reform Act of 1995 (UMRA), Pub. L.

104-4, establishes requirements for Federal agencies to assess the

effects of their regulator actions on State, local, and tribal

governments and the private sector. Under section 202 of the UMRA, the

agency generally must prepare a written statement, including a cost-

benefit analysis for proposed and final rules with ``Federal mandates''

that may result in expenditures to State, local, or tribal governments,

in the aggregate, or to the private sector, of $100 million or more in

any one year. When such a statement is needed for a rule, section 205

of the UMRA generally requires the agency to identify and consider a

reasonable number of regulatory alternatives and adopt the least

costly, more cost-effective or least burdensome alternative that

achieves the objectives of the rule.

This rule contains no Federal mandates (under the regulatory

provisions of Title II of the UMRA) for State, local, and tribal

governments or the private sector. Thus, today's rule is not subject to

the requirements of sections 202 and 205 of the UMRA.

Discussion

On May 11, 1994, the Farmers Home Administration (FmHA)

(predecessor to the Rural Housing Service and the Farm Service Agency),

published a proposed rule with a request for public comments to revise

7 CFR part 1927, subpart B, ``Real Estate Title Clearance and Loan

Closing.''

The agency received fifteen comments. Eight comments came from

within the United States Department of Agriculture (USDA); six comments

came from private practice attorneys, and one comment came from a title

insurance company.

Those sections of the proposed regulation that are administrative

in nature and apply only to administrative procedures within the agency

have been removed from this document. These procedures are available

from any agency office upon request.

The proposed rule discussed the need to make real estate title

clearance and loan closing procedures more

[[Page 11710]]

compatible with the public sector requirements. Many of the comments

addressed this desire.

The agency policy is that all loans be closed with the issuance of

a title insurance policy except in those areas of the country where

title insurance is unavailable. It is anticipated that in most states,

attorneys will continue to close loans and be issuing agents of title

insurance for a title insurance company instead of providing a title

opinion. This provides better protection for both the agency and the

borrower. When a title insurance company indemnifies the issuing agent

attorney through the use of an indemnification agreement, the attorney

will not be required to obtain a fidelity bond or errors and omissions

insurance.

Comments and Other Significant Changes are Discussed Below

One respondent questioned the need for a title insurance company to

provide an audited financial statement in order to show financial

responsibility to the agency. We feel it is important that the agency

can determine the financial responsibility of a title insurance

company. We will allow each State Office to determine whether the State

Agency which regulates title insurance companies requires sufficient

proof of financial responsibility to meet this requirement, or if

additional proof is necessary. If the State Office concludes that the

State Insurance Agency provides sufficient assurance of financial

responsibility of State regulated title insurance companies, no other

minimal information will be required from the individual title

insurance company.

One respondent questioned Sec. 1927.59(a)(1) (i) through (iii),

which states that title insurance will only be obtained for subsequent

loans in certain situations. The recommendation was that title

insurance should be required in all subsequent loan cases. It has been

decided that title insurance or title opinions will be obtained unless

the cost of title services is excessive in relationship to the size of

the loan, the agency currently has a first mortgage security interest,

the applicant has sufficient income to service all loans from the

agency, the borrower is current on all existing agency loans, and the

best mortgage obtainable adequately protects agency security interests.

A comment questioned the policy of not allowing the mention of the

use of abstracts of title in any title opinions furnished to the United

States Department of Agriculture (USDA). The agency does not prevent an

attorney from using an abstract of title when preparing an attorney's

opinion, but what the agency requires is the unqualified opinion of the

attorney, not an opinion which passes the liability for an error from

the attorney to an abstract company. Reviewing the abstract is a method

an attorney can use to arrive at his or her opinion and it is not

necessary on the face of the opinion to indicate the methodology by

which the attorney arrived at the opinion. With the agency's policy

shifting to the use of title insurance policies, instead of title

opinions, this concern will be diminished. (This subject is not

specifically addressed in this regulation and no change is being made.)

The recommendation to continue to have the attorney use Forms FmHA

1927-9, ``Preliminary Title Opinion,'' and FmHA 1927-10, ``Final Title

Opinion,'' on title opinions for both loan closing and foreclosure

proceedings when an attorney's opinion is used, is acceptable. The

proposed regulation did not preclude this practice.

A comment was made suggesting that loan closing attorneys and title

companies agree to indemnify the agency against any losses that occur

as a result of mistakes. The agency does not agree with this

suggestion. Title insurance will provide the agency with adequate

coverage against any errors made by the title insurers. The agency will

be a named insured on title insurance policies issued in conjunction

with agency loans. In those areas where attorney's opinions will still

be used, the agency is protected to a lesser extent by the attorney's

malpractice insurance.

A comment was received debating the use of a title opinion versus

title insurance, and the additional cost incurred if a title insurance

company were to require a survey. Typically, the agency requires a

survey unless the title insurance company provides survey coverage. The

change to the regulation will give State Offices the authority to

decide the form of title insurance certification and form of survey

that is best for their state.

It was recommended that the definitions of ``approved attorney''

and ``approved title insurance company,'' be expanded to cross

reference the provisions providing for approval. This recommendation

was accepted.

It was pointed out that an ``issuing agent'' may or may not be a

party who can perform closing services, depending on local law. This

fact was incorporated.

It was pointed out that the reference to ``warranty deed'' in the

definition of ``mortgage'' in Sec. 1927.52 is somewhat confusing. This

reference was removed.

It was suggested to expand the definition of ``quitclaim deed.''

The current method of conveying title by use of a quitclaim deed has

not been a problem.

The Anti-Deficiency Act, 31 U.S.C. Secs. 1512-1519, precludes

Federal agencies from agreeing to expend federal funds in excess of an

appropriation. The covenants in warranty deeds could commit the agency

to expend funds in future fiscal years were a warranty to be breached.

This would violate the Anti-Deficiency Act and, for this reason, the

agency cannot use warranty deeds in conveying property to which it

holds title. Therefore, no change was made.

It was pointed out that a closing protection letter need not be

furnished when the loan closing is conducted in a branch office of the

title insurance company. This was incorporated.

It was also pointed out that by saying a closing protection letter

must provide equivalent protection of a ``professional liability and

fidelity insurance policy,'' will create problems, because title

insurance companies are prohibited by law from providing professional

liability and fidelity insurance. This reference was removed.

It was pointed out that Sec. 1927.54(d)(4) is not needed when a

closing protection letter is provided. The paragraph stated, ``Title

insurance company agrees that the title insurance company employee or

closing agent who supervises the closing of the transaction will be

authorized to receive funds and give receipts for the company's

charges.'' This paragraph has been removed.

It was suggested that we remove what appears to be a mandatory

requirement that an owner's title insurance policy be issued. In most

instances, an owner should obtain an owner's policy of title insurance

for the owner's protection and the agency will encourage but not

require this. A correction was made to clarify this point.

It was pointed out that in some states only an attorney can prepare

a deed. Therefore, a change was made that a closing agent can prepare a

deed unless prohibited by law.

One commentor stated that the statement, ``Loan funds for the

payment of a lien may be disbursed only upon the receipt of a

discharge, satisfaction, or release,'' in Sec. 1927.58(a), is

impracticable. We agree with this perception; however, a completely

satisfactory wording is impracticable. The word ``receipt'' is being

changed to ``recording.'' We believe it is understood by closing agents

that funds change hands and releases and recordings occur substantially

simultaneously.

[[Page 11711]]

A comment was made that instead of ``recommending'' the use of

title insurance, we should ``require'' its use unless prohibited by

State law. If this were implemented, any deviation would need to be

authorized by the Administrator. Since State laws vary greatly, it is

important to give State Offices latitude in this regard. In some very

rural areas of the country title insurance may be unavailable for

logistical as opposed to legal reasons. This wording will remain

unchanged.

The question was raised as to why the agency requires the borrower

to receive a copy of the title opinion. It goes on to say neither the

conventional nor the government mortgage market provides a title

opinion to the borrower. The agency has a responsibility to provide

supervised credit. It is important that all borrowers are aware of the

terms and conditions of the title insurance commitment as well as the

final title insurance binder. No change is made with regard to this

comment.

A comment was made concerning ``a loan is considered closed,'' and

``the date of closing,'' and which definition is correct. The terms

apply to two different events and are not meant to be the same. By

definition ``closed loan'' is ``a loan is considered to be closed when

the mortgage is filed for record.'' The date of closing is the date

that the closing agent conducts the loan closing activity. No change

was made.

It was commented that sometimes ``mortgagee's policy'' was

interchanged with ``lender's policy.'' All references were changed to

``lender's policy.''

Concerning debarment or suspension, a comment was made that the

proposed regulation implied that once a party was debarred or suspended

they are always debarred or suspended. This was corrected by inserting

the words ``is currently.''

A comment was made that the closing agent should not be required to

determine the validity of the legal description, but rather should use

the legal description provided by the survey or other legal document.

It is part of the closing agent's duties to verify an accurate legal

description. Using the survey or other recorded legal document is one

way of meeting this requirement but the ultimate responsibility rests

with the closing agent. No change has been made.

A comment was made that in one section we required the return of

``the final title opinion or policy of title insurance,'' within one

day, while in another section it requires they be returned ``as soon as

possible.'' The requirement is removed from the section requiring their

return within one day.

It was recommended that Sec. 1927.59(a)(iv) be clarified by

changing the word ``additional'' to ``subsequent.'' This change was

made.

A comment was made that we refer to a ``clear'' title while the

conventional term is ``marketable.'' This change was made.

A comment was made that there are different definitions and

examples of ``exceptions'' in various passages. These variations were

corrected.

Two concerns were raised about the requirement that approved

attorneys providing title opinions must have a $50,000 fidelity bond.

The comment was that no other lender requires a fidelity bond and it

results in increased cost to the borrower. We believe the continued

requirement for a fidelity bond is necessary to protect these funds

which are public monies. Therefore, this requirement will not be

changed for closings where attorney opinions are obtained. In most

cases where the party handling closing funds is covered by an

acceptable closing protection letter, there will be no need for a

fidelity bond.

A question was raised concerning the ``certification of title,''

and the business of insuring titles. It is not the intent of this

regulation that attorneys insure titles. In most cases, the agency will

obtain title insurance and in such cases the agency will look to the

title insurance company, not the closing agent, if there is a defect in

title. In those cases where an attorney's opinion is issued instead of

title insurance, if the title opinion is defective, the agency will

seek redress from the attorney who issued the opinion.

A question was raised with regard to the requirement that an

approved attorney furnishing a title opinion must have at least a

$250,000 errors and omissions insurance policy with a deductible not to

exceed $5,000. The regulation will allow each State Office to establish

the appropriate level of errors and omissions insurance coverage and

the level of deductible, according to what is customary in the area and

necessary for the protection of the agency. To the extent that real

estate loans are closed using a title insurance policy with a closing

protection letter covering the closing agent, concerns regarding

fidelity bonds, and errors and omissions insurance coverage, are

eliminated.

One respondent requested the reinstatement of Form FmHA 427-18,

``Fidelity Bond for Loan Closing Attorneys.'' It is felt that a surety

company can provide verification of fidelity bond coverage without the

agency developing a replacement form. In keeping with the Paperwork

Reduction Act, this form will not be reinstated.

Four public comments encouraged the agency to require the adoption

of title insurance policies. Two respondents said they would reduce

their legal fees, as an accommodation to the purchaser, when title

insurance policies are issued. We believe the proposed rule adequately

addressed these comments and no changes will be required.

List of Subjects for 7 CFR Part 1927

Loan programs--Agriculture, Loan program--Housing and community

development, Mortgages.

Therefore, chapter XVIII, title 7, Code of Federal Regulations is

amended by revising part 1927 to read as follows:

PART 1927--TITLE CLEARANCE AND LOAN CLOSING

Subpart A--[Reserved]

Subpart B--Real Estate Title Clearance and Loan Closing

Sec.

1927.51 General.

1927.52 Definitions.

1927.53 Costs of title clearance and closings of transactions.

1927.54 Requirements for closing agents.

1927.55 Title clearance services.

1927.56 Scheduling loan closing.

1927.57 Preparation of closing documents.

1927.58 Closing the transaction.

1927.59 Subsequent loans and transfers with assumptions.

1927.60--1927.99 [Reserved]-

1927.100 OMB control number.

Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C. 1480.

Subpart A--[Reserved]

Subpart B--Real Estate Title Clearance and Loan Closing

1927.51 General.

(a) Types of loans covered by this subpart. This subpart sets forth

the authorities, policies, and procedures for real estate title

clearance and closing of loans, assumptions, voluntary conveyances and

credit sales in connection with the following types of Rural Housing

Service (RHS) and Farm Service Agency (FSA) loans: Farm Ownership (FO),

Nonfarm Enterprise (FO-NFE), Emergency (EM), Operating (OL), Rural

Housing (RH), Farm Labor Housing (LH), Rural Rental Housing (RRH),

Rural Cooperative Housing (RCH), Soil and Water (SW), Indian Land

acquisition loans involving nontrust property, and NonProgram (NP)

loans. This subpart does not apply to guaranteed loans.

(b) Programs not covered by this subpart. Title clearance and

closing for

[[Page 11712]]

all other types of agency loans and assumptions will be handled as

provided in the applicable program instructions or as provided in

special authorizations from the National Office.

(c) [Reserved]

(d) Copies of all agency forms referenced in this regulation and

the agency's internal administrative procedures for title clearance and

loan closing are available upon request from the agency's State Office.

Forms and title clearance and loan closing requirements which are

specific for any individual state must be obtained from the agency

State Office for that state.

1927.52 Definitions.

Agency. The Rural Housing Service (RHS) and Farm Service Agency

(FSA) or their successor agencies.

Approval official. The agency employee who has been delegated the

authority to approve, close, and service the particular kind of loan,

will approve an attorney or title company as closing agent for the

loans. If a loan must be approved at a higher level, the initiating

office may approve the closing agent.

Approved attorney. A duly licensed attorney, approved by the

agency, who provides title opinions directly to the agency and the

borrower or upon whose certification of title an approved title

insurance company issues a policy of title insurance. Approved

attorneys also close loans, assumptions, credit sales, and voluntary

conveyances and disburse funds in connection with agency loans.

Approved attorney is further defined in Sec. 1927.54(c).

Approved title insurance company. A title insurance company,

approved by the agency, (including its local representatives,

employees, agents, and attorneys) that issues a policy of title

insurance. Depending on the local practice, an approved title insurance

company may also close loans, assumptions, credit sales, and voluntary

conveyances and disburse funds in connection with agency loans. If the

approved title insurance company does not close the loan itself, the

loan closing functions may be performed by approved attorneys or

closing agents authorized by the approved title insurance company.

Borrower. The party indebted to the agency after the loan,

assumption, or credit sale is closed.

Certificate of title. A certified statement as to land ownership,

based upon examination of record title.

Closed loan. A loan is considered to be closed when the mortgage is

filed for record and the appropriate lien has been obtained.

Closing agent. The approved attorney or title company selected by

the applicant and approved by the agency to provide closing services

for the proposed loan. Unless a title insurance company also provides

loan closing services, the term ``title company'' does not include

``title insurance company.''

Closing protection letter. An agreement issued by an approved title

insurance company which is an American Land Title Association (ALTA)

form closing protection letter or which is otherwise acceptable to the

agency and which protects the agency against damage, loss, fraud,

theft, or injury as a result of negligence by the issuing agent,

approved attorney, or title company when title clearance is done by

means of a policy of title insurance. Depending on the area, closing

protection letters may also be known as ``Insured Closing Letters,''

``Indemnification Agreements,'' ``Insured Closing Service Agreements,''

or ``Statements of Settlement Service Responsibilities.''

Cosigner. A party who joins in the execution of a promissory note

or assumption agreement to guarantee repayment of the debt.

Credit sale. A sale in which the agency provides credit to the

purchasers of agency inventory property. Title clearance and closing of

a credit sale are the same as for an initial loan except the property

is conveyed by quitclaim deed.

Deed of trust. See trust deed.

Exceptions. Exceptions include, but are not limited to, recorded

covenants; conditions; restrictions; reservations; liens; encumbrances;

easements; taxes and assessments; rights-of-way; leases; mineral, oil,

gas, and geothermal rights (with or without the right of surface

entry); timber and water rights; judgments; pending court proceedings

in Federal and State courts (including bankruptcy); probate

proceedings; and agreements which limit or affect the title to the

property.

Fee simple. An estate in land of which the owner has unqualified

ownership and power of disposition.

FSA. The Farm Service Agency, an agency of the United States

Department of Agriculture ( and any successor agency). FSA is the

successor agency for farm program loans of the former Farmers Home

Administration.

General warranty deed. A deed containing express covenants by the

grantor or seller as to good title and right to possession.

Indemnification agreement. An agreement that protects the agency

against damage, loss, fraud, theft, or injury as a result of useful

conduct or negligence on behalf of the issuing agent, approved

attorney, or title company. This agreement may also be entitled closing

protection letter, insured closing letter, insured closing service

agreement, statement of settlement service responsibilities, or letters

which provide similar protection.

Issuing agent. An individual or entity who is authorized to issue

title insurance for an approved title insurance company.

Land purchase contract (contract for deed). An agreement between

the buyer and seller of land in which the buyer has the right to

possession and use of the land over a period of time (usually in excess

of 1 year) and makes periodic payments of a portion of the purchase

price to the seller. The seller retains legal title to the property

until the final payment is made, at which time the buyer will receive a

deed to the land vesting fee title in the buyer.

Mortgage. Real estate security instrument which pledges land as

security for the performance of an obligation such as repayment of a

loan. For the purpose of this regulation the term ``mortgage'' includes

deed of trust and deed to secure debt. A real estate mortgage or deed

of trust form for the state in which the land to be taken as security

is available in any agency office, and will be used to secure a

mortgage to the agency.

National Office. The National Headquarters Office of FSA or RHS

depending on the loan program involved.

OGC. The Office of the General Counsel, United States Department of

Agriculture.

Program regulations. The agency regulations for the particular loan

program involved (e.g., subpart A of part 1944 of this chapter for

single family housing (SFH) loans).

Quitclaim deed. A transfer of the seller's interest in the title,

without warranties or covenants. This type of deed is used by the

agency to convey title to purchasers of inventory property.

RHS. The Rural Housing Service, an agency of the United States

Department of Agriculture, or its successor agency. RHS is the

successor agency to the Rural Housing and Community Development Service

(RHCDS) which was, in turn, the successor agency to the Farmers Home

Administration.

Seller. Individual or other entity which convey ownership in real

property to an applicant for an agency loan or to the agency itself.

Special warranty deed. A deed containing a covenant whereby the

grantor agrees to protect the grantee against any claims arising during

the grantor's period of ownership.

[[Page 11713]]

State Office. For FSA this term refers to the FSA State Office. For

RHS this term refers to the Rural Economic and Community Development

State Director.

Title clearance. Examination of a title and its exceptions to

assure the agency that the loan is legally secured and has the required

priority.

Title company. A company that may abstract title, act as an issuing

agent of title insurance for a title insurance company, act as a loan

closing agent, and perform other duties associated with real estate

title clearance and loan closing.

Title defects. Any exception or legal claim of ownership (through

deed, lien, judgment, or other recorded document), on behalf of a third

party, which would prevent the seller from conveying a marketable title

to the entire property.

Trust deed. A three party security instrument conveying title to

land as security for the performance of an obligation, such as the

repayment of a loan. For the purpose of this regulation a trust deed is

covered by the term ``mortgage.'' A trust deed is the same as a deed of

trust.

Voluntary conveyance. A method of liquidation by which title to

agency security is transferred by a borrower to the agency by deed in

lieu of foreclosure.

Warranty deed. A deed in which the grantor warrants that he or she

has the right to convey the property, the title is free from

encumbrances, and the grantor shall take further action necessary to

perfect or defend the title.

Sec. 1927.53 Costs of title clearance and closing of transactions.

The borrower or the seller, or both, in compliance with the terms

of the sales contract or option will be responsible for payment of all

costs of title clearance and closing of the transaction and will

arrange for payment before the transaction is closed. These costs will

include any costs of abstracts of title, land surveys, attorney's fees,

owner's and lender's policies of title insurance, obtaining curative

material, notary fees, documentary stamps, recording costs, tax

monitoring service, and other expenses necessary to complete the

transaction.

Sec. 1927.54 Requirements for closing agents.

(a) Form of title certification. State Offices are directed to

require title insurance for all loan closings unless the agency

determines that the use of title insurance is not available or is

economically not feasible for the type of loan involved or the area of

the state where the loan will be closed. If title insurance is used,

State Offices are authorized to require a closing protection letter

issued by an approved title insurance company to cover the closing

agent, if available. A closing protection letter need not be furnished

when the closing is conducted by the title insurance company.

(b) Approval of closing agent. An attorney or title company may act

as a closing agent and close agency real estate loans, provide

necessary title clearance, and perform such other duties as required in

this subpart. A closing agent will be responsible for closing agency

loans and disbursing both agency loan funds and funds provided by the

borrower in connection with the agency loan so as to obtain title and

security position as required by the agency. The closing agent must be

covered by a fidelity bond which will protect the agency unless a

closing protection letter is provided to the agency. The borrower will

select the approved closing agent. If title clearance is by an

attorney's opinion, the agency will approve the attorney who will

perform the closing in accordance with paragraph (c) of this section.

The attorney will be approved after submitting a certification

acceptable to the agency. If title certification is by means of a

policy of title insurance, the title company which will issue the

policy must have been approved in accordance with paragraph (d) of this

section. A closing agent's delay in providing services without

justification in connection with agency loans may be a basis for not

approving the closing agent in future cases.

(c) Approval of attorneys. Any attorney selected by an applicant,

who will be providing title clearance where the certificate of title

will be an attorney's opinion, must submit an agency form certifying to

professional liability insurance coverage. If the attorney is also the

closing agent, fidelity coverage for the attorney and any employee

having access to the funds must be provided. The agency will determine

the appropriate level of such insurance. Required insurance will, as a

minimum, cover the amount of the loan to be closed. The agency will

approve the form stipulating the bond coverage. The agency will approve

any attorney who is duly licensed to practice law in the state where

the real estate security is located and who complies with the bonding

and insurance requirements in this section. If the certification of

title will be by means of title insurance, any attorney or closing

agent designated as an approved attorney or closing agent by the

approved title insurance company which will issue the policy of title

insurance will be acceptable, and when covered by a closing protection

letter, will not be required to obtain professional liability insurance

or a fidelity bond. Each approved title insurance company may provide a

master list of their approved attorneys that are covered by its closing

protection letters to the State Office and, in such cases the attorneys

are approved for closings for that title insurance company. Delay in

providing closing services without justification may be a basis for not

approving the attorney in future cases.

(d) Approval of title companies. A title company acting as a

closing agent, or as an issuing agent for a title insurance company,

must be covered by a title insurance company closing protection letter

or submit an agency form certifying to fidelity coverage to cover all

employees having access to the loan funds. The agency will determine

the appropriate level of such coverage and will approve the form

stipulating the bond coverage. Delay in providing closing services

without justification may be a basis for not approving the company in

future cases. Each approved title insurance company may provide a

master list of their approved title companies that are covered by its

closing protection letter to the State Office and, in such cases the

title companies on the list are approved for closings for that title

insurance company.

(e) Approval of title insurance companies. The agency will approve

any title insurance company which issues policies of title insurance in

the State where the security property is located if:

(1) The form of the owner's and lender's policies of title

insurance (including required endorsements) to be used in closing

agency loans are acceptable to the agency, and will contain only

standard types of exceptions and exclusions approved in advance by the

agency;

(2) The title insurance company is licensed to do business in the

state (if a license is required); and

(3) The title insurance company is regulated by a State Insurance

Commission, or similar regulator, or if not, the title insurance

company submits copies of audited financial statements, or other

approved financial statements satisfactory to the agency, which show

that the company has the financial ability to cover losses arising out

of its activities as a title insurance company and under any closing

protection letters issued by the title insurance company.

[[Page 11714]]

(4) Delay in providing services without justification may be a

basis for not approving the company.

(f) [Reserved]

(g) Conflict of interest. A closing agent who has, or whose spouse,

children, or business associates have, a financial interest in the real

estate which will secure the agency debt shall not be involved in the

title clearance or loan closing process. Financial interest includes

having either an equity, creditor, or debtor interest in any

corporation, trust, or partnership with a financial interest in the

real estate which will secure the agency debt.

(h) Debarment or suspension. No attorney, title company, title

insurance company, or closing agent, currently debarred or suspended

from participating in Federal programs, may participate in any aspect

of the agency loan closing and title clearance process.

(i) Special provisions. Closing agents are responsible for having

current knowledge of the requirements of State law in connection with

loan closing and title clearance and should advise the agency of any

changes in State law which necessitate changes in the agency's State

mortgage forms and State Supplements.

(j) [Reserved]

Sec. 1927.55 Title clearance services.

(a) Responsibilities of closing agents. Services to be provided to

the agency and the borrower by a closing agent in connection with the

transaction vary depending on whether a title insurance policy or title

opinion is being furnished. The closing agent is expected to perform

these services without unnecessary delay.

(b) [Reserved]

(c) Ordering title services. Application for title examination or

insurance will be made by the borrower to a title company or attorney.

The lender's policy will be for at least the amount of the loan. The

United States of America will be named as the insured lender.

(d) Use of title opinion. If a title opinion will be issued, a

title examination will include searches of all relevant land title and

other records, so as to express an opinion as to the title of the

property and the steps necessary to obtain the appropriate title and

security position to issue a title opinion as required by this subpart.

The closing agent or approved attorney will determine:

(1) The legal description and all owners of the real property;

(2) Whether there are any exceptions affecting the property and

advise the approval official and borrower of the nature and effect of

outstanding interests or exceptions, prior sales of part of the

property, judgments, or interests to assist in determining which

exceptions must be corrected in order for the borrowers to obtain good

and marketable title of record in accordance with prevailing title

examination standards, and for the agency to obtain a valid lien of the

required priority;

(3) Whether there are outstanding Federal, State, or local tax

claims (including taxes which under State law may become a lien

superior to a previously attaching mortgage lien) or homeowner's

association assessment liens;

(4) Whether outstanding judgments of record, bankruptcy,

insolvency, divorce, or probate proceedings involving any part of the

property, whether already owned by the borrower, or to be acquired by

assumption or with loan funds, or involving the borrower or the seller

exist;

(5) If a water right is to be included in the security for the

loan, and if so, the full legal description of the water right;

(6) In addition to paragraph(d)(2) of this section, if wetlands

easements or other conservation easements have been placed on the

property;

(7) What measures are required for preparing, obtaining, or

approving curative material, conveyances, and security instruments, and

(8) That sufficient copies of these interests and exceptions are

provided as requested by the approval official.

(e) Use of title insurance. When title insurance is to be obtained,

the approval official will be furnished with a title insurance binder

disclosing any defects in, exceptions to, and encumbrances against, the

title, the conditions to be met to make the title insurable and in the

condition required by the agency, and the curative or other actions to

be taken before closing of the transaction. The binder must include a

commitment to issue a lender policy in an amount at least equal the

amount of the loan, except in instances where there may be an

outstanding owner's policy in favor of the borrower. Not withstanding

the provisions of this section, the instance of an assumption without a

subsequent loan, the existing policy may be continued if the coverage

meets or exceeds the assumption balance and the title company agrees in

writing to extend coverage in full force and effect.

(f) [Reserved]

Sec. 1927.56 Scheduling loan closing.

The agency, in coordination with the closing agent, will arrange a

loan closing and send loan closing instructions, on an agency form to

the closing agent when the agency determines that the exceptions shown

on the preliminary title opinion or title insurance binder will not

adversely affect the suitability, security value, or successful

operation of the property and all other agency conditions to closing

have been satisfied.

Sec. 1927.57 Preparation of closing documents.

(a) Preparation of deeds. The closing agent, unless prohibited by

law, will prepare, complete, or approve documents, including deeds,

necessary for title clearance and closing of the transaction and

provide the agency with the policy of title insurance or title opinion

providing the lien priority required by the agency and subject only to

exceptions approved by the agency. Agency forms will be used when

required by this part.

(1) [Reserved]

(2) [Reserved]

(b) Preparation of mortgages. The closing agent will insure that

all mortgages are properly prepared, completed, executed, and filed for

record. Where applicable, the mortgages should recite that it is a

purchase money mortgage. The following requirements will be observed in

preparing agency morgages:

(1)-(8) [Reserved]

(9) Alteration of mortgage form. An agency mortgage form may be

altered pursuant to a State Supplement having prior approval of the

National Office, or in a special case, to comply with the terms of loan

approval prescribed in accordance with program instructions. No other

alterations in the printed mortgage forms will be made without prior

approval of the National Office. Any changes made by deletion,

substitution, or addition (excluding filling in blanks) will be

initialed in the margin by all persons signing the mortgage.

(10) [Reserved]

(11) Mortgages on leasehold estates. When the agency security

interest is a leasehold estate, unless State law or State Supplement

otherwise provides, the real estate mortgage or deed of trust form,

available in any agency office, will be modified as follows:

(i) In the space provided on the mortgage for the description of

the real property security, the leasehold estate and the land covered

by the lease must be described. The following language must be used

unless modified by a State Supplement:

All of borrower's right, title, and interest in and to a

leasehold estate for an original term of ____ years, commencing on

______, 19 ____, created and established by and between ______ as

lessor and owner and ____ as

[[Page 11715]]

lessee, including any extensions and renewals thereof, a copy of

which lease was recorded or filed in book ____, page ____, as

instrument number ____, in the Office of the (e.g., County Clerk),

for the aforesaid county and State and covering the following real

property: ______.

(ii) Immediately preceding the covenant starting with the words

``should default,'' the following covenant will be added:

( ) Borrower covenants and agrees to pay when due all rents and

any and all other charges required by said lease, to comply with all

other requirements of said lease, and not to surrender or

relinquish, without the Government's prior written consent, any of

borrower's right, title, or interest in or to said leasehold estate

or under said lease while this mortgage remains of record.

(12) Mortgages on land purchase contract. When the agency security

interest is on a borrower's interest in a land purchase contract, OGC

will provide language used to modify agency forms.

(13) [Reserved]

(c) [Reserved]

(d) Preparation of protective instruments. The closing agent will

properly prepare, complete, and approve releases and curative documents

necessary for title clearance and closing, in recordable form and

record them if required.

(1) Prior lienholder's agreement. If any liens (other than agency

liens or tax liens to local governmental authorities) or security

agreements (hereafter called ``liens''), with priority over the agency

mortgage will remain against the real property securing the loan, the

lienholders must execute, in recordable form, agreements containing all

of the following provisions unless prior approval for different

provisions has been obtained from the National Office:

(i) The prior lienholder shall agree not to declare the lien in

default or accelerate the indebtedness secured by the prior lien for a

specific period of time after notice to the agency. The agreement must:

(A) Provide that the specified period of time will not commence

until the lienholder gives written notice of the borrower's default and

the prior lienholder's intention to accelerate the indebtedness to the

agency office servicing the loan,

(B) Include the address of the agency servicing office,

(C) Give the agency the option to cure any monetary default by

paying the amount of the borrower's delinquent payments to the prior

lienholder, or pay the obligation in full and have the lien assigned to

the agency, and

(D) Provide that the prior lienholder will not declare the lien in

default for any nonmonetary reason if the agency commences liquidation

proceedings against the property and thereafter acquires the property.

(ii) When the prior lien secures future advances, including the

lienholder's costs for borrower liquidation or bankruptcy, which under

State law have priority over the mortgage being taken (or an agency

mortgage already held), the prior lienholder shall agree not to make

advances for purposes other than taxes, insurance or payments on other

prior liens without written consent of the agency.

(iii) The prior lienholder shall consent to the agency making (or

transferring) the loan and taking (or retaining) the related mortgage

if the prior lien instrument prohibits a loan or mortgage (or transfer)

without the prior lienholder's consent.

(iv) The prior lienholder shall consent to the agency transferring

the property subject to the prior lien after the agency has obtained

title to the property either by foreclosure or voluntary conveyance if

the prior lien instrument prohibits such transfer without the prior

lienholder's consent.

(2) [Reserved]

(3) [Reserved]

(4) Agreement by holder of seller's interest under land purchase

contract. If the buyer's interest in the security property is that of a

buyer under a land purchase contract, it will be necessary for the

seller to execute, in recordable form, an agreement containing all of

the following provisions:

(i) The seller shall agree not to sell or voluntarily transfer the

seller's interest under the land purchase contract without the prior

written consent of the State Office.

(ii) The seller shall agree not to encumber or cause any liens to

be levied against the property.

(iii) The seller shall agree not to commence or take any action to

accelerate, forfeit, or foreclose the buyer's interest in the security

property until a specified period of time after notifying the State

Office of intent to do so. This period of time will be 90 days unless a

State Supplement provides otherwise. The agreement shall give the

agency the option to cure any monetary default by paying the amount of

the buyer's delinquent payments to the seller, or paying the seller in

full and having the contract assigned to the agency.

(iv) The seller shall consent to the agency making the loan and

taking a security interest in the borrower's interest under the land

purchase contract as security for the agency loan.

(v) The seller shall agree not to take any actions to foreclose or

forfeit the interest of the buyer under the land purchase contract

because the agency has acquired the buyer's interest under the land

purchase contract by foreclosure or voluntary conveyance, or because

the agency has subsequently sold or assigned the buyer's interest to a

third party who will assume the buyer's obligations under the land

purchase contract.

(vi) When the agency acquires a buyer's interest under a land

purchase contract by foreclosure or deed in lieu of foreclosure, the

agency will not be deemed to have assumed any of the buyer's

obligations under the contract, provided that the failure of the agency

to perform any such obligations while it holds the buyer's interest is

a ground to commence an action to terminate the land purchase contract.

(5) [Reserved]

(6) [Reserved]

(e) [Reserved]

1927.58 Closing the transaction.

The closing agent will cooperate with the approval official,

borrower, seller, and other necessary parties to arrange the time and

place of closing. The transaction may be closed when the agency

determines that the agency requirements for the loan have been

satisfied and the closing agent or approved attorney can issue or cause

to be issued a policy of title insurance or final title opinion as of

the date of closing showing title vested as required by the agency, the

lien of the agency's mortgage in the priority required by the agency,

and title to the mortgaged property subject only to those exceptions

approved in writing by the agency. The loan will be considered closed

when the mortgage is filed for record and the required lien is

obtained.

(a) Disbursement of loan funds. When the closing agent indicates

that the conditions necessary to close the loan have been met, loan

funds will be forwarded to the closing agent. Loan funds will not be

disbursed prior to filing of the mortgage for record; however, when

necessary, loan funds may be placed in escrow before the mortgage is

filed for record and disbursed after it is filed. No development funds

will be kept in escrow by the closing agent after loan closing, unless

approved by the agency. Loan funds for the payment of a lien may be

disbursed only upon the recording of a discharge, satisfaction, or

release of prior lien interests (or assignment where necessary to

protect the interests of the agency).

[[Page 11716]]

(b) Title examination and liens or claims against borrowers. If

there are exceptions or recorded items which have arisen since the

preliminary title opinion, the transaction will not be closed until

these entries have been cleared of record or approved by the agency.

The closing agent will advise the approval official of the nature of

such intervening instruments and the effect they may have on obtaining

a valid mortgage of the priority required or the title insurance policy

to be issued.

(c) Taxes and assessments. The closing agent will determine if all

taxes and assessments against the property which are due and payable

are paid at or before the time of loan closing. If the seller and the

borrower have agreed to prorate any taxes or assessments which are not

yet due and payable for the year in which the closing of the

transaction takes place, the seller's proportionate share of the taxes

and assessments will be deducted from the proceeds to be paid to seller

at closing and will be added to the amount required to be paid by

borrower at closing. Appropriate prorations as agreed upon between the

borrower and seller may also be made for taxes paid by the seller which

are applicable to a period after the closing date, and for common area

maintenance fees, prepaid rentals, insurance (unless the borrower is to

obtain a new policy of insurance), and growing crops.

(d) Affidavit regarding work of improvement.

(1) Execution by borrower. If required by State Supplement, the

closing agent will require that an affidavit regarding work of

improvement, provided by the agency, be completed and executed when a

loan is being made to a borrower who already owns the real estate to be

mortgaged. This affidavit will be executed by the borrower at closing.

(2) Execution by seller. If required by State Supplement, the

closing agent will require that an affidavit regarding work of

improvement, provided by the agency, be completed and executed

(including acknowledgment) by the seller when the agency is making a

loan to a borrower to enable the borrower to acquire the property

(including transfers). This affidavit will be executed by the seller at

closing.

(3) Legal insufficiency of affidavit form. If the agency affidavit

regarding work of improvement is not legally sufficient in a particular

State, a State form approved by OGC will be used. A similar form that

may be required by a title insurance company may be substituted for the

agency form.

(4) Recording. The affidavit will not be recorded unless the

closing agent deems it necessary and State law permits.

(5) Delay in closing. The loan will not be closed if, at the loan

closing, the seller (in a sale transaction) or the borrower (in a

nonpurchase money loan situation) indicates that construction, repair,

or remodeling has been commenced or completed on the property, or

related materials or services have been delivered to or performed on

the property within the time limit specified in the affidavit, unless a

State Supplement provides otherwise. The closing agent will notify the

approval official, who will determine if the work of improvement could

result in a lien prior to the agency lien. The State Office will, with

the advice and concurrence of OGC, provide in a State Supplement the

period of time to be used in completing the affidavit.

(e) [Reserved]

(f) [Reserved]

(g) Return of loan documents to approval official after loan

closing. Within 1 day after loan closing, the closing agent will return

completed and executed copies of the loan closing instructions, the

executed original promissory note, and all other documents required for

loan closing (except the mortgage), to the approval official. If the

recorded mortgage is customarily returned to the borrower or closing

agent after recording, then it must be forwarded to the approval

official immediately.

(h) Final title opinion or title insurance policy. As soon as

possible after the transaction has been closed.

(1) Final title opinion. The attorney will issue a final title

opinion to the agency and the borrower on a form provided by the

agency. Issuance of the final title opinion should not be held up

pending the return of recorded instruments. If it is not possible for

the final title opinion to show the book and page of recording of the

agency security instrument, the words ``and is recorded'' in the final

title opinion form provided by the agency office, may be deleted and

the blank space completed to show the filing office and the filing

instrument number, if available. Attached to the final title opinion

will be required documents then available, including any which the

approval official has furnished to the attorney which were not

previously returned. The attorney will ensure that all recorded

instruments are forwarded or delivered to the proper parties after

recording. The certification of title will be forwarded for a voluntary

conveyance.

(2) Title insurance policy. The closing agent will send or deliver

the title insurance policy, with the United States listed as mortgage

holder, to the approval official. The policy will be subject only to

standard exceptions and those outstanding encumbrances, and exceptions,

approved by the approval official. If an owner's policy of title

insurance is requested, the closing agent will send or deliver it to

the borrower. The closing agent will ensure that all recorded

instruments are delivered or sent to the proper parties after

recording.

(3) [Reserved]

(i) Other services of the closing agent.

(1) The closing agent will assist the approval official in

preparing, completing, obtaining execution and acknowledgment, and

recording the required documents when necessary. The closing agent will

keep the approval official advised as to the progress of title

clearance and preparation of material for closing the transaction.

(2) The closing agent will provide services for deeds in lieu of

foreclosure as set forth in Sec. 1927.62 of this subpart, and

Sec. 1955.10 of subpart A of part 1955 of this chapter.

Sec. 1927.59 Subsequent loans and transfers with assumptions.

Title services and closing for subsequent loans to an existing

borrower will be done in accordance with previous instructions in this

subpart, except that:

(a) Loans closed using title insurance or title opinions.

(1) Title insurance or title opinions will be obtained unless:

(i) The cost of title services is excessive in relationship to the

size of the loan,

(ii) The agency currently has a first mortgage security interest,

(iii) The applicant has sufficient income to service the additional

loan,

(iv) The borrower is current on the existing agency loan, and

(v) The best mortgage obtainable adequately protects the agency

security interests.

(2) Title insurance or a final title opinion will not be obtained

for a subsequent Section 504 loan where the previous Section 504 loan

was unsecured or secured for less than $7,500 and the outstanding debt

amount plus the new loan is less than $7,500.

(3) Loans closed using a new lender title insurance policy:

(i) Will cover the entire real property which is to secure the

loan, including the real property already owned and any additional real

property being acquired by the borrower with the loan proceeds.

(ii) Will cover the entire amount of any subsequent loan plus the

amount of any existing loan being refinanced (if

[[Page 11717]]

the existing loan is not being refinanced, the new lender policy will

insure only the amount of the subsequent loan).

(b) Title services required in connection with assumptions. These

regulations are contained in part 1965, subparts A, B, and C, of this

chapter as appropriate for the loan type.

Secs. 1927.60-1927.99 [Reserved]

Sec. 1927.100 OMB control number.

The reporting requirements contained in this regulation have been

approved by the Office of Management and Budget and have been assigned

OMB control number 0575-0147. Public reporting burden for this

collection of information is estimated to vary from 5 minutes to 1.5

hours per response, with an average of .38 hours per response,

including time for reviewing instructions, searching existing data

sources, gathering and maintaining the data needed, and completing and

reviewing the collection of information. Send comments regarding this

burden estimate or any other aspect of this collection of information,

including suggestions for reducing this burden, to Department of

Agriculture, Clearance Officer, OIRM, Ag Box 7630, Washington, D.C.

20250; and to the Office of Management and Budget, Paperwork Reduction

Project (OMB# 0575-0147), Washington, D.C. 20503. You are not required

to respond to the collection of information unless it displays a

currently valid OMB control number.

Dated: February 25, 1996.

Jill Long Thompson,

Under Secretary, Rural Economic and Community Development.

Dated: February 28, 1996.

Eugene Moos,

Under Secretary, Farm and Foreign Agriculture Services.

[FR Doc. 96-6698 Filed 3-21-96; 8:45 am]

BILLING CODE 3410-07-U