No Creditors' Rights Endorsement - Alternatives


Now that the American Land Title Association ("ALTA") has withdrawn the ALTA Form 21-06 Creditor's Rights Endorsement, what steps can a lender take to protect itself?

To recap, the Creditors' Rights Endorsement provided protection against loss or damage sustained by the lender in the event that the lender's mortgage was set aside due to a fraudulent conveyance or preference under the U.S. Bankruptcy Code, state insolvency statutes or other creditor's rights laws.

In a routine re-financing transaction or a purchase money loan, where (i) the loan proceeds are provided by a third party lender in an arm's length transaction and (ii) the proceeds are used to pay off a prior loan or purchase the real estate from an unrelated seller, the risk that the lender's mortgage interest would be impaired due to a creditor's rights claim is low. In general, a lender that gives reasonably equivalent value for its interest, without knowledge that other creditors were being hindered or delayed will have a valid defense against a creditor's rights claim.

Under different circumstances, however, a lender faces an increased risk.

Please see full article below for more information.

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