ALTA Risk Management Flashcards

What is 'mechanic's lien' risk and how do title companies address it?

Answer: Risk that unpaid contractors or suppliers file liens after closing; addressed by requiring lien waivers and affidavits at closing

Mechanic's lien risk arises when contractors or suppliers who performed work on the property file liens after closing; title companies require lien waivers and no-lien affidavits to mitigate this risk.

Under RESPA, which disclosure must a settlement agent provide to borrowers to protect against affiliated business arrangements?

Answer: An Affiliated Business Arrangement (AfBA) disclosure

RESPA requires that when a settlement service provider refers business to an affiliate, the referring party must provide an Affiliated Business Arrangement disclosure so the consumer can make an informed choice.

What is the purpose of a 'closing protection letter' (CPL) in risk management?

Answer: It provides the lender protection against fraud or misappropriation of funds by the closing agent

A closing protection letter (CPL) is issued by the title underwriter to protect the lender against loss due to the closing agent's fraud, misappropriation of funds, or failure to follow the lender's written closing instructions.

Why should title companies conduct pre-closing fraud screening on transaction parties?

Answer: To identify red flags such as identity fraud, straw buyers, or suspicious patterns that could indicate mortgage fraud or title scams

Pre-closing fraud screening helps title companies detect red flags like identity theft, straw buyers, and suspicious transaction patterns before closing to prevent fraud losses.

What is the significance of the 'chain of title' in assessing title risk?

Answer: It is the chronological sequence of ownership transfers and encumbrances that establishes the history of a property's title and reveals potential defects

The chain of title traces all recorded transfers and encumbrances on a property over time; gaps, forgeries, or defective conveyances in the chain represent title risks that must be examined and underwritten.

How does title insurance differ from other forms of insurance in its approach to risk?

Answer: Title insurance is a one-time premium paid at closing that covers past events and pre-existing defects discovered after policy issuance

Unlike casualty insurance that protects against future events, title insurance is a one-time premium that protects against losses from past defects, errors, or encumbrances that exist at the time of policy issuance but are discovered later.