State Statute Requiring a Certficate of Title or Title Insurance on Real Estate Loans

You asked whether there is a Connecticut statute requiring all loans secured by real estate to contain a certificate of title or other suitable form of title review issued by a suitable person or have a satisfactory policy of title insurance in force. In effect, you want to know whether a title search is required in Connecticut for every second mortgage. You have been informed that an insurance company has developed an insurance endorsement called The Home Equity Protector, which would insure the bank if there was a blemish on a title in a second mortgage. You have been told that this policy nevertheless does not qualify as title insurance.

The Office of Legislative Research is not authorized to give legal opinions and the following should not be considered one.

Connecticut banking statutes state that, for state-chartered banks' first and second mortgages, “A satisfactory certificate of title or other suitable form of title review issued by a suitable person approved by such Connecticut bank, or a satisfactory policy of title insurance, shall be filed with the lending bank until the loan is paid or until the loan is sold” (CGS § 36a-261). It appears that the statute exempts loans that the bank sells promptly after origination from this and other statutory requirements by excluding them from the definition of “mortgage loan.” But “Fannie Mae” and “Freddie Mac,” quasi-government agencies which are among the biggest purchasers of first mortgage loans from lenders, apparently do not buy first mortgage loans without title insurance.

Banks do not usually sell the second mortgages (home equity loans) they make and they often do not require title insurance on them. They also sometimes do not do a full title search on them, but only a “title report,” which provides more abbreviated information that goes back only to the point when the borrower entered into his first mortgage. The bank's interest here is to make certain that it is next in line in priority after the first mortgage, for which a full title search would have been done. This appears to be allowed under the statute's reference to “other suitable form of title review.” Both state and federal law requires banks to “adopt and implement a real estate lending policy which reflects, in accordance with safe and sound banking principles, consideration of acceptable standards for title review and title insurance.”

State-chartered credit unions have a similar though not identical provision that says, “A certificate of title issued by a person approved by the Connecticut credit union, or a policy of title insurance, shall be filed with the lending Connecticut credit union until the loan is paid” (CGS § 36a-442). We found no similar requirements for nonbank licensed first and second mortgage lenders. Federally chartered banks are subject to federal rules.

It is possible that the insurance policy you describe may not qualify as title insurance under the section of banking law above. Under Connecticut insurance law, a corporation has to be licensed specifically to do title insurance business, and it cannot engage in any other type of insurance business (CGS §§ 38a-45, 38a-403, 38a-404). In addition, a title insurance policy cannot be issued without a reasonable title search as its basis. In the past several years, the Insurance Department has prevented two companies (Fidelity and Deposit Company of Maryland and Norwest Corporation) that did not meet these requirements from selling products which it determined would have constituted “title insurance.”

The insurance statutes define a title insurance policy as “a contract insuring or indemnifying against loss or damage arising from (A) defects in or liens or encumbrances on the insured title, (B) unmarketability of the insured title or (C) invalidity or unenforceability of liens or encumbrances on the stated property, provided any such defect, unmarketability or invalidity existed on or before the policy date. Title insurance policy does not include a preliminary report, binder, commitment, or abstract” (CGS § 38a-402 (15)). The statutes define “title insurer” as “a company organized under laws of this state for the purpose of transacting as insurer the business of title insurance and any foreign or alien title insurer engaged in this state in the business of title insurance as insurer” (CGS § 38a-402 (16)).

CGS § 38a-407 states that “no title insurance policy may be written unless and until the title insurer or its title agent has caused to be conducted a reasonable search and examination of the title and has caused to be made a determination of insurability of title in accordance with sound underwriting practices. Evidence of the examination of title and determination of insurability shall be preserved and retained in the files of the title insurer or its title agent for a period of not less than 10 years after the title insurance policy has been issued… . In causing to be conducted a reasonable search and examination of title and determination of insurability of title, a title insurer or its agent may rely upon a policy of title insurance previously issued by a title insurer authorized to do business in this state when such policy was issued.”

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