When title insurance commitments arrive with exceptions that threaten loan security, private lenders face a critical decision point: how aggressively should you push for removal? The answer depends on understanding what title companies can and cannot do—and knowing when to accept reasonable risk versus demanding clear title.
Understanding Title Insurance Exceptions
Title insurance commitments contain Schedule B exceptions that identify issues the title company will not insure against. These exceptions fall into two distinct categories:
Standard Exceptions appear on virtually every commitment and include items like unrecorded easements, rights of parties in possession, and certain tax liens. These are boilerplate provisions that title companies use to limit their exposure.
Property-Specific Exceptions identify actual clouds on title discovered during the title search, such as recorded easements, CC&Rs, unpaid judgments, or existing liens. These require careful analysis to determine their impact on your security interest.
The critical distinction: standard exceptions reflect what the title company won’t cover. Property-specific exceptions reflect actual encumbrances that may affect your lien position.
When Title Companies Cannot Remove Exceptions
Title companies operate under strict underwriting guidelines that limit their ability to remove certain exceptions. Understanding these limitations helps you determine which battles are worth fighting.
Recorded EncumbrancesIf an easement, lien, or restriction appears in the county recorder’s records, the title company cannot simply delete it from the commitment. The recorded document creates a real interest that affects the property regardless of the title policy.
Matters Not of Public RecordTitle companies examine public records but cannot insure against rights not appearing in those records. Unrecorded leases, adverse possession claims, or mechanic’s lien rights for recent work may exist without being discoverable through record searches.
Survey-Related IssuesWhen surveys reveal encroachments, boundary disputes, or improvements crossing property lines, title companies require resolution before removing exceptions. They will not simply ignore what the survey disclosed.
Negotiation Strategies That Work
Effective exception negotiation requires understanding what title companies need to remove items from Schedule B.
Request Specific Underwriting EvidenceRather than simply asking for removal, provide evidence that addresses the underwriter’s concerns. For recorded liens, obtain releases or subordination agreements. For easements, secure documentation showing they were released or relocated.
Seek Affirmative Coverage InsteadWhen exceptions cannot be removed, negotiate for affirmative coverage that insures over the exception. This provides the same protection as removal while allowing the title company to acknowledge the encumbrance exists.
Prioritize Exceptions by Risk LevelFocus your negotiation efforts on exceptions that materially affect loan security. Not every exception justifies delaying closing.
When to Accept Exceptions
Some exceptions create minimal risk and should be accepted to avoid delays and maintain borrower relationships.
Utility Easements in Standard LocationsUnderground utility easements along property boundaries or in standard access corridors rarely affect single-family residential or commercial property value. Unless your collateral analysis identified specific concerns, these exceptions can typically be accepted.
Covenants, Conditions, and Restrictions (CC&Rs)Subdivision CC&Rs appear as exceptions on most properties in planned developments. Review them for provisions that could affect your foreclosure rights or property marketability, but standard restrictions on architectural design, landscaping, or use generally create minimal risk.
Water Rights and Mineral Rights ReservationsIn many Western states, water rights are separate from land ownership. Mineral rights reservations are common in states with oil, gas, or mining history. These exceptions are often unavoidable and create minimal risk unless your borrower’s business depends on these specific rights.
Red Flag Exceptions Requiring Resolution
Certain exceptions should never be accepted without resolution or substantial rate adjustments to compensate for increased risk.
Prior Liens in Any PositionIf another lender holds a deed of trust on the property, you must verify your lien position. First position lenders should require payoff of all prior liens at closing. Subordinate lenders need explicit subordination agreements confirming lien priority.
Mechanic’s Lien Rights or Pending ClaimsRecent construction work creates mechanic’s lien rights that may not yet appear of record. Require lien releases from all contractors or hold back funds to cover potential claims.
Outstanding Tax ObligationsProperty tax liens and IRS tax liens take priority over most private liens regardless of recording date. These must be paid or subordinated before closing.
Pending Litigation Affecting TitleLis pendens notices, bankruptcy proceedings, or quiet title actions create uncertainty about ownership. These should be resolved before funding.
Practical Solutions for Common Exception Problems
The Survey Shows EncroachmentsProblem: The survey reveals the garage extends 18 inches onto the neighbor’s property.
– Obtain an encroachment agreement from the neighbor
– Negotiate affirmative coverage from the title company
– Require increased equity cushion to offset potential removal costs
– Purchase additional insurance for encroachment risk
Prior Lien Shows Satisfied But Not ReleasedProblem: Tax records show a prior deed of trust was paid in full 10 years ago, but no reconveyance was recorded.
– Contact the prior lender for a late-recorded reconveyance
– Obtain an indemnity from the borrower
– Use title company’s release tracking service
– Accept exception if prior lien is substantially aged and borrower has clear payment evidence
CC&Rs Contain Right of First RefusalProblem: Subdivision restrictions give the homeowner’s association first right to purchase before any sale.
– Obtain waiver from the HOA for foreclosure sales
– Negotiate affirmative coverage insuring the right will not affect foreclosure
– Review state law regarding HOA rights in foreclosure
– Factor potential delays into underwriting
Documentation and Communication Best Practices
Request Detailed Exception ExplanationsDon’t accept vague exceptions. Ask the title company to provide:
– Document recording information for each exception
– Copies of recorded instruments creating the exception
– Underwriting reason why the exception cannot be removed
– Specific evidence that would allow removal
Create Exception Review ChecklistsDevelop standardized procedures for reviewing commitments:
– Categorize exceptions by type and risk level
– Assign responsibility for investigating each exception
– Set deadlines for resolution before closing
– Document decisions to accept exceptions with business justification
Maintain Exception Resolution DatabaseTrack how similar exceptions were handled on previous transactions. This creates institutional knowledge about which title companies are flexible on specific issues and what evidence successfully resolved similar problems.
Working Effectively With Title Companies
Title company relationships matter. Underwriters who trust your judgment and understand your business are more likely to work creatively within their guidelines.
Build Relationships With Decision MakersIdentify the underwriters and officers who can approve affirmative coverage or exception deletions. Present complex issues directly to decision makers rather than working only through sales representatives.
Present Complete Resolution PackagesWhen requesting exception removal, provide all supporting documentation in a single, organized submission. Make the underwriter’s job easier by anticipating their questions.
Respect Underwriting GuidelinesUnderstand that title companies operate within regulatory and reinsurance constraints. Unreasonable demands damage relationships without producing results.
Risk-Based Decision Framework
Not every exception requires resolution before closing. Apply this framework:
The goal is protecting your security interest while closing loans efficiently. Perfect title is rare—but adequate title protection is achievable through informed negotiation and strategic risk acceptance.
This article provides general information about title insurance exception handling for private lenders. For specific title issues or complex exception negotiations, consult with experienced real estate counsel. Geraci LLP provides comprehensive legal guidance on title insurance matters and loan documentation for private lenders nationwide.
