Does the Underwriter Cover the Gap?
The Property Professor Explains It All for You
Underwriting Counsel Alan McCall, aka the Property Professor, enjoys answering his students’ questions that require clarity and detailed expertise. One nervous pupil approached the professor with an issue that truly perturbed him. It involved an IRS lien for $500,000 found recorded in the so-called “gap.” The student asked, wide-eyed, “Does my underwriter cover the gap? Why are they asking me all these questions?” The poor thing is still in the corner, trembling, with a cold cloth on his head.
Can Anyone See My Gap?
Well, not to worry, dear scholar. The old prof says there are in fact three kinds of gaps that can occur during underwriting. Let him explain in his own words:
There are at least three gaps (not including the one between my ears):
- The gap between title-check downs from the previous one and the one before closing.
- The one in the recorders’ offices between the filing of documents and their accessibility in the indexes; and
- The gap between closing and recording the documents.
While there is interplay between all three, there isn’t much that the closer can control with #2 above. If this gap is significant, it should be taken into consideration when deciding whether to disburse at the table. For instance, if the seller is in trouble, judgments against him or her are starting to appear or there is a real possibility of a bankruptcy filing, it may be a good idea to file the documents, check the title and then disburse once the all-clear is given. This narrows or eliminates the risk that something could be filed “in the gap.”
The length of time between the last check-down of title and the closing should also be narrowed as much as possible to eliminate the filing of lawsuits, judgments, liens, mortgages and other matters that could be discovered in a complete examination of title up to the day of closing subject to the recorders’ gap in item 2 above. It is recommended that the last check down occur the day of, or day before, closing, if possible. A title affidavit at the time of closing should include a statement that the seller or borrower has suffered no transfer, lien or encumbrance to be filed against the title other than what appears in the title commitment.
Narrowing the gap in item 1 is only half the job of the title closer. Item 2 is the other half. The documents should be recorded timely in accordance with the instructions of all the parties. The agent’s contract requires him to follow all the procedures of the title insurer he or she represents in the closing. In our case, which means delivering the documents in the ordinary coursed by over-night carrier, courier or other means as soon after the closing as reasonable, i.e., by the next business day. There may be extraordinary circumstances where walking the documents to the courthouse may be required the day of closing to insure over a special risk that may be evident. The agent should discuss this with his underwriter to determine if special handling is required.
All the above are “gaps” that must be addressed satisfactorily by the closer, underwriter and agent. This will avoid the misunderstanding that sometimes occurs when the popular notion, that the underwriter “takes the gap,” is repeated and relied upon. Yes, we are willing to take on the recorders’ gap in item 2 above, but not in every case. The other gaps, not so much. The closer, agent or office plays a central role in narrowing those gaps as much as possible. Moreover, in special cases, the underwriter may require that the gap described in number 3 above, is eliminated.
In this case, I am sure that the IRS will be friendly and helpful to deal with. Good luck.
Reach out to your local Stewart representative for more information. Visit virtualunderwriter.com for up-to-date information on underwriting. If you are a Stewart Trusted Provider™, feel free to contact your Stewart underwriting counsel with questions.
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