NOTE: For in-depth information on this topic, attend our online seminar October 18, 2012, and earn 1.5 hours of CLE: Construction Liens and Disbursing in Wisconsin 

WISCONSIN UNDERWRITING BULLETIN

Title insurance companies and title agencies enter into construction escrows when money is being lent to build a home or other structure. Due to the possibility that this process will result in a construction lien being filed, the lender is unwilling to trust the borrower with the mortgage funds prior to or during construction. Instead, the lender insists that their funds be disbursed by the escrow department of a title insurance company or agent. This construction disbursement process allows the lender to deposit the funds with the escrow agent or escrowee in installments for disbursement to the contractors; in return, the escrowee insures that the lender will be protected from construction liens. The escrowee, the owner, and the lender set forth the specific terms of this arrangement in the Construction Loan Escrow Disbursement Agreement. The escrow agent does not insure that the building will be completed, that it will conform to the plans and specifications, or that sufficient funds will be available to complete the work.

In Wisconsin, the ability to insure lenders against the construction lien risk is enhanced by the provisions of Wis Stat Sec 706.11. This statute provides that most institutional lenders (“priority lenders”) do not run the risk of having construction liens prime their loan unless the actual construction lien is filed prior to the recording of their mortgage. This is vastly different than the significant risk to owners and non-priority lenders. For the owners and non-priority lenders, a construction lien is effective as of the date work commenced as opposed to when the lien is actually filed. The lien can be filed up to six months after the last day of work, yet the lien has an effective date of the date work commenced. Simply put, the construction has a “retroactive” effective date. The construction lien exposure for owners and non-priority lenders is very great. The risk for priority lenders is very manageable.

To determine whether or not a particular lender enjoys statutory priority, refer to Wis. Stats. Sec. 706.11. Here are some examples of priority lenders (not a complete list):

1. Banks chartered by State of Wisconsin or national banks;
2. Credit unions incorporated in Wisconsin or chartered by U.S.;
3. Finance companies licensed pursuant to Sec 138.09;
4. Insurance companies licensed to do business in Wisconsin;
5. Mortgage bankers registered with the State of Wisconsin;
6. United States or State of Wisconsin agencies, such as the Wisconsin Housing and Economic Development Authority (WHEDA).

 In addition to the mortgage being in favor of a priority lender, the mortgage also must clearly state on the first page that it is a construction mortgage.

If you are in doubt as to whether the lender enjoys statutory priority, or whether the mortgage otherwise complies with 706.11 so as to enjoy this status, please call the ATG Wisconsin office for assistance.

This Underwriting Bulletin will explain four new forms that have been approved for use in Wisconsin:

• Construction Loan Escrow Disbursement Agreement – Wisconsin (ATG Form 4024-WI);
• Disbursement Endorsement - Wisconsin (ALTA 33-06) (ATG Form 2129-06-WI);
• Owner’s Payment Authorization – Wisconsin (ATG Form 4114-WI); and
• Final Waiver of Lien and Contractor’s Affidavit (ATG Form 3005).

We recommend that you use ATG forms whenever possible, but we are aware that our customers may insist that we use their forms instead. If you are being requested to use another form, please forward that form to the ATG Wisconsin office and we will review it to determine whether it is acceptable. If the form is acceptable “in substance,” we will try to approve it or make suggested amendments or additions.

With those thoughts in mind, here is a very brief review of required procedures and the related documents:

1) CONSTRUCTION LOAN ESCROW DISBURSEMENT AGREEMENT – WISCONSIN

The Construction Loan Escrow Disbursement Agreement – Wisconsin (ATG Form 4024-WI) is the cornerstone of the process and the “roadmap” of the procedures to be followed. DISBURSING OF FUNDS CANNOT BE DONE WITHOUT A SIGNED DISBURSMENT AGREEMENT. The agreement sets forth all the rights, duties, and responsibilities of the parties. The terms and conditions are set forth in numbered paragraphs in the form, so we will not repeat them at length here. However, at a minimum, a disbursement agreement must cover the following subjects:

1. Description of the extent of lien coverage;
2. Inspections;
3. Statement of liability limitations (e.g., escrowee does not guarantee completion or quality of work); and
4. Escrow disbursement fees and expenses.

2) CONTRACTOR’S COST BREAKDOWN

To properly manage the disbursement of funds, keep an organized list or spreadsheet of work to be performed and names of contractors and subcontractors who will be performing that work and/or supplying materials and expecting payment. These contractors will need to supply lien waivers. Use the General Contractor’s Sworn Statement (ATG Form 3018-B) for this purpose. We will consider other forms as long as they provide the following:

1. A sworn statement from the general contractor that it is a true and correct list of all those subcontractors and suppliers who will be involved in the project (and from whom lien waivers will be required) ; and
2. Appropriate spaces for the escrowee to post disbursements to the various contractors in order to “keep track” of funds disbursed.

3) DRAW REQUEST

The draw request is the document the contractor provides to request payment for work performed. It must be sworn to as correct and contain the following: all subcontractors and suppliers who are to be paid and what amounts each subcontractor and supplier is to be paid.

4) OWNER’S PAYMENT AUTHORIZATION

The Owner’s Payment Authorization – Wisconsin (ATG Form 4114-WI) is the document that the owner signs approving the draw request. The amount of the payment authorization must match the amount of the draw request. Do not disburse unless and until any differences are reconciled. When there is disagreement on this subject (or on any other subject) it is always prudent to call the lender to advise them of the problem. It is the lender’s funds we are holding and it is always a good idea to keep them in the loop and to have them intervene if necessary.

5) WAIVER OF LIEN TO DATE AND CONTRACTOR’S AFFIDAVIT

The Waiver of Lien to Date and Contractor’s Affidavit (ATG Form 3019) is the document by which contractors and subcontractors agree to waive the rights (Under Wis. Stats. Chap 779) they have to file construction liens against the real estate we are insuring. Waivers must be collected from all parties disclosed on the draw request. They must be originals (i.e., no faxed copies) and they must contain the project owner’s name, address of the project, and the type of work performed or material supplied. During the course of the project, the waivers can state “partial to date” or can contain the amount of the current draw. Before the final draw can be made, the waivers must be final and complete. Waivers can be collected on a “one-draw delay” (i.e., funds for the second draw disbursed upon receipt of lien waivers for the first) basis only after approval by the ATG Wisconsin Office.

6) FINAL WAIVER OF LIEN AND CONTRACTOR’S AFFIDAVIT (ATG Form 3005)

The Final Waiver of Lien and Contractor’s Affidavit (ATG Form 3005) is a sworn statement that discloses the date that the project was completed and a statement that there are no lienable claims remaining.

7) REQUIREMENT AND EXCEPTION TO BE ADDED TO COMMITMENT

When ATG is handling the Construction Escrow disbursements and insuring the Construction Mortgage, we should also include the Pending Disbursement Exception (which indicates that the amounts of policy increases as disbursements are made) and Construction Mortgage Requirement (which indicates the mortgage must recite that it is a Construction Mortgage on the first page). The language for both is listed below, and is available in ATG REsource.

PENDING DISBURSEMENT/ CONSTRUCTION MORTGAGE  EXCEPTION

Pending disbursement of the full proceeds of the loan secured by the insured mortgage  the policy,  when issued,  insures only to the extent of the amount actually disbursed but increases as each disbursement is made, up to the face amount of the policy. At the time of each disbursement of the proceeds of the loan the title must be updated to such time for possible construction liens, and any other title defects between the date hereof and the date of each disbursement.

CONSTRUCTION MORTGAGE REQUIREMENT

If the terms of the loan permit the borrower to use any of the loan funds for construction, the mortgage must recite on its first page that it is a construction mortgage pursuant to Wis. Stats. Sec. 706.11 (1m).

Please feel free to email jmarlin@atgf.com or call 262.347.0102 with questions about handling Wisconsin construction escrows, our procedures, or our forms. Thank you.