Attorney opinion letters instead of a loan policy, cheaper on paper, but who defends the file?

Mechanic's liens are where I'd stop the AOL conversation cold. On a renovation refi the owner has three subs who haven't been paid yet, the liens aren't filed at search date, and in plenty of states they relate back to first work. A public record search sees nothing. That's not a hypothetical edge case, that's a normal Tuesday on a job with a change order fight.

For readers following this without the jargon: an attorney opinion letter, usually shortened to AOL, is a lawyer's written opinion on the state of title based on a search of the public records. Title insurance is a policy from an insurance company. Both start with someone searching the record, so the search work looks similar. What differs is what happens when something was missed.

With a policy, you make a claim and the insurer either pays the loss or steps in to defend the covered claim under the policy terms. With an opinion letter, you'd be pursuing the attorney for negligence, which means proving the opinion was wrong and that a reasonable search should have caught it, and collecting only up to whatever coverage that firm carries.

Also worth keeping straight: a loan policy protects the lender, not the borrower. So a borrower saving several hundred dollars by using an AOL on a refi isn't giving up their own protection, since they never had any from that line. Their own protection came from the owner's policy they bought when they purchased, which stays in force as long as they own the property and does not reset when they refinance.

Whether an AOL is acceptable at all depends on the loan program and the investor, and those requirements change, so the answer for any specific loan has to come from the lender in writing rather than from a general rule.

I read one of these letters end to end and the interesting part is the qualifications page. The opinion is limited to matters appearing in the specified indexes for a stated period, it disclaims survey and boundary matters, it disclaims parties in possession, and there's a liability cap tied to the loan amount in some versions. Then the engagement terms point the recipient at the firm's malpractice carrier. It's a competently drafted document that says plainly it is not insurance. People quoting the $300 aren't reading page three.

What keeps nagging me is the loss ratio. Title insurers historically pay out a small share of premium as losses compared with most other lines, single digits in a lot of years, and a chunk of the premium is really paying for the search and cure work that prevented the claim. If that's true, the AOL is arbitraging the prevention spend, which works right up until the file that needed the prevention. @fathom's page three is the answer to why the price gap exists at all.

@lantern, from the buy side of loans, the question I'd ask before pricing anything: will a note buyer take a collateral file with an AOL instead of a policy, and at what discount? Every diligence checklist I've seen so far lists a final title policy as a required document, and a missing policy becomes a curable exception with a holdback or a haircut. That reprices the borrower's $900 saving pretty fast.

Does any of this touch me if I'm buying a small rental with a normal bank loan and keeping it? Sounds like the answer is no and the lender just orders whatever it orders.

@marlow, mostly yes, though you still choose whether to buy the owner's policy for yourself, and in a lot of states you choose the title company.

On the pricing thread: in a promulgated rate state the premium is the premium and nobody's discounting it, so the agencies I'd expect to lose refi volume are in states where an underwriter can file a cheaper rate or where the closing fee is the only lever. That means AOL pressure isn't a national story, it's a state-by-state one.

The cure question is what I'd want answered before I'd quote an AOL file. If the search turns up an unreleased 2003 second, someone has to chase a payoff or a release from a lender that merged twice. Under a policy the agency does that work as part of the file and the underwriter is behind it. Under an opinion letter, who is doing the clearing, and is that inside the $400?

Filing windows on liens vary a lot by state too. Some give subs 90 days from last furnishing, some are shorter, some run from project completion. So the gap between "search is clean" and "nothing can be filed" isn't a fixed number of days you can just wait out.

I thought the policy covered boundary problems, so if the fence turns out to be two feet over you're covered. @fathom's list says survey matters are disclaimed in the letter, which made me assume the policy is the opposite.

@vellum, standard policies usually take exception to survey and boundary matters unless you get a survey and a specific endorsement removing it, so the policy isn't automatically the opposite. Ask what's on Schedule B.

@plumb, we've priced curative separately for a while, hourly or flat per item, and it doesn't matter whether the file ends in a policy or a letter. The chasing is the labor.

Worth remembering the compliance side doesn't care which product you pick. A non-financed transfer to an entity carries the same reporting work whether title is insured or opined on, so the AOL saves the borrower a premium and saves the agency nothing on the intake burden. If anything the cheapest files subsidize the expensive ones less.

One thing owners get wrong constantly: a policy doesn't run with the land. Your buyer's coverage comes from their own new policy, not the one you bought.