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Attorney Opinion Letters: The Risks and Realities in Homeownership Finance

Lenders claim that AOLs are an acceptable alternative to title insurance polices to make homeownership more accessible through Equitable Housing Finance Plans. We disagree.

Some lenders have opted to accept Attorney Opinion Letters. Fannie Mae, Freddie Mac and other lenders claim that AOLs are an acceptable alternative to title insurance policies to make homeownership more accessible through Equitable Housing Finance Plans. We disagree emphatically with this decision because of the horrendous risks associated with AOLs. 

As pointed out recently by the American Land Title Association (ALTA), title insurance protections replaced Attorney Opinion Letters and other alternative products historically because these products were considered too risky. Read on to learn more.

What Are Attorney Opinion Letters?

A lawyer approved by the lender to offer their insight writes a legal opinion in letter format, also known as a title opinion letter or opinion of title, to help determine title and other factors related to property ownership. Supporters of AOLs claim that title insurance services are too expensive and that high costs make it impossible for some first-time and low- and middle-income borrowers to become homeowners.

Why are we concerned? Lenders claim that AOLs are only allowed as alternatives to title insurance policies in “limited circumstances,” but it’s entirely possible that they’re testing the waters for future broader usage. We believe it’s a passing trend, but it’s wise to keep an open mind about what might happen if AOLs become the standard for EHFPs or even other lending scenarios involving property sales.

What Are the Main Risks to Borrowers and Banks?

The “perceived” upfront savings at closing acquired with an Attorney Opinion Letter don’t offset the long-term risk. 

Unlike title insurance, Attorney Opinion Letters offer zero coverage for items not found via a public records search, such as federal tax, HOA liens, or even misindexed items. An AOL doesn’t cover forged seller deeds or fraud related to a previous owner’s will. It doesn’t cover fees and costs related to lawsuits for either borrower claims or lender defense.

As noted by ALTA, a buyer or lender that discovers issues with a property post-transaction must prove that the attorney who issued the AOL acted negligently, which is as difficult as it sounds. The burden is entirely on them both in terms of proof and costs. They would need to be able to afford to pay legal fees. Depending on the requirements outlined with a specific alternative product, the borrower might also have to agree to foreclosure even to make a claim against an attorney.

Worse, criminals often target first-time buyers and low- and middle-income borrowers. They deal with negligence and fraud more than any other type of borrower, which means that they’re more likely to lose the home that they worked hard to obtain if they rely on limited protection from an AOL. Additionally, no one knows exactly what happens legally if the attorney dies during an investigation into a claim or has too many claims against them because of negligence and no remaining coverage.

Title Insurance Is the Obvious Choice

On the other hand, title insurance offers low-cost protections that cover multiple potential scenarios. Title insurance underwriting ensures that no other claims of ownership exist so that a borrower can clearly have those rights. The majority of title agency owners have also listened to clients about costs. They’re using more cutting-edge technologies to streamline processes and eliminate errors to reduce associated costs.

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