There has been increasing discussion within the real estate community about Attorney Opinion Letters and the potential role they could play in the settlement process. In 2022, Fannie Mae launched a pilot program which allows lenders to use Attorney Opinion Letters (AOLs) in place of certain title insurance requirements. This option is only available in a few specific situations such as sales by government agencies or cases with a long chain of title. This pilot program has some clients wondering if they may be able to forego title insurance if they can just get a letter of opinion from their attorney. It is very important to understand that AOLs are very different from Title Insurance Policies and offer significantly less protection.
An AOL is essentially a legal document that outlines an attorney’s professional legal opinion on a specific topic – in this case, the legality of the real estate transaction. A Title Insurance Policy is a contract that indemnifies against loss resulting from a defect in the title to the interest or lien in the real property being insured. The main difference is the amount of protection each can provide.
- With an AOL, the attorney is only liable for negligence. That means the attorney who issues the AOL will not be liable for a hidden defect or mistake in the public records as there was no negligence on their part. However, a title policy protects the buyer/lender against all title defects and claims, not only those caused by negligence.
- A title policy also insures the title against potential future issues such as encumbrances and liens, which can require significant legal fees to resolve. The expenses of these legal fees may not be covered by an AOL but a title insurer would cover the costs of resolving the issues.
- An AOL only provides protection to the client who purchased it. In contrast, a title policy provides protection to heirs and some third parties in addition to the client who purchased it.
One final point of difference between AOLs and Title Insurance Policies is the level of regulatory oversight. At this time, there is no clear regulatory authority charged with overseeing alternatives to title insurance. However, title insurance is a highly regulated industry that is overseen by state agencies and insurance commissioners.
AOLS essentially provide legal advice while a Title Insurance Policy offers broad protection against potential defects or claims. Purchasing real estate is one of the biggest investments you can make so you should make sure you are getting the best protections that are available to you!