Some Implications of the New Predatory Lending Law
By James Bruce Davis[1]
Having survived the Congressional review period, the
District of Columbia Protections from Predatory Lending and Mortgage
Foreclosure Improvements Act of 2000 has become the law of the District of
Columbia. Beyond prohibiting predatory
lending practices and establishing new foreclosure procedures, the Act makes
far-reaching changes in mortgage law. This article summarizes some of the
mortgage law changes that will affect the title insurance industry.
Requirements
for Recordation
Names and addresses of the parties (Section 204). Every lien
instrument (the Act’s name for mortgages and deeds of trust), certificate of
transfer, amendment or deed of appointment must state the name and address of
each party. Instruments that fail to
meet this requirement are not to be recorded; however, a recorded lien
instrument’s failure to satisfy this requirement does not affect the validity
the instrument.
Information statements for residential lien
instruments (Section 205). Every lien instrument affecting “residential
real property” must have attached to it an information statement or else a
certification that the lender will enforce the lien instrument only by judicial
foreclosure. “Residential real property” means: (A) a one to four family
dwelling, including a condominium or cooperative unit; (B) an owner-occupied
residential building of up to 10 dwelling units; (C) an owner-occupied mixed
use building with an assessed value of $1,000,000 or less containing one to
four dwelling units. The information
statement must be prepared by the originating noteholder or its agent and must
be executed and acknowledged by: (1)
all borrowers and owners under the deed of trust; and (2) the mortgage
broker or other person who originated or placed the loan or vendor who is a
noteholder in a purchase money lien instrument. Each information statement must indicate whether the lien
instrument secures a “home loan” (a term with a five-page definition). Any home loan will come within the Act’s
prohibition of predatory lending practices.
The requirement for information statements has a
deferred effective date: the later of 60 days after the effective date of
regulations under the Act or 150 days after the effective date of the Act.
A separate provision of the Act (Section 1410)
prohibits the Recorder of Deeds from recording any lien instrument on
residential real property without an information form, unless the person
submitting the lien instrument for recordation provides a written certification
that an information form is not attached.
A recorded lien instrument’s failure to satisfy this requirement does
not affect the validity of the instrument.
However, failure to file a correct and complete information statement
within six months after the recordation of a lien instrument on residential
real property nullifies any provision in the lien instrument providing for
non-judicial foreclosure.
Requirements for
a Valid Lien Instrument
Identification of obligation and amount secured
(Section 202). A lien instrument must identify the
instrument whose performance it secures and state a monetary value in United
States currency of the principal amount of the obligation secured.
Formal requirements (Section 206). Lien
instruments must be executed, acknowledged and recorded in the same manner as
deeds.
Payoffs and Releases
Payoff information (Section 210). Upon
request, for good cause, the noteholder or secured party must provide a payoff
statement, escrow balance and certain other information regarding the loan to
anyone liable on the note, a subordinate lienholder (not more frequently than
once every 12 months), or a prospective purchaser at a foreclosure sale of a
subordinate lien instrument or at a judicial sale to enforce a subordinate
judgment lien. The noteholder is not
required to provide payoff or reinstatement figures to a prospective purchaser
at a foreclosure sale under the lender=s
own lien instrument.
Presumption of payment (Section 217). A lien instrument
is conclusively presumed to have been paid if not released within 12 years
after the maturity date stated in the instrument or, if the lien instrument
does not state a maturity date, within 35 years after recordation of the lien
instrument or the last amendment to the lien instrument. The presumption is inapplicable to a
foreclosure proceeding commenced prior to the expiration of the applicable 12
or 35 year period.
Releases (Section 218). A lien
instrument may be released by recording the original note, marked “paid,”
“satisfied,” or “canceled,” together with a note affidavit executed by an
attorney or title company who advanced funds to pay off the note. A lien instrument may also be released by
certificate of satisfaction signed by the noteholder, beneficiary or trustee
under a lien instrument. If the note
secured by a lien instrument has been lost or destroyed, the noteholder,
beneficiary or trustee may release the lien instrument by recording a release
affidavit. The Act provides forms for certificates
of satisfaction and release affidavits.
Duty to release (Section 219). A noteholder
who receives payment in full or a partial prepayment of a note is required
promptly to provide a release or partial release of the lien instrument. If the lien instrument is a residential lien
instrument, the noteholder must deliver the release to the Recorder of Deeds,
together with the required recordation fee.
If the noteholder fails to deliver the release, a party in interest may
send the noteholder a notice requesting the release. If the noteholder fails to give the release within 30 days after
the notice, the noteholder will be liable for statutory delay damages of $50
per day, not to exceed $10,000.00, actual, direct and consequential damages,
and the costs and legal fees incurred by anyone enforcing his right to a
release.
Effect
of Foreclosure or Deed In Lieu of Foreclosure
Effect of foreclosure (Section 222). A valid
foreclosure of a lien instrument terminates a subordinate interest in the real
estate, but only if the owner of the subordinate interest is given notice of a
nonjudicial foreclosure or is joined as a defendant in a judicial
foreclosure. Foreclosure does not
affect any interest senior to the lien instrument being foreclosed. Generally, a foreclosure sale will terminate
a subordinate non-residential lease; however, if the lease was recorded at
least 60 days prior to the commencement of a foreclosure, the lease will be
unaffected if the tenant is not given notice of a nonjudicial foreclosure or
named as a defendant in a judicial foreclosure. This provision has a deferred effective date: the later of 60
days after the effective date of regulations under the Act or 150 days after
the effective date of the Act.
Deeds in lieu of foreclosure (Section 214). Deeds in
lieu of foreclosure do not affect senior or subordinate liens. If the noteholder takes the deed in lieu of
foreclosure, the lien instrument is canceled.
Therefore, a lender should never accept a deed in lieu of foreclosure if
there are subordinate liens on the property.
However, a deed in lieu may be made to the noteholder=s designee without canceling the lien instrument. A deed in lieu of foreclosure to the lender=s designee will preserve the lender=s right to foreclose, which would be necessary to
extinguish junior liens on the property.
Priority
of Lien Instruments
Several Sections of
the Act affect the priority of lien instruments. All have a deferred effective date: the later of 60 days after
the effective date of regulations under the Act or 150 days after the effective
date of the Act.
Priority of purchase money lien instruments (Section
223). A purchase money lien instrument, if recorded within 30 days of
delivery, takes priority over a pre-closing judgment against the purchaser or
other lien created by the purchaser prior to his acquisition of the
property. Unless otherwise agreed by
the parties, a seller take-back lien instrument recorded within 30 days of
delivery takes priority over any other purchase money lien on the same
property. Under this rule, a seller=s purchase money lien instrument, even if unrecorded
until 30 days after a closing, could take priority over a lender=s purchase money lien instrument recorded at the time
of closing. Therefore, settlement
agents may wish to require the buyer and seller to provide an affidavit stating
that there is no undisclosed seller financing.
Replacement or modification of lien instrument
(Section 224). Subject to various requirements and
limitations, the Act provides that a senior lien instrument may be modified or
refinanced without the consent of a junior lienholder. If a senior lien instrument reserves to the
owner and lender the right to modify or replace the senior lien instrument,
then the senior lien instrument may be modified or replaced without a junior
lienholder=s consent, even if the new or modified lien instrument
is materially prejudicial to the junior lienholder, except to the extent that
the new or modified senior lien instrument increases the maximum principal
amount of the senior debt, readvances principal under the senior debt or grants
the senior lender a share of the revenues, income or appreciation of the
security property. To be effective, the
reservation must be stated conspicuously and in all capital letters. If the senior lien instrument does not
reserve the right of replacement or modification, the senior instrument may
still be released and replaced in a single transaction, without losing priority
to a junior lien instrument, except to the extent that the replacement senior
lien instrument is materially prejudicial to the junior lienholder, increases
the principal indebtedness above the amount stated in the old senior lien
instrument, readvances principal under the senior lien instrument or adds a
provision for revenue, income or appreciation sharing.
Lien instrument may encumber after acquired property
(Section 226). A lien instrument may encumber specifically
identified property that the borrower does not own but acquires within one year
after recordation of the lien instrument.
The wording of this provision is confusing. The lien seems to be good between the parties upon the borrower=s acquisition of the after acquired property. However, the lien instrument is treated as
unrecorded as to third parties until a modification of the lien instrument is
recorded describing the after acquired property. The Act does not state when the modification must be
recorded. Presumably, the modification
should be recorded after the borrower actually acquires the property, but the
Act does not say this explicitly.
The lien on after acquired property is automatically
subordinate to any purchase money lien instrument on the property. However, because of the lack of clarity
concerning when the lien on after acquired property will be treated as
unrecorded, other kinds of lien instruments may not have priority over a lien
on after acquired property. Because a
lot and square search should disclose a lien on after acquired property, the
lien will appear to be recorded even if the Act requires it to be treated as
unrecorded. Title insurers undoubtedly
will wish to take exception for an after acquired property lien in any owner=s policy and in any loan policy that does not secure a
purchase money loan. Further reflection
may show that liens on after acquired property have additional implications for
examination and underwriting practices.
Future advances (Section 230). A lien
instrument may secure future advances of principal if the parties so agree in
writing. For the future advances to
have priority over subsequent owners and encumbrancers, the lien instrument
must state that it secures future advances, identify the document that so
provides, and state the monetary amount that may be secured by the lien instrument. If the lien instrument secures a loan to
improve residential real property owned by the borrower, the lien instrument
may not secure future advances except those requested by the borrower in
writing at the time of each advance.
Concluding Remarks
[1] James Bruce Davis is a shareholder in Bean, Kinney & Korman, P.C., Arlington, VA, and a past President of the District of Columbia Land Title Association.