Some Implications of the New Predatory Lending Law
By James Bruce Davis
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.
 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.