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Issue  102  Article  180
Published:  1/1/2004

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New Mortgage Cancellation Laws on the Horizon
Chris Burti, Vice President and Legal Counsel

Until the 1980’s most home mortgage lending was done by local thrift institutions and cancellation of satisfied deeds of trust in order to clear title to property was relatively simple and quick. It was relatively common for the lender to provide the cancelled instruments, in trust, to the local closing attorney pending the closing. Alternatively, the instruments were provided upon presentation of the payoff check. In the worst case, a closing attorney might have to wait a week or two for the instruments to be sent from a corporate home office. Many changes have occurred in the lending industry since then. Thrift institutions have all but disappeared. Failures, mergers and consolidations have resulted in mortgage lending being concentrated in a relatively few national lenders with centralized mortgage operations. The vast majority of mortgage loans are now sold on the secondary mortgage market with the paper being held by one entity and the loan serviced by an entirely different one.

The result of this dramatic change in the economic environment is that it has become exceedingly difficult to cancel satisfied instruments of record in a timely fashion. In many cases it has become virtually impossible to do so without litigation. These institutions are typically far distant from the closing attorney and they are reluctant to entrust the attorney with satisfaction instruments. In North Carolina, a deed of trust that has been satisfied, but remains uncancelled constitutes unmarketable title under the holding in Nick v. Baker, 125 N.C.App. 568, 481 S.E.2d 412, (1997). North Carolina’s mortgage cancellation penalty statute (N.C.G.S. Section 45-36.3) provides little relief for this growing problem. It takes too long to accomplish and the penalty is too minimal for lenders to take seriously before litigation is commenced. It is entirely useless when the lender becomes defunct after payoff.

This situation has developed to a point where remedial legislation is imperative. Claims against title companies are filed daily. Attorneys’ offices are backlogged with files only needing cancellation to complete. Potential liability for failure to cancel looms like a crack in a dam waiting to burst. This problem is not unique to North Carolina. It is acquiring epidemic proportions all over the country.

Fortunately, help in the form of a Uniform Act may be on the way. The National Conference of Commissioners on Uniform State Laws (NCCUSL) has assigned ‘fast track’ priority to the problem and has established a drafting committee to develop a proposed Uniform Mortgage Satisfaction Act. The Drafting Committee on Uniform Mortgage Satisfaction Act has been at work for over a year and there has been considerable input from members of the North Carolina Bar Association Real Property Section and the North Carolina Land Title Association. Nancy Short Ferguson, who serves as Secretary of the Section and is a Past President of NCLTA, is a member of the Committee. The proposed Act will incorporate provisions enabling "self-help" satisfaction remedies that have proved successful in several states, modified to work in a national context.

A summary discussion of the Act follows. The Committee is meeting on January 23-25, 2004 to discuss the most recent version. A copy may be downloaded from the following site: http://www.law.upenn.edu/bll/ulc/ulc_frame.htm . The comments are very helpful and provide a great deal of insight into the process of developing an Act that will provide a uniform process to cure a national problem.

Section 102 of the Act is the Definitions section. The following are significant in the context of the Act.

(3) "Document" means information that is inscribed on a tangible medium or that is stored on an electronic or other medium and is retrievable in perceivable form.

This language incorporates current definitional standards furthering electronic commerce.

(6) "Notification" means a document containing required information and signed by the person required to provide the information.

(8) "Payoff statement" means a document containing at a minimum the information specified in Section 201(c).

(12) "Secured creditor" means a person that holds a security interest or that is authorized both to receive payments on behalf of a person that holds a security interest and to record a satisfaction of the security instrument upon receiving full performance of the secured obligations.

These terms are essential to the process of self-help satisfaction. They incorporate the concept of reliable payoff statements and recognize the broad powers of modern mortgage servicing agents.

(5) "Landowner" means a person that owns the equitable right of redemption in the real property described in a security instrument.

(13) "Security instrument" means an agreement, whether denominated a mortgage, deed of trust, trust deed, security deed, or otherwise, that creates or provides for a security interest. Such an agreement is a security instrument even if it also creates or provides for a lien upon personal property.

(14) "Security interest" means an interest in real property located in this state, created by a security instrument and securing payment or performance of an obligation.

(15) "Secured obligations" means all obligations the payment or performance of which are secured by a security interest.

State laws governing the satisfaction of mortgages typically use the traditional terms "mortgage," "mortgagor," and "mortgagee." The Act abandons these terms, in order to avoid definitional limitations restricting the Act’s coverage in a national environment that encompasses many forms of real property securitization based on varying common law and statutory doctrines. Instead, the Act uses categorical terms that do not have common law or statutory associations restricting them to specific traditional forms. Instead of "mortgage" or "deed of trust," the Act uses the term "security instrument." For "mortgagee" or "beneficiary," the Act uses "secured creditor." The real property interest conveyed to the secured creditor is defined as a "security interest" rather than a "lien" or as "title." Under the proposed Act it is irrelevant whether a state has adopted the "lien theory" or "title theory" of mortgage law.

Section 103 provides the manner of giving notification under the proposed Act. The proposed Act provides a process that recognizes modern methods of commercial communication including facsimile transmissions if the intended recipient has agreed to receive notification in this method. This section specifies the effective date of various notifications by reference to the approximate delivery time for each form of delivery. In order to avoid uncertainty about the expiration of the various grace and cure periods incorporated into the Act, it provides that these periods shall commence upon the effective date of a notification.

Article 2 contains the primary process for securing cancellation of mortgages. Section 201 defines "entitled person" as a landowner or any person liable for payment or performance of the secured obligations. The identity of the "landowner" under the Act is contextual. Here, the "landowner" is the party who owns the mortgaged land at the time of the request for a payoff statement or any authorized agent acting on the landowner’s behalf. For example, if seller have contracted to sell mortgaged land and have authorized an attorney to represent them in the transaction, the attorney may properly request a payoff statement on their behalf.

Section 202 sets forth the procedure for obtaining a reliable Payoff statement. Under its provisions the first statement must be provided without charge, it may not be qualified after closing and it must specify all charges and fees required to satisfy the obligation. A limiting factor in today’s lending environment is that the creditor has ten days within which to provide the information, but a reasonable response period is necessary in order to keep the mortgage industry on board with this legislation. An important additional benefit will be derived from the prohibition of qualification language in payoff statements. A continuing nightmare for closing attorneys is the possibility of a lender refusing a payoff check after closing. We have seen numerous examples of this occurring and the closing attorney not being notified for several months. During the interim period between the closing and the disastrous news, the lender has put the loan in default and racked up thousands of dollars in interest, costs and fees. If the transaction was a purchase, there rarely is successful recourse against the seller who is often long gone. The specific provisions of Section 202 provide that an entitled person may give the creditor a notification requesting a payoff statement. The notification must identify the payoff date, which must be no more than 30 days after the date of the notification. It must contain:

(1) The entitled person’s name;

(2) The name of the entitled person’s authorized agent, if the notification requests delivery of the statement to that agent;

(3) The address to which the creditor must deliver the statement;

(4) The date that the notification is given; and

(5) Sufficient information to enable the creditor to identify the secured obligations and the real property encumbered by the security interest.

If this notification so directs the secured creditor must to deliver the payoff statement to an authorized agent unless the creditor has reasonable grounds to believe that the entitled person has not authorized the request. The creditor must issue a payoff statement and deliver it to the agent within 10 days of the effective date of a valid notification. The payoff statement must:

(1) Identify the date on which it was prepared and the amount required to satisfy the secured obligations as of that date, including an itemization by type of each fee, charge, or other sum that comprises the balance of the secured obligations;

(2) Include the information reasonably necessary to calculate the payoff amount as of the requested payoff date, including the per diem interest amount; and

(3) Set forth the payment cutoff time, if any, the place where payment must be made, and any limitation as to the authorized method of payment.

A secured creditor may not qualify a payoff statement or state that it is subject to change prior to the payoff date unless it provides sufficient information to permit the agent to obtain an updated and reliable payoff amount during the secured creditor’s normal business hours no later than the payoff date. An entitled person can request one payoff statement without charge during any six-month period. A secured creditor may charge no more than $25 for each additional request for a payoff statement during the six-month period. A secured creditor may not charge a fee for providing an updated payoff amount for a qualified statement or for providing a corrected payoff statement.

Section 203 provides for the effect of a payoff statement under the proposed Act. An entitled person may rely upon a payoff statement to determine the amount that must be paid to the creditor as of the payoff date in order to obtain a recorded satisfaction of the security instrument. If the entitled person acts in good faith and does not know or have reason to know that the amount is incorrect and upon timely receipt of payment of that amount, the creditor shall timely record a satisfaction of the security instrument. If the creditor determines that information it provided in a payoff statement is inaccurate, the creditor may furnish a corrected payoff statement. If the entitled person receives the corrected payoff statement before making payment, the corrected statement supersedes the earlier statement. If a creditor issues a qualified payoff statement as specified in Section 202(d), the entitled person may rely only upon the updated payoff amount provided by the secured creditor, unless the secured creditor fails to provide an updated payoff amount within one business day following a proper request. The creditor is not precluded from recovering any valid sums not included in the payoff statement from any person personally liable for performance of the obligations. Failure to deliver a timely required payoff statement without reasonable cause results in the creditor being liable to the entitled person for the actual loss caused by the failure. This would include reasonable attorney’s fees and costs, and a penalty in an amount to be determined by each state ($500 is the sum recommended).

Section 206 provides for the liability of a secured creditor for failure to record satisfaction. A secured creditor who must record a satisfaction of a security instrument and fails to do so within the period specified in Section 204(b) is liable to the landowner for actual damages. In addition, the creditor must pay reasonable attorneys’ fees and costs, and the additional sum of $100 per day, for each day following the deadline up to a maximum of $3,000.

Section 207 provides for reinstatement of an erroneously satisfied security. If a person has erroneously recorded a satisfaction, they may execute and record a document rescinding the satisfaction. This document must state that the satisfaction was erroneously recorded, that the secured obligations remain unsatisfied, and that the security instrument remains in force. This rescinds the erroneously recorded satisfaction and reinstates the lien of the security instrument when recorded. The rescission would have no effect upon the rights of third party purchasers for value under the North Carolina recording act. For purposes of the proposed Act, a satisfaction cannot be recorded "in error" if the secured creditor was legally obligated to record the satisfaction. For example, if a landowner pays off the amount specified in a reliable payoff statement, the creditor is legally obligated to record a satisfaction of the mortgage, even if the payoff amount specified in the statement was erroneous and the secured obligations remain unsatisfied. A person who wrongfully records a rescission is liable for damages in the amount of any actual loss plus reasonable attorneys’ fees and costs to any person injured thereby.

Article 3 contains the provisions for satisfaction by affidavit often referred to as "self help" provisions. The Article permits a landowner, acting through a "satisfaction agent," to record an affidavit of satisfaction of a security instrument where the secured creditor is legally obligated to record a satisfaction and has failed to do so following notification and an opportunity to cure. In this Article "Satisfaction agent" means a title insurance company, acting directly or through its authorized agent, or an attorney licensed to practice law and in good standing in the state. The affidavit of satisfaction has the same legal effect of a satisfaction. If a satisfaction agent wrongfully records an affidavit of satisfaction, the satisfaction agent is liable to the creditor for damages. The limitation that the satisfaction agent must be either a title insurance company or a licensed attorney increases the security of a creditor as a result of the recording of a wrongful affidavit of satisfaction.

Article 4 makes provision for an authorized satisfaction by a closing attorney. A creditor can authorize the closing agent, upon full payment of the amount specified in that statement, to execute and record a satisfaction of the security instrument in the name of the secured party by issuing a "satisfaction statement". Upon recording, this certificate operates as a satisfaction of the security instrument.


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