Modernization of Deed of Trust Laws - Part 1
Chris Burti, Vice President and Senior Legal Counsel

Session Law 2011-312, Senate Bill 679 was passed in order to modernize and clarify the existing statutes regulating deeds of trust and mortgages as well as related instruments. In addition, the legislation codifies and modifies some common law principles applying to these instruments. The changes also affect releases, short sales, future advance provision terminations and satisfactions, terminations and satisfactions for equity line liens, release of ancillary documents, eliminating the requirement for the trustee of deed of trust to join or be joined as necessary party for certain transactions and litigation, and indexing of subsequent instruments. The provisions of this act are extensive, some make significant substantive changes in the law and all are effective as of October 1, 2011. Due to the extensiveness of the amendments, we are publishing this article in two parts.

N.C.G.S. Section 45-10 has been rewritten in Section 2 in order to provide that if the mortgagee is also named as the Trustee, the instrument will be treated as a valid deed of trust and not a mortgage.

"§ 45-10. Substitution of trustees in mortgages and deeds of trust.

(a) In addition to the rights and remedies now provided by law, the holders or owners of a majority in amount of the indebtedness, notes, bonds, or other instruments evidencing a promise or promises to pay money and secured by mortgages, deeds of trust, or other instruments conveying real property, or creating a lien thereon, may, in their discretion, substitute a trustee whether the trustee then named in the instrument is the original or a substituted trustee or a holder or owner of any or all of the obligations secured thereby, by the execution of a written document properly recorded pursuant to Chapter 47 of the North Carolina General Statutes.

...

(c) If the trustee named in a deed of trust is also the beneficiary named in that deed of trust, the instrument shall be deemed to be a deed of trust, and any substitute trustee named under the authority of subsection (a) of this section shall succeed to all the rights, titles, authority, and duties of the trustee under the terms of the deed of trust."

SECTION 3. rewrites N.C.G.S. Section 45-36.4 to include definitional provisions necessary to be more effectively able to terminate HELOC's, obtain satisfactions  in short sales as well as regular loan payoffs.

"§ 45-36.4. Definitions.

As used in this Article, the following terms mean:

...

(1a) Borrower. – A person primarily liable for payment or performance of the obligation secured by the real property described in a security instrument.

(1b) Credit suspension directive. – A notification given to a secured creditor pursuant to G.S. 45-36.7A directing the secured creditor to suspend temporarily a borrower's right and ability to obtain additional credit advances in anticipation of the imminent sale of, or the imminent making of a new loan to be secured by, real property then encumbered by an existing security instrument when the anticipated transaction will involve either the satisfaction of the existing security instrument or the release of the real property from the lien of the existing security instrument.

...

(5) Entitled person. – A person who:

a. Is a borrower;

b. Is a landowner;

c. Has contracted to purchase real property encumbered by an existing security instrument;

d. Has made or has committed to make a loan that is secured or is to be secured by real property encumbered by an existing security instrument;

e. Is a title insurance company authorized pursuant to Article 26 of Chapter 58 of the General Statutes to issue title insurance policies in the State of North Carolina that has insured or has committed to insure title to real property encumbered by an existing security instrument;

f. Is the foreclosing trustee or the high bidder in a foreclosure sale involving real property encumbered by an existing security instrument;

g. Is a qualified lien holder; or

h. Is an attorney licensed to practice law in the State of North Carolina or a bank, savings and loan association, savings bank, or credit union, but only when:

1. The attorney, bank, savings and loan association, savings bank, or credit union is or will be responsible for the disbursement of funds in connection with the sale of, or a new loan secured by, property then encumbered by an existing security instrument; and

2. A requirement of the sale or new loan transaction is or will be that the property be conveyed or encumbered free and clear of the lien of the existing security instrument.

...

(7) Landowner. – A person that, before foreclosure, has the right of redemption in the real property described in a security instrument. The term does not include a person that holds only a lien on the real property or the trustee under a deed of trust.

...

(11) Payoff statement. – A document containing the information specified in G.S. 45-36.7(e).

...

(12a) Qualified lien holder. – A person who holds or is the beneficiary of a security interest in or lien on real property encumbered by an existing security instrument, but only if that person's security interest in or lien on the real property arises from a mortgage or deed of trust that is subordinate in priority to the lien of the existing security instrument. The term does not include a trustee under a deed of trust.

...

(19a) Short-pay amount. – The sum necessary to obtain the release of all or a specific portion of the real property from the lien of a security instrument without satisfying the secured obligation in full. SL2011-0312 Session Law 2011-312 Page 3

(19b) Short-pay statement. – A document containing the information specified in G.S. 45-36.7(e1).

...

(23) Trustee. – The trustee or substitute then serving as such under the terms of a deed of trust."

SECTION 4 rewrites portions of N.C.G.S. Section 45-36.6 dealing with the provisions for a Document of rescission to clarify who, when and how a rescission may be effected. There are new forms promulgated by the legislation and existing Law Firm documents should be promptly updated to conform.

SECTION 5 rewrites N.C.G.S. Section 45-36.7 dealing with payoff requests to make new explicit and conforming provisions for short sale payoff requests. Of particular note are the provisions in the new subsection(e1).

...

(e1) A short-pay statement must contain:

(1) The information reasonably necessary to calculate the short-pay amount as of the requested short-pay date, including the per diem interest amount, if any; Page 6 Session Law 2011-312 SL2011-0312

(2) The payment cutoff time, if any, the address or place where payment of the short-pay amount must be made, and any limitation as to the authorized method of payment;

(3) Any conditions precedent that must be satisfied to obtain the release of the property identified in the request for the short-pay statement from the lien of the security instrument; and

(4) Confirmation of the specific real property to be released from the lien of the security instrument upon receipt of the timely payment of the short-pay amount and satisfaction of the other conditions precedent to the release of that property.

Unless the short-pay statement expressly provides otherwise, all persons liable for payment or performance of the obligations secured by the security instrument will remain liable for the secured obligations to the extent the short-pay amount is not sufficient to satisfy the secured obligations in full.

Section 6 adds a new section to Article 4 of Chapter 45 of the General Statutes that provides a mechanism for the closing attorney to ensure that HELOCs and other open lines of credit can be effectively blocked and a reliable payoff obtained in order to safely close a real estate transaction for property encumbered by such security interests. Sections 7 and 8 make conforming changes to the remedial provisions for an erroneous payoff statement in N.C.G.S. Section G.S. 45-36.8 and the satisfaction provisions in N.C.G.S. Section 45-36.9.

"§ 45-36.7A. Credit suspension directives.

(a) A credit suspension directive may be given to a secured creditor by any of the following:

(1) Any borrower.

(2) The legal representative of any borrower.

(3) The attorney for any borrower.

(4) An attorney licensed to practice law in the State of North Carolina or a bank, savings and loan association, savings bank, or credit union, but only when (i) the attorney, bank, savings and loan association, savings bank, or credit union is responsible for the disbursement of funds in connection with the sale of, or a new loan secured by, real property then encumbered by an existing security instrument; (ii) a requirement of the sale or new loan transaction is that the property be conveyed or encumbered free and clear of the lien of the existing security instrument; and (iii) the credit suspension directive is given to the secured creditor contemporaneously with a notification requesting a payoff statement or a short-pay statement in anticipation of and in preparation for the imminent settlement of the sale or new loan transaction.

(b) A credit suspension directive must contain all of the following:

(1) The name and authority of the person giving the directive.

(2) Sufficient information to enable the creditor to identify the secured obligation, the identity of the borrower, and the real property encumbered by the security interest.

(3) The specified payoff date, which may not be more than 30 days after the notification is given.

(4) A clear and unambiguous directive to the secured creditor to suspend through and including the payoff date the borrower's right and ability to obtain any additional credit advances which, if made, would be secured by the security instrument.

(c) If the person who gives a credit suspension directive to a secured creditor is a person listed in subdivision (a)(4) of this section, that person shall also (i) give a copy of the credit suspension directive to the borrower and (ii) provide an additional notification to the borrower that provides substantially as follows:

"NOTICE TO BORROWER

You have a loan with (name of lender) secured by a mortgage or deed of trust on real property located at (address of property).

We will be responsible for disbursing funds in connection with a scheduled sale of the property or a new loan that will be secured by the property. A requirement of the sale or new loan transaction is that the property be conveyed or encumbered free and clear of the existing mortgage or deed of trust that secures your loan.

As permitted by North Carolina law, we are sending the (enclosed/attached/following/foregoing) notification to your lender directing that it temporarily suspend your right and ability to obtain credit advances in anticipation of the settlement of the sale or loan. The notification accompanies a request asking the amount that must be sent to your lender to pay your loan in full and cancel the mortgage or deed of trust that secures your loan (or, if your loan will not be paid in full, to release the property from the mortgage or deed of trust that secures your loan). The information your lender provides us may be inaccurate if you obtain additional credit advances before the scheduled settlement date of the sale or new loan transaction.

When your lender receives our directive, it will temporarily suspend your right and ability to obtain credit advances. The period of suspension will continue through and including (anticipated payoff date), the anticipated payoff date, regardless of whether the settlement of the sale or new loan transaction occurs as scheduled. The suspension will not affect your responsibility to continue making payments to your lender during the suspension period. You should not attempt to obtain additional credit advances from your lender during the suspension period.

You may instruct us at any time during the suspension period to withdraw the credit suspension directive we are sending your lender, and we are required by law to comply. However, if you do so, you may jeopardize the settlement of the sale or new loan transaction because the payoff or release information provided by your lender may become inaccurate.

When proceeds from a sale or new loan transaction are used to pay an existing loan in full, lenders typically close the loan account, thereby terminating their borrower's ability to obtain additional credit advances. You should contact your lender to determine whether you will be able to obtain additional credit advances after the settlement of the sale or new loan transaction.

If you have questions about this notice or our action, please contact (name of contact person or department) by calling us at (phone number) or writing to us at (mailing address).

(Name of attorney, bank, savings and loan association, savings bank, or credit union)"

(d) Upon receipt of a credit suspension directive, a secured creditor shall:

(1) Subject to subsection (e) of this section, suspend the borrower's right and ability to obtain credit advances which, if made, would be secured by the security instrument. The period of suspension shall continue through and including the payoff date stated in the credit suspension directive.

(2) Apply all sums subsequently paid during the period of suspension by or on behalf of the borrower in connection with the secured obligation, including sums paid to the secured creditor by a person responsible for the disbursement of funds in connection with the sale of, or a new loan secured by, real property then encumbered by a security instrument, to the satisfaction of the secured obligation, regardless of whether the amount or amounts paid are sufficient to pay the secured obligation and other sums secured by the security instrument in full. Sums paid to the secured creditor in excess of the amount required to pay the secured obligation and other sums secured by the security instrument in full shall be refunded by the secured creditor to or at the direction of the person who paid the excess amount.

(e) Notwithstanding a secured creditor's receipt of a credit suspension directive, a secured creditor may do any of the following, all of which shall be secured by the security instrument:

(1) The secured creditor may advance sums and incur expenses (i) for insurance, taxes, and assessments, (ii) to protect the secured creditor's interest under the security instrument, (iii) to preserve and protect the value or condition of the real property encumbered by the security instrument, or (iv) to complete the construction of improvements on the real property encumbered by the security instrument.

(2) The secured creditor may permit the borrower to obtain a credit advance, but only if the credit advance was initiated or approved before the secured creditor received the credit suspension directive.

(f) If the person giving a credit suspension directive is not a borrower, then the person giving a credit suspension directive shall be conclusively deemed the borrower's agent acting with full authority from the borrower to issue the credit suspension directive on the borrower's behalf.

(g) A credit suspension directive may be withdrawn at any time by the person who gave the directive. If the person who gives a credit suspension directive to a secured creditor is a person listed in subdivision (a)(4) of this section, that person shall promptly notify the secured creditor that the credit suspension directive is withdrawn (i) if instructed by the borrower at any time to withdraw the directive or (ii) if the anticipated sale or new loan transaction is cancelled. Upon receipt of a notice from the person who originally gave the credit suspension directive that the credit suspension directive is withdrawn, the secured creditor may reinstate the borrower's right and ability to obtain credit advances."

Section 9 adds a new section to Article 4 of Chapter 45 to create express statutory provisions applicable to partial release of a security instrument.

"§ 45-36.22. Partial release: content and effect; form.

(a) A document is a partial release if it does all of the following:

(1) Identifies the type of security instrument, the original parties to the security instrument, the recording data for the security instrument, and the office in which the security instrument is recorded.

(2) States that the person signing the partial release is the secured creditor or, if the security instrument is a deed of trust, that the person or persons signing the partial release is or are the secured creditor, the trustee, or both the secured creditor and the trustee.

(3) Contains language releasing property or an interest in property from the lien of the security instrument.

(4) Is signed and acknowledged as required by law for a conveyance of an interest in real property by the secured creditor or, if the security instrument is a deed of trust, by the secured creditor, the trustee, or both the secured creditor and the trustee.

(b) The register of deeds shall accept a partial release for recording unless one of the following applies:

(1) The document is submitted by a method or in a medium not authorized for registration by the register of deeds under applicable law.

(2) The required recording fee is not paid.

(3) The document is not signed and acknowledged as required by law for a conveyance of an interest in real property by the secured creditor or, if the security instrument is a deed of trust, by the secured creditor, the trustee, or both the secured creditor and the trustee. The register of deeds shall not be required to verify or make inquiry concerning the truth of the matters stated in any partial release or the authority of the person executing any partial release to do so.

(c) Upon recording, a partial release shall release from the lien of the security instrument the property or interest in property as is expressly described and released. With respect only to the specific property or interest in property identified and released by a partial release, the partial release shall (i) operate and have the same effect as a duly executed and recorded deed of release or reconveyance of the property or interest in the property; (ii) release and discharge all of the secured creditor's interest in the property or property interest arising from the security instrument; and (iii) if the security instrument is a deed of trust, release and discharge all the interest of the trustee in the property or property interest arising from the deed of trust. The security instrument shall otherwise remain in full force and effect, and the remainder of the property and interests in property described in and encumbered by the security instrument shall remain subject to the lien of the security instrument.

(d) The recording of a partial release does not by itself extinguish any liability of a person for payment or performance of the secured obligation.

(e) The provisions of this section are not exclusive. Property and interests in property may be released from the lien of a security instrument by methods other than the filing of a partial release.

(f) Unless the deed of trust provides otherwise, the trustee in a deed of trust is not a necessary party to a partial release.

(g) No particular phrasing is required for a partial release. The following form, when properly completed, is sufficient to satisfy the requirements of G.S. 45-36.22(a):

"PARTIAL RELEASE

(G.S. 45-36.22)

The security instrument that is the subject of this Partial Release is identified as follows:

Type of Security Instrument: (identify type of security instrument, such as deed of trust

or mortgage)

Original Grantor(s): (identify original grantor(s), trustor(s), or mortgagor(s))

Original Secured Party(ies): (identify the original beneficiary(ies), mortgagee(s), or

secured party(ies) in the security instrument)

Recording Data: The security instrument is recorded in Book _______ at Page

________ or as document number _______________ in the office of the Register of

Deeds for _______________________ County, North Carolina.

The person or persons signing this Partial Release is/are: (check appropriate box)

[ ] The secured creditor.

[ ] The trustee or substitute trustee.

[ ] The secured creditor and the trustee or substitute trustee.

The following described property or interest in property (and no other) is released from the lien of the security instrument: (identify legal description of property or interest in property to be released)

Date: _____________                                               _________ _______________________________

                                                                                Signature(s) of secured creditor and/or trustee

[Acknowledgment before officer authorized to take acknowledgments]"."

Section 10 adds a new section to Article 4 of Chapter 45, N.C.G.S. Section 45-36.23, creating a statutory provision enabling a release of less than all obligations secured by a mortgage or Deed of Trust without affecting the lien of the security instrument. Those obligations that are not specifically released in an obligation release remain secured by the security instrument. The recording of an obligation release has no effect on the lien of the security instrument on the real property described in the mortgage or Deed of Trust. A form that may be used, but is not required to be used is included in the statute.

Section 11 adds a new section to Article 4 of Chapter 45, N.C.G.S. Section 45-36.24 that creates a completely new statute of repose for uncancelled mortgages. It includes definitional sections that clarify questions the prior statute engendered such as expressly providing that "The maturity date of the secured obligation is "stated" in a security instrument if ... the maturity date ... can be ascertained or determined from information contained in the security instrument, such as, for example, from a payment schedule contained in the security instrument." It also makes provision for an extension agreement to be recorded and adds model forms for a lien maturity extension agreement.

The statute retains the current presumption of expiration of 15 years after the obligation becomes due with the added proviso noted above that has also recognized in common law in many other jurisdictions. It further adds a presumption of expiration after 35 years for instruments that do not state their due date or for which it can't be calculated. If the mortgage was first recorded on or after October 1, 2011, it expires under the new provisions 35 years after the date the security instrument was recorded in the Office of the Register of Deeds or October 1, 2011, whichever is later. If the security instrument was first recorded before October 1, 2011, 35 years after the date the security instrument was recorded or acknowledged, whichever is later. We believe these provisions are reversed as the result of a typographical error and may be corrected in the future.

No release, satisfaction, or other instrument is necessary to discharge the lien of a security instrument that has expired This section applies to all security instruments, whether recorded before, on, or after October 1, 2011, except obligations conclusively presumed to have been fully paid and performed pursuant to the provisions of G.S. 45-37(b) prior to October 1, 2011 and any security instrument made or given by any railroad company.

Section 14 adds a new section to Article 4 of Chapter 45 making express provision for automatic cancellation of ancillary instruments. While the statute would effectively cancel the ancillary lien, in instances typical of secured transactions where the ancillary instrument does not specifically reference the primary obligation, we will not be certain from the record if they are in fact cancelled

therefore, the statute will offer less practical benefit than what was intended by the Legislature. As we typically surmise that instruments recorded the same date are ancillary and insurers sometimes agree to insure over them once the primary obligation is satisfied, much will remain the same.

"§ 45-42.3. Automatic release of real property from ancillary security instruments.

(a) The following definitions shall apply in this section:

(1) Ancillary security instrument. – An assignment of leases with respect to the real property, an assignment of rents from or arising out of the real property, a financing statement covering fixtures on the real property that is filed in the office of the register of deeds in the county in which the real property is located, and any other document or instrument that assigns, or creates a lien on, an interest in the real property.

(2) Real property. – The real property described in and encumbered by the lien of a security instrument.

(b) Except as provided in subsection (c) of this section, (i) the expiration of the lien of a security instrument pursuant to G.S. 45-36.24 or the satisfaction of a security instrument of record pursuant to G.S. 45-37 shall be deemed automatically to release the real property from the operation of all ancillary security instruments that secure the same obligation or obligations secured by the security instrument and (ii) the recording of a partial release pursuant to G.S. 45-36.22 or the recording of a deed of release shall be deemed automatically to release the real property described in the partial release or deed of release from the operation of all ancillary security instruments that secure the same obligation or obligations secured by the security instrument.

(c) Subsection (b) of this section shall not apply to an ancillary security instrument if (i) the ancillary security instrument secures obligations other than, or in addition to, the obligation or obligations secured by the security instrument; (ii) the security instrument, the ancillary security instrument, or the document recorded in the office of the register of deeds to satisfy the security instrument of record expressly states that the satisfaction of the security instrument of record shall not release the real property from the operation of that particular ancillary security instrument or from ancillary security instruments in general; or (iii) the security instrument, the ancillary security instrument, the partial release, or the deed of release expressly states that the partial release or deed of release shall not release real property from the operation of that particular ancillary security instrument or ancillary security instruments in general."

Section 15 is highly significant in that it eliminates the requirement for the joinder of the trustee almost every action by the mortgagee with the exception of foreclosure.  Now, the owner and holder of an obligation may declare it no longer secured by the deed of trust, may release property from the lien of a deed of trust, may release or subordinate the lien of a deed of trust, may modify the terms of a deed of trust with the joinder of the owner of the property encumbered by the lien of the deed of trust and may satisfy the deed of trust of record.

In the United States, a few states are "title theory" states while most are "lien theory" states. In title theory states, legal title to the property securing the debt is vested in the mortgagee or trustee of the Deed of Trust. The mortgage or Deed of Trust operates as a conveyance of the property to secure a debt, while the borrower retains equitable title. In a lien theory state, a mortgage or a deed of trust merely create a lien upon the title to the real property much in the way a judgment attaches, while the borrower continues to hold both legal and equitable title. It can be argued that this amendment moves North Carolina from a modified title theory state fully to a lien theory jurisdiction. Article 5 of Chapter 45 of the General Statutes is amended by adding a new section to read as follows:

"§ 45-45.3. Trustee in a deed of trust.

(a) The following definitions apply in this section:

(1) Secured creditor. – The holder, owner, or assignee of the obligation secured by a deed of trust. Page 18 Session Law 2011-312 SL2011-0312

(2) Trustee. – The trustee or substitute trustee then serving as such under the terms of a deed of trust.

(b) Unless the deed of trust provides otherwise, all of the following may be done without the knowledge, consent, or joinder of the trustee:

(1) Pursuant to G.S. 45-36.23, an obligation may be declared by the owner and holder of the obligation to be no longer secured by the deed of trust.

(2) Property may be released from the lien of a deed of trust by the secured creditor.

(3) The lien of a deed of trust may be released or subordinated by the secured creditor.

(4) The terms of a deed of trust may be modified by the secured creditor and the then record owner of the property encumbered by the lien of the deed of trust.

(5) The deed of trust may be satisfied of record by the secured creditor.

(c) Except in matters relating to the foreclosure of the deed of trust or the exercise of a power of sale under the terms of the deed of trust, the trustee is neither a necessary nor a proper party to any civil action or proceeding involving (i) title to the real property encumbered by the lien of the deed of trust or (ii) the priority of the lien of the deed of trust. Examples of civil actions or proceedings in which the trustee is neither a necessary nor a proper party include, but are not limited to, civil actions or proceedings relating to:

(1) Condemnation.

(2) Bankruptcy.

(3) The establishment or correction of title to real property, including, but not limited to, actions to quiet title, reform land records, or resolve boundary line disputes.

(4) Fraudulent conveyances.

(5) The creation or enforcement of an attachment or judgment lien.

(6) The foreclosure of a lien other than the lien of the deed of trust, regardless of whether the lien is superior or subordinate to the lien of the deed of trust, including, but not limited to, the foreclosure of mortgages, other deeds of trust, tax liens, and assessment liens.

(7) The establishment, perfection, or enforcement of a mechanic's or materialman's lien.

(8) The creation or enforcement of a constructive trust, resulting trust, or equitable lien relating to the property.

(9) The partition of real property.

(10) The interpretation or enforceability of a will, trust, or estate.

(11) A subrogation claim or other equitable claim or defense involving the priority or enforceability of a deed of trust.

(12) Determination or enforcement of rights and obligations involving easements or restrictive covenants.

(d) If a trustee is improperly joined as a party to an action or proceeding when this section provides that the trustee is neither a necessary nor a proper party to that action or proceeding, then:

(1) Upon motion duly made by any party to the action or proceeding, the trustee shall be dismissed from the action or proceeding;

(2) Regardless of whether the trustee makes an appearance in the action or proceeding, no entry of a default or default judgment shall be entered against the trustee; and

(3) If the trustee makes an appearance in the action or proceeding, each person who improperly joined the trustee as a party to the action or proceeding shall be jointly and severally liable to the trustee for all the expenses and costs incurred by the trustee in the defense of the action or proceeding or in obtaining the trustee's dismissal from the action or proceeding, including the reasonable attorneys' fees actually incurred by the trustee.

(e) Except as expressly provided in this section, this section is not in derogation of case law and statutory provisions that vest legal title to property conveyed by a deed of trust in the trustee named therein."