Deeds of Trust, Mortgages, Foreclosure and Lender Liability
Mortgages and deeds of trust are used to secure real estate loans. A deed of trust operates like a mortgage except that it conveys title to real property to a trustee as security until the grantor of the deed of trust repays the loan. If a secured piece of real estate is transferred, and the lender does not enforce an acceleration clause in the mortgage or deed of trust, the new buyer takes the property “subject to” the loan. The original borrower may still be liable unless the lender consents to an assumption. It is typical for lenders to assign their loans to other lenders. Filing a homestead protects a portion of the borrower’s equity in the event of a foreclosure.
When a borrower defaults on a real estate loan, the lender must first look to the security for the loan, and foreclose on the real property before going after the borrower’s personal property. If the loan has a power of sale clause, the lender can choose either court foreclosure or private sale. If a private sale is chosen, the lender cannot get a deficiency judgment to hold the borrower personally liable for any balance not recovered from the sale. If a court sale is held, and the original loan proceeds were used to purchase the property, in many cases the borrower cannot be held personally liable for a deficiency. An assignment of rents clause in a deed of trust or mortgage gives the lender the right to collect rents during the foreclosure of a non-owner occupied property.
Lenders must be aware that they can be held liable under many different circumstances. For example; improperly taking and processing loan applications, improperly making loan commitments and construction agreements, negligently disbursing funds, imprudently acquiring construction defects, contamination, and other liabilities through foreclosure, committing negligence, fraud, or circumstances of strict liability, breaching the covenant of good faith and fair dealing, violating the Truth-in-Lending regulations and disclosure requirements, violating the Real Estate Settlement Procedures Act (“RESPA”), taking kickbacks and unearned fees, exceeding the limitation on escrow deposits, violating the Predatory Lending Act, or violating the usury laws.