TOP 4 RISK AREAS. Nancy Short Ferguson Vice President and Sr. State Counsel Chicago Title Insurance Company

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1 TOP 4 RISK AREAS Nancy Short Ferguson Vice President and Sr. State Counsel Chicago Title Insurance Company

2 Top 4 1. Mortgage Fraud schemes 2. Deeds of Trust: Releases, cancellations, subordinations, equity Lines, purchase money 3. Mechanics Liens & Construction Loans 4. Mobile Homes

3 PRACTICAL TIPS Insuring over may not be enough. Finish the file, incl. cancellations, before you close it. Respond promptly to issues or concerns

4 PRACTICAL TIPS: Resources Web sites! (Not about play-surfing and personal s!!!)

5 RISK AREA #1: MORTGAGE FRAUD SCENARIOS / TACTICS Power of attorney Trust Multiple deeds at closing Accommodation fees ( off the HUD ) Two (or more) HUD-1 Settlement Statements

6 WHO IS YOUR CLIENT? CPR 100 and RPC 210

7 Mortgage Fraud Does the transaction make sense? Understand the transaction; look behind the surface Attorney & title insurer must be satisfied with the bona fides Is this realistic for this buyer? Are docs correct i.e. not all saying principal residence? Remember: Mortgage broker, dealer is probably not the investor / lender!

8 WARNING!!!! HUD-1 MUST BE COMPLETE & SHOW ALL ASPECTS OF TRANSACTION!!!

9 RISKS TO ATTORNEY LICENSE!! LIVELIHOOD!! LIBERTY!!

10 RISKS TO TITLE COMPANY Closing Protection Liability for Violation of written closing instructions Incomplete HUD-1 Failure to disclose deeds in chain of title certification (especially multiple deeds at closing) Incorrect parties shown on title opinion & commitment

11 Special case: Flipping Owner: Property conveyed multiple times within last year, or at closing! Many closing instructions request chain of title information Lender: Repeated refinances & costs Why the change??? Apply common sense!

12 Special Case: Resale Dealer Owner places home in trust subject to their lien Dealer says will find buyer Lease with option or contract with buyer rental until can get a loan Dealer gets both option fees, may or may not make seller payments

13 Special case: Rental investment property Seller places property in trust or just signs over to dealer Dealer says rented, creates legit looking package of credit report, usually inflated appraisal, etc. Buyer trusts and purchases to make money off margin of rental over payments

14 REMEMBER: Broker or Dealer only cares about $$ at the table! Lender only cares about loan $$$$ down the road! Client cares about their home, their property, their equity!

15 CAUTION: Mortgage Elimination schemes Dorean Group, Scott Heineman, Kurt Johnson vapor money argument NCDOJ TRO debtnemesis Other internet vendors of the schemes

16 Red flags Powers of attorney to cancel Trusts Borrowers suddenly obtain cancellations on substantial debt without any visible source of funds (refinance, inheritance, etc.)

17 WHAT TO DO? DO NOT ASSUME that the Register of Deeds can identify all of these! BE SURE YOUR TITLE EXAMINER KNOWS ABOUT THESE SITUATIONS!!! (Your job to supervise!) USE COMMON SENSE! IF QUESTIONABLE, CONTACT NCDOJ, Assistant AG s Harriett Worley or Lynne Weaver

18 SEE ARTICLES & INFORMATION ATTACHED

19 Supervision of ALL non-lawyers whose work you rely on Are you maintaining & constantly updating their training? Do they know how to recognize these risks? Are you regularly reviewing their work? Are they truly accountable to you? Do you have a signature stamp? Do you do this for ALL of the individuals on whose work you rely for your legal representation and opinions?

20 RISK AREA #2: DEEDS OF TRUST: Releases, Cancellations, Subordinations, Buyer differs from Borrower, Equity Lines, Purchase Money, Buyer Judgments / Liens

21 PROBLEMS Failure to cancel of record No written payoff or release terms Not following requirements Not freezing equity lines Not obtaining updated payoff amounts Failure to obtain & record subordinations & releases Short payoff

22 PROBLEMS (cont d) Failure to send payoff letter with instructions to apply and contact immediately regarding shortage Failure to follow up post-closing Subordinated or paid off wrong deed of trust Release of wrong property Missed deeds of trust

23 Releases Deed -- so must comply with requirements of deed, i.e. parties, conveyance language, legal description, acknowledgments Must be signed by Trustee, who is the legal title holder under a deed of trust Lender s approval necessary Lender need not join in execution of release

24 Releases (cont d) May be some or all of property in deed of trust -- clearly described Must clearly identify the deed of trust from which property released Get agreement to release in writing Follow terms & conditions precisely

25 Cancellations (G.S ) Closing attorney s responsibility to exercise all reasonable efforts to obtain cancellation FEO 5 Lender closing instructions require first lien & lender is also your client -- RPC 210 & CPR 100

26 Cancellations (cont d) Title certification to title insurers Marketability of title impaired until cancellation of record, Nick v. Baker, 125 N.C.App. 568, 481 S.E.2d 412, (1997)

27 Forms and instructions docs/word/payoff.doc

28 PROPOSED NC Mortgage Satisfaction Act I II III IV Definitions, Notification, Rescission Mandatory Reliable Payoff & Mandatory Lender Satisfaction (Form) Self-Help or Satisfaction Agent Satisfaction (Form) Miscellaneous Provisions

29 PAYOFFS (Art. 2) Address for request & notification Information (waived if payoff sent n/w/s defect in request): Specified payoff date, no more than 30 days after notification Entitled person s name Name & authority of person making request ( safe harbor for lender on privacy issues) Where payoff statement to be sent (agent or entitled person and

30 PAYOFFS (Art. 2) (cont d) Time frame (within 10 days) Payoff Statement: Date, payoff amount, incl all fees, charges, sums required to satisfy Info reasonably necessary to calculate per diem Payment cutoff time, place where payment must be made & method of payment required (if any) Conditions only if means of verifying on payoff date or immediately preceding date

31 PAYOFFS (Art. 2) (cont d) Assignee name & address must be provided Fees Automatic penalty, o/w attorneys fees & costs

32 CORRECTIONS & ERRONEOUS PAYOFF STATEMENTS Corrections: only if actual receipt and reas opportunity to act (202) Discharges lien not personal liability if correction not timely Lender may not deny accuracy as against any person that reasonably & detrimentally relied

33 Mandatory Lender Satisfaction (203) Full payment or performance If not canc within 30 days, nondiscretionary actual loss If not canc within 30 days after follow up notice, nondiscretionary actual loss plus penalties, court costs & attorneys fees (for post-act payoffs) NO req t of update disputed payoff: lender may incur penalties/loss/costs if not cancel & court finds not entitled to disputed amt

34 EXC: Reasonable procedure & Circumstances beyond its control Burden on lender to appear and prove Servicer is w/in defn of secured creditor & has liability, even if holder does not NOT a defense: that computer system crashed on last day too busy & understaffed to handle volume IS a defense: entire northeastern blackout PO shut down for anthrax Fed Ex plane crashed

35 Mandatory Lender Satisfaction (203) (cont d) Standardized Form SATISFACTION (204) -- streamlined / simple / few fill-ins no requirement of copy of deed of trust like our current statute Equity line of credit full performance definition (GS 45-81)

36 Self-Help Satisfaction (Art. 3) Satisfaction agent (SA): licensed NC attorney [draft incl. title insurance company; NCLTA obj] State agency (Banking, Insurance, Bar) may set regulations - registration, bonding, etc. -- [bracketed item] Residential limitation Not require Article 2 payoff or post- Act

37 Self-Help Satisfaction (Art. 3) (cont d) Requires 30-day notification on behalf of landowner (may be subsequent purchaser other than borrower) & full performance Lender responses: No response: SA may cancel Assigned: SA give 30-day notif. to assignee Not satisfied: SA not cancel SA / borrower follow up on outstanding balance (as now)

38 Self-Help Satisfaction (Art. 3) (cont d) SA not required to cancel - depends on contract with landowner Form AFFIDAVIT OF SATISFACTION (304) Personal liability of obligor remains even if satisfaction recorded (305(b)) Registry must record unless $$ or execution / acknowledgment inappropriate

39 Self-Help Satisfaction (Art. 3) (cont d) Liability of SA who records satisfaction: Erroneous but lender did not respond to 30-day notice: No liability Erroneous (other than above) or knowingly false: Actual loss Knowledge that false: May be subject to litigation by lender for actual loss, punitive damages or even criminal sanctions Section 306

40 Some Self-Help statutes Arizona California Colorado Connecticut Delaware Georgia Hawaii Idaho Indiana Kansas Massachusetts Nevada New Hampshire New Jersey New York Oregon Pennsylvania Rhode Island Texas Utah Vermont Virginia Wyoming One-touch: Illinois Minnesota South Dakota North Dakota South Carolina

41 RESCISSION OF SATISFACTION (104) Reinstatement of lien under NC case law If satisfaction was erroneous, amount still outstanding & security instrument remains in force Can be done by person who erroneously recorded the satisfaction

42 RESCISSION OF SATISFACTION (104) (cont d) No effect on rights of third parties who acquired an interest and are protected under GS or GS Liability for erroneous or wrongful rescission of satisfaction (reinstatement): Actual loss, attorneys fees and costs

43 BANKS & LENDERS NC Banking Commissioner: HUD: FDIC (for federal banks):

44 BANKS & LENDERS (continued) SBA: ml Comptroller of the Currency, (for federally chartered banks): Office of Thrift Supervision (for federally chartered thrifts):

46 Subordinations Identify deed of trust and parties (original and current) New statutory provision effective for instruments recorded after 10/1/03 G.S intent of the parties Pre-10/1/03, required joinder of trustee, terms (incl. Interest rate) retroactive statutory provision possible this legislature

47 Hypothecated Security Borrower not exactly same as property owner Consideration to owner? (Fraudulent conveyance / creditor s rights risk) Identify borrower as different from grantor in DOT, to correctly identify note secured. See In re Foreclosure of Enderle, 110 N.C.App. 773, 431 S.E.2d 549 (1993)

48 Equity Lines Freeze or termination letter signed by borrower -- G.S Payoff is not enough! Not purchase money financing

49 Purchase Money Same transaction. Childers V. Parker s, Inc., 274 N.C. 256, 162 S.E.2d 481 (1968) Same recording package Proceeds actually applied to purchase; But for the loan, there would be no purchase. Slate v. Marion, 104 N.C.App. 132, 408 S.E.2d 189 (1991)

50 Purchase Money (cont d) Lender priority only Marital interest of non-title-holder spouse is subordinate. NCGS For purchase money portion ONLY, not future construction -- Dalton Moran Shook case Not subordinate to construction loan. Carolina Builders. V. Howard- Veasey Homes, 72 N.C.App. 224, 324 S.E.2d 626 (1985)

51 Purchase Money: Issues Conveyance to only one spouse Mortgage solely for purchase, not future advance, construction, equity line Buyer judgments, liens, spousal interest still attach as subordinate matter to true PMDOT only but have priority over equity line, construction funds, etc. Simultaneous recording Risky because no clear statutory authority

52 Buyer Judgments Structure ownership - other options (to prevent lien of a purchaser from attaching) Advise buyer of effects on ability to use property Federal Debt Collection Procedures Act of 1990 (28 U.S.C. 3201(b) -- priority over PM Loans for construction or equity lines -- bifurcated by Dalton Moran Shook case

53 RISK AREA #3: Construction Loans & Mechanics Liens Chapter 44A, Article 2 of NCGS Dalton Moran Shook, Inc. v. Pitt Dev. Co., 113 N.C. App. 707, 440 S.E.2d 585 (1994) -- bifurcated priority G.S et seq - future advance provisions for deed of trust

54 Owner/Buyer potential construction lien claimants: Architect Suppliers

55 Waivers & subordinations If no recent construction, need AFFIDAVIT / INDEMNITY / WAIVER from current owner If construction completed, need WAIVERS from all contractors (persons who dealt with owner), not just owner If construction contemplated or in progress, also need SUBORDINATIONS from contractors (persons who dealt with owner)

56 Sale / construction loan Indemnity from seller (raw land) AND Subordination from buyer & contractors (construction contemplated)

57 Owner/Buyer potential construction lien claimants: Graders Surveyor

58 Owner/Buyer potential construction lien claimants: Any mechanic, materialman, supplier dealing directly with owner Not nec ly general contractor under licensing law -- different definition & standards

59 RISK AREA #4: Mobile Home Either G.S (if DMV title) or (if no DMV title) applies to convert title to RP Must appear of record at Register of Deeds after 1/1/02 or conversion not completed word/mobilehomes doc

60 Land / home deal = construction Need subordinations / waivers from contractors (incl. seller) who graded, installed well, septic, driveway or other improvements

61 REMEMBER! It s all about: Protecting your client To the best of your ability Acting Professionally Finding personal satisfaction in each and every day

Ability-to-Repay Statutes

Ability-to-Repay Statutes FEDERAL ALABAMA ALASKA ARIZONA ARKANSAS CALIFORNIA STATUTE Truth in Lending, Regulation Z Consumer Credit Secure and Fair Enforcement for Bankers, Brokers, and Loan Originators