This article addresses requests on the holder of a trust deed for either a report on the current status of the secured debt or a payoff demand to satisfy the debt and reconvey the trust deed.
Confirming loan conditions
A beneficiary statement is a written disclosure from a lender regarding the condition of a loan or other debt secured by real estate.
A complete beneficiary statement includes:
- the amount of the unpaid balance;
- the interest rate of the loan;
- the total of all overdue payments of principal and/or interest;
- the amounts of any periodic payments;
- the date the loan is due;
- the date to which real estate taxes and special assessments have been paid, if known;
- the amount of hazard insurance and its term and premium, if known;any impound balance reserve for payments of taxes and insurance;
- the amount of any additional charges incurred by the beneficiary which have become part of the trust deed lien; and
- whether the trust deed debt can be transferred to a new owner. [Calif. Civil Code §2943(a)(2)]
On adjustable rate notes (ARMs), the beneficiary statement must list the note rate as variable, and reference and attach a copy of the note containing the rate formula.
Since formulas for ARM adjustments vary extensively from note to note, the person intending to rely on the beneficiary statement for an ARM needs greater detail than the current interest rate and payment amount. Thus, the need to attach a copy of the note to the statement.
Time period for request response
Any entitled person may request, in writing, a beneficiary statement. An entitled person includes:
the original borrower on the note and trust deed;
the successor-in-interest (new owner) to the original borrower; or
an authorized agent of either, such as a real estate broker, attorney or escrow. [CC §2943(a)(4)]
The lender must, within 21 days of receipt of a written request by an entitled person, prepare and deliver a beneficiary statement for a charge not to exceed $30. [CC §2943(b)(1), 2943(b)(6)]
Intentional failure to timely send the statement results in a $300 forfeiture by the lender to the person making the request. Also, the lender is liable for all damages resulting from its failure to comply. [CC §2943(e)(4)]
However, the lender’s failure to timely deliver the statement must be proven to be an intentional failure – a difficult task.
Editor’s note — Previously, mere administrative failure to send the beneficiary statement within the 21-day period resulted in an automatic forfeiture of $300 by the lender. [Anderson v. Heart Federal Savings (1989) 208 CA3d 202]
The request for a beneficiary statement may be made by an entitled person before or within two months after the recording of a Notice of Default (NOD). [CC §2943(b)(2)]
The lender may not charge more than $30 for each beneficiary statement, with the exception of loans insured by the Federal Housing Administration (FHA) or the Veterans Administration (VA). Occasionally, the trust deed states a lesser amount that then controls the charge. [CC §2943(e)(6)]
A payoff demand statement is a written demand by the lender of the amounts required, on the date of preparation, to pay off the loan and reconvey the trust deed.
The statement includes information and formulas to calculate on a per diem basis the payoff amount after the date it is issued. The statement is issued for up to 30 days, or less if the loan terms will change, such as with loans with adjustable interest and payments. [CC §2943(a)(5)]
The payoff demand, as with the beneficiary statement, is required to be delivered within 21 days of receipt of a written request from an entitled person. The charge for this service is limited to $30, unless the loan is insured by the FHA or VA. [CC §§2943(c), 2943(e)(6)]
As with the beneficiary statement, intentional failure to timely reply results in the lender’s forfeiture of $300 and liability for any resulting money damages. [CC §2943(e)(4)]
However, if the loan is in foreclosure under a trustee’s or judicial action and the notice of sale has been published, the lender need not respond to requests for a payoff demand received on or after publication since separate rules apply to demands during foreclosure. [CC §2943(c)]
Requests during foreclosure
A lender is required, as part of complying with the foreclosure process, to provide the owner-in-foreclosure with an accounting of the exact amount due to reinstate or redeem the loan.
Procedurally, the recorded NOD states the beneficiary must provide the owner-in-foreclosure with accurate information in response to the owner’s written request to determine the exact amount to be paid to stop the foreclosure. [CC §2924c(b)(1)]
Requesting the statement
Unless an entitled person, such as the owner-in-foreclosure, specifically requests a beneficiary statement, the lender need only send a payoff demand statement. [CC §2943(e)(1)]
The request for either statement must be in writing and sent to the lender at the address given in the payment notice or payment book. [CC §2943(e)(5)]
Before delivering the beneficiary statement or payoff demand, the lender may require proof the request is being made by an entitled person – proof of ownership or proof of authority. The written request by escrow should be accompanied by escrow’s written authorization. [CC §2943(e)(3)]
If a request for either a beneficiary statement or a payoff demand includes a request for a copy of the trust deed, the lender must supply copies of the document at no extra charge. [CC §2943(e)(2)]
The statutory scheme for beneficiary statements does not require that a payoff demand include delivery of a copy of the note.
For the lender to demand the amounts necessary to pay a loan in full, the lender may issue either the beneficiary statement or the payoff demand statement. [CC §2943(d)(1)]
Any amendment to either statement given orally by the lender must be followed up by delivery of a written amendment by the next business day. [CC §2943(d)(2)]
Amended statements can also be relied on to establish payoff amounts. [CC §2943(d)(1)]
However, any error in the statements regarding the amount owed the lender becomes an unsecured obligation of the original borrower after the close of escrow or completion of the trustee’s sale. If either loan statement is amended prior to the close of escrow or the trustee’s sale, the amounts listed in the amended statement control. [CC §§2943(d)(3)(A), 2943(3)(B)]
For example, an owner refinances a trust deed note with a new lender. The payoff demand on the existing note understates the amount due. The new lender funds the amount stated in the payoff demand and the existing trust deed is reconveyed.
Later, the paid-off lender realizes the mistake in the amount of the payoff and seeks to recover the underpayment from the new lender. The paid-off lender claims the new lender is liable for the unpaid amount since it funded the payoff.
The new lender claims the real estate owner who signed the note is liable for the unpaid amount since the statutory scheme only allows for recovery from the borrower obligated on the note for any amount due that remains unpaid on reconveyance of the trust deed.
Here, the lender issuing an erroneous payoff demand can only recover any amounts remaining unpaid from the original borrower. The named borrower on the note is the sole source of recovery for amounts understated in the payoff demand. [Freedom Financial Thrift & Loan v. Golden Pacific Bank (1993) 20 CA4th 1305]
Further, if a prepayment penalty, late charge, attorney fees or other enforceable charges are not included in a payoff demand, the charges become unsecured obligations of the original borrower, not the buyer – collection of which is limited by anti-deficiency rules to the value of the property at the time of the payoff. [First Nationwide Savings, supra]
Nonrecourse vs. recourse obligations after payoff
Buyers of owner-occupied, one-to-four unit residential property subject to purchase-assist loans are barred from a judgment for any deficiency in the value of the property to cover the loan on a foreclosure. These loans are nonrecourse loans, called purchase-money obligations. Likewise, carryback notes secured only by the property sold are nonrecourse, purchase-money paper and those who hold them are also barred from obtaining a deficiency judgment.
If a mistake is made by the lender in the amount of a payoff demand or beneficiary statement for a nonrecourse loan, the lender is barred from recovering losses in excess of the property value to cover the correct amount at the time of the erroneous payoff demand.
Initially, the amount of the error is an unsecured purchase-money obligation of the original borrower, but the amount is still nonrecourse paper. The character of the debt did not change – it only became unsecured. [CC §2943(d)(3)]
Since an error in the payoff demand on nonrecourse paper is still a nonrecourse debt, the lender is limited to a money judgment for the difference between the amount received and the value of the property at the time of the initial payoff. [Ghirardo v. Antonioli (1996) 14 C4th 39]
Also, if an error is made in the beneficiary statement or payoff demand for a recourse debt, the amount of the understatement or underpayment becomes an unsecured debt. However, recovery on a recourse loan is not limited to the value of the property on the date of the payoff. [Calif. Code of Civil Procedure §726(b)]
The lender who demands and is paid an erroneous amount on payoff of a recourse loan can proceed straightaway to a money judgment for the uncollected amount, disregarding the value of the security.
Thus, sellers are exposed to a continuing liability for trust deed debts they owed as original or assuming borrowers when the property is sold subject to the existing trust deed debt.
When a buyer acquires the property subject to, or by assumption of a secured loan, the real estate is the lender’s primary source for recovery. However, the seller is considered a “guarantor,” secondarily liable for payment of the loan, unless the assumption included a significant modification to which the seller did not consent. [Braun v. Crew (1920) 183 C 728]
If the buyer who purchases the property later resells the property, and a mistake is made in the beneficiary statement leading to a deficiency for the lender, then the seller, as a guarantor of payments, is liable for the error.
Thus, the seller who is the original borrower or who enters into a written assumption of the loan with the lender, may feel compelled to condition the closing of any sale on a release of liability from the lender for any future errors in the beneficiary statements, called a novation.
The release eliminates the seller’s risk of “original borrower” liability for a future error by the lender in payoff demands or beneficiary statements. [CC §1531]
In a novation, as with an assumption, the buyer promises to perform the duties of the original borrower. In addition, the lender agrees to release the seller from all liability for the debt under the novation.