A brief refresher of how the Deed of Trust works. Despite common parlance, California is not a “mortgage” state. For example, if Betty Borrower purchases a house in San Jose and puts down $100k and borrows $400k from Wells Fargo Bank, that $400k is memorialized with a Promissory Note (debt instrument) and then the house becomes collateral under the Deed of Trust (security instrument).
The Deed of Trust has 3 parties:
1) The Trustor (borrower who puts up the house)
2) The Beneficiary (lender who lent the purchase money)
3) The Trustee (the person the Beneficiary designates to sell the collateral if the loan is not repaid.)
When Betty Borrower finishes paying off her loan, Wells Fargo Bank must notify the Trustee that the loan is paid off, and complete the “Request for Reconveyance”, which is typically the lower portion of the Deed of Trust (usually not recorded).
California Civil Code section 2941 (b)(1) requires the beneficiary, upon payoff, to “execute and deliver to the trustee the original note, deed of trust, request for a full reconveyance….” The trustee then executes and records the full reconveyance within 21 days of receipt of the documents from the beneficiary, delivers a copy of the reconveyance to the beneficiary and, upon request, delivers the original note and deed of trust to the trustor. (Civ.Code § 2941, subd. (b)(1)(A)-(C).)
What happens if the Trustee or the Benficiary does NOT do this? The statute provides two backup methods to help the owner clear title to their property. First, upon request by the trustor, the beneficiary must substitute itself in as trustee and execute a full reconveyance. (Civ.Code § 2941, subd. (b)(2).) Second, if neither the trustee nor the beneficiary has executed the full reconveyance within 75 calendar days after the loan payoff, “a title insurance company may prepare and record a release of the obligation” after giving notice of its intent to do so to the trustor, trustee, and beneficiary. “The release issued pursuant to this subdivision shall be entitled to recordation and, when recorded, shall be deemed to be the equivalent of a reconveyance of a deed of trust.” (Civ.Code § 2941, subd. (b)(3)(B).)
Are there any teeth to this provision? Not really.
Section 2941(d) states “The violation of this section shall make the violator liable to the person affected by the violation for all damages which that person may sustain by reason of the violation, and shall require that the violator forfeit to that person the sum of three hundred dollars ($300).”
Obviously $300 is not a big penalty for the violation. Establishing the damages from the delayed recording then becomes the more crucial factor. In today’s market of falling interest rates, there is probably a stronger likelihood that Betty Borrower can show some damages due to the inability to refinance at a lower interest rate or take out money of the property—but those types of damages can be difficult to prove beyond speculation.
More crucially, this statute only has 1 year statute of limitations, which means that Betty Borrower has very limited time to file suit against the Trustee and/or Beneficiary. [Prudential Home Mortgage Co. v. Superior Court (1998) 66 Cal.App.4th 1236.]
Ultimately, we have found that clients with this issue have more success after an attorney has worked his or her way up the food chain at a title company to prepare and record the release. Title companies earn revenue by selling insurance and performing a function like this, while part of their duties, does not necessarily earn them any income so working with them can be time consuming. This time delay is further exacerbated by the fact that over the years, many title companies have merged, gone bankrupt or simply changed names thereby making it difficult to track them down. Betty Borrower will be best served if she finds legal assistance early as opposed to waiting until she is trying to sell the property and close escrow in a rush.