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The foreclosure crisis taught us that even the most routine and common of tasks can be the source of major problems when not handled properly. In fact, failure to treat the common assignment with sufficient care has cost some companies millions of dollars and even caused some to go out of business.

What follows are six essential considerations for servicers that must undertake these tasks or assign them to outside service providers:

 

1. Know what has come before

Except in cases where the servicer’s own affiliated loan origination company wrote the loan - and sometimes not even then - the servicer should not rely solely on its own files as a source of information about the chain of title.

If the loan was transferred even once during its history, any document the servicer inserts into the public record could create a break in the chain that could later be exploited by the borrower’s attorney in a future legal proceeding. In some cases, the chain may already be broken and should be corrected long before the borrower experiences any difficulties that put the loan’s repayment in jeopardy.

The servicer’s own file is an excellent starting point for the necessary research that goes into creating a complete and accurate assignment. But that is only the beginning. The research may extend outside the enterprise, possibly back to the originator, but almost certainly to the county recorder’s office.

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2. Do not rely on rescissions

As a means of correcting a document that has already been made a part of the public record, rescissions often fall short. In most jurisdictions across the country, it is impossible to “rescind” a document that has been recorded, regardless of whether the county recorder accepts a written rescission or not. This is obviously a serious problem because the servicer may later operate as if the rescission solved the problem when, in fact, it did not.

Instead of filing a rescission, servicers should use a corrective document. In most counties across the country, a corrective document can correct a scrivener’s error or even something incorrectly assigned.

For example, let’s use the case in which Bank A desires to sell a loan’s servicing rights to Bank B. Unfortunately, Bank A accidentally assigns the rights to Bank X and that assignment is recorded into the public record. Because this was an error, it is possible to record a corrective document that clearly states that it is being recorded to correct the document of record that came in the chain just before it, correctly assigning the rights from Bank A to Bank B.

The assignment to Bank X will always remain a part of the public record. Because it was recorded legally, it cannot be removed, rendering a rescission an ineffective solution for this problem. However, the corrective document will make clear to all future researchers to whom the rights were actually assigned.

In our experience, a corrective document is effective in virtually every case. The only exception we have found involves states, such as New York, in which you must appear in court to have an incorrectly recorded document corrected or removed.

 

3. If you must rescind, involve the grantee

In cases where you feel you absolutely must file a rescission, you should take steps to ensure that it will have the result on the chain of title that you expect. This means that you should consider the possibility of asking the original grantee to join in the rescission document.

There is a standard that has been embraced by the title industry and the courts that holds that a transfer, once made, cannot be unilaterally “undone” by the grantor. According to the standard, once the grantor signs the document, it has given up to the grantee the right to further affect title to the property.

There is a sound legal basis for this standard and, in general, it serves the industry and the consumer well that it be so. However, in the case of an error, such as that described in the example above, it tends to make a simple rescission ineffective.

 

4. Be specific in the rights you assign

It is important that the assignment document the servicer records into the public record specifies exactly what rights are transferred to the grantee and only those rights. Historically, there has been a tendency to simply transfer any rights that are available to the grantor under the promissory note.

This is no longer a recommended practice. While it seems, on its face, to be an acceptable method to transfer any and all rights to the grantee, such assignments have been successfully challenged in court and have resulted in investor losses. Assignments should, by their terms, transfer only the rights that are meant to be transferred.

 

5. Have the authority to assign

Servicers and some of their third-party service providers encountered a very high level of borrower confusion when foreclosure attorneys revealed that signers of some documents were not employees of the banks making the assignments. Due to the nature of the business, it is necessary to send some document preparation tasks outside of the servicer’s enterprise. The foreclosure crisis taught the industry that this requires a high level of care.

In all cases, the entity that executes an assignment should have the authority to execute a transfer of the underlying mortgage or deed of trust. Failure to demonstrate that such authority exists has been a boon to foreclosure attorneys and a source of significant financial pain to the industry. This is unfortunate, as there are a number of ways to make this process safe and defensible.

The corporate resolution is often used to grant signing authority to an entity that exists outside of the company. However, when used, the terms of such a resolution must be carefully monitored to ensure that the documents being executed under the resolution are being executed with full legal authority.

This is a rights management function that service providers, by now, should have well in hand. This is the only way to ensure that the documents being signed are covered by the terms of the resolution and the person actually signing the document is the entity authorized by the resolution to do so.

Similarly, a powers of attorney can be used to grant signing authority to a servicer or assignee. In such situations, care must be taken to ensure that the document being signed is one that is described by the power of attorney.

Many of the states list out, with great specificity, the persons who are authorized or required to execute releases in their jurisdictions. Servicers should familiarize themselves with those statutes to make sure the entity that signs the release is one of the statutorily authorized entities. Many states have adopted a practice of accepting releases signed by practically anyone, but given the current regulatory environment, one should not expect such practices to go unnoticed.

 

6. Never mark a document ‘paid in full’ if it’s not

No release that the servicer records into the public record should ever be marked “Paid in Full” if the borrower - or any other party - is paying less than the full principal balance of the promissory note.

Failure to properly reflect the details of the transaction in the release document can result in an unexpected loss on the note and can also adversely affect the tax consequences of the transaction. Furthermore, making the document in such a way as to indicate that the note has been paid will make it very difficult, if not impossible, to pursue a deficiency judgment in a future attempt to collect any balance that remains unpaid.

 

A word about compliance

No discussion of assignments or lien releases would be complete without some attention to compliance concerns in the current environment. Rules and standards are still under development, and there can be no assurances that the rules won’t change significantly in the future. All the servicer can do is make every effort to comply with current rules and create systems that can be used to demonstrate a customer-focused approach to regulators.

A reliable and accurate document preparation operation must be built on standard practices, and those practices must be written and available to all staff for training purposes. Because such systems tend to rely heavily on individual actions, they should be subject to random inspections to spot and correct the variations of standard practices that inevitably creep in over time. We have found this to be an effective method of maintaining auditable standards.

In closing, any activity contains a near-infinity of wrong ways to do things and usually only one right way. That “right way” is defined by a precise and well-documented standard - one that doesn’t pendulum swing from one extreme to the other. While there are far more essential considerations to these document types, the above six have been distilled from many hard-won lessons learned over 23 years and tens of millions of assignments and releases recorded. s

 

John Hillman is CEO of Palm Harbor, Fla.-based Nationwide Title Clearing. He can be reached at johnhillman@nwtc.com.

Assignment-Release-Reconveyance

Six Considerations For Assignment And Release

By John Hillman

Very often, there’s only one “right” way to handle assignment-release processes.

 

 

 

 

 

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