You Have One Job: The Narrow Duty of a Trustee Under a Deed of Trust

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In states using deeds of trust, a trustee is a third party who holds legal title to a property until the homebuyer or commercial developer pays off a loan associated with the parcel—or until the borrower defaults.

When a state’s law allows for deeds of trust as instruments to hold legal title to a property:

  • A lender financing the sale or development can easily exercise the right to foreclose.
  • Foreclosure occurs not through the court, but under the power of sale clause in the deed of trust. (This allowance for non-judicial foreclosure differentiates deeds of trusts from mortgages and some land contracts.)

The main thrust is to lower risk for lenders. Perhaps it’s no wonder that deed of trust states rarely go to bat for a borrower fighting foreclosure.

In this analysis, we’ll look at the trustee’s narrow liability under the deed of trust (not to be confused with a living trust, in which a trustee must comport with exacting fiduciary duties.

We’ll also review a recent case in point, involving a commercial borrower in California.

Finally, we’ll look at the exception that proves the rule: North Carolina.

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Nevada Clarifies Mortgage Law, But What About Deed of Trust Lender Entry Provisions?

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In May 2019, effective October 1, 2019, Nevada passed Senate Bill 382 amending the law pertaining to deeds of trust, foreclosure sales, and homeowners’ associations.

Among other things, this is a change to Nevada Revised Statute § 40.050, whose language states that a mortgage of real property is not deemed a conveyance. If a mortgage does not constitute a conveyance, the mortgage lender may take possession on the home upon the inhabitant’s default, bypassing a judicial foreclosure sale.

Nevada employs a deed of trust between the home buyer and the lender. A deed of trust places the legal ownership of a home with a designated trustee until the buyer—who holds equitable ownership—pays off the loan.   

Of course, some buyers do experience financial challenges and find themselves unable to pay their mortgages.

Here, we briefly explore the ramifications, as seen through a case that shook mortgage lenders’ expectations in homes they held legally through deeds of trust.

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What Is a Deed of Trust?

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With a deed of trust, a buyer pledges an interest in real estate to secure a loan. In some states this takes the place of a mortgage document. (For a list of states commonly using deeds of trust see the section on Mortgage States and Deed of Trust States in our previous post, “You’ve Paid Off the Mortgage. What Happens Now?”)

Whereas a mortgage agreement is formed between the borrower and the lender, a deed of trust, also known as a trust deed, has one key difference. The trust deed designates a trustee—a third party who retains legal ownership of the home until the buyer completes the payoff.  

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You’ve Paid Off the Mortgage. What Happens Now?

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Congratulations! Paying off a mortgage is an impressive milestone.

Now that you have paid off all the debt on your property, your home state’s law will direct your lender to take certain actions. 

The lender will send you a certificate of satisfaction. This certificate, which the lender records in your home county, notifies the public that you have satisfied your obligation, and the lender has removed the lien from your property.

A few details of this process depend on what state your property is in, and whether your debt was secured through a deed of trust.

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