During its past two regular sessions, the Utah legislature enacted two bills (S.B. 53 (2001) and H.B. 44 (2002)) substantially modifying the statutes governing trust deeds. This article is intended to provide some background for these bills and give a brief overview of the significant changes involved.
Utah's trust deed statutes were first enacted in 1961. During the ensuing four decades, the real estate lending arena, like most things, changed significantly. In the spring of 2000, several attorneys with foreclosure practices met to discuss the possibility of updating the statutes governing trust deeds to address aspects of the then current law that were felt to be either outdated or needing improvement. In addition, during recent years, foreclosures were increasingly being conducted in Utah by out-of-state, non-qualified trustees using 'agency' arrangements. Several out-of-state trustee companies, and even some mortgage lenders, which did not otherwise qualify as trustees under Utah law, entered into arrangements with local title agencies pursuant to which the title agencies would serve as the nominal trustees in order to meet the statutory requirement. The actual handling of the foreclosure, though, was done by the out-of-state company. That practice not only violated the statutory limitation on trustee qualification, but it increasingly became the source of difficulty and delays for borrowers seeking to reinstate or payoff defaulted mortgage obligations and third parties interested in pending foreclosure proceedings.
S.B. 53 (2001), sponsored by Senator Michael Waddoups, was the result of efforts to improve the existing statutes and stop out-of-state, non-qualified trustees from handling foreclosures in Utah. Additional concerns with the qualifications of trustees conducting of trust deed foreclosures and the handling of residential trust deed foreclosures resulted in H.B. 44 (2002), sponsored by Representative David Clark.
S.B. 53 Changes.
Trustee qualification. Section 57-1-211 was amended to require that only Utah resident members of the Bar and title companies could serve as trustees for purposes of handling foreclosure proceedings.2 In addition, subsection (4) was added to section 57-1-21 to address the situation where a deed of trust does not name a trustee or names a non-qualified trustee. Prior to the enactment of S.B. 53, failure to include a qualified trustee in a deed of trust could have resulted in a determination that the lender holding the deed of trust had no lien on the property or, at best, that the lender would have to foreclose its lien judicially. The statute now provides that the failure to name a qualified trustee doesn't invalidate the lien. It merely requires that a qualified trustee be appointed before non-judicial foreclosure proceedings may be employed.
Section 57-1-21.5 was added to ensure that certain core duties of the trustee would not be delegated. This was intended to specifically address the practice of out-of-state, non-qualified trustees using agency agreements to get around the trustee qualification requirements.
Substitution of Trustee. Prior to the enactment of S.B. 53, the statute stated that an appointment of a substitute trustee would not be effective until it was, not only executed and acknowledged, but, actually recorded. That requirement was removed and a provision added that allows the holder of the deed of trust to ratify any action taken by the new trustee prior to the recording. Also, to deal with issues arising out of situations where trust deed property straddles county lines, the recording requirement for substitutions was modified to clarify that they must be recorded in each county in which the trust deed property is situated.
Advertising Foreclosure Sales. Section 57-1-25 was modified to change the requirement that a notice of foreclosure sale be posted in three public places in the county. The absence of better definition in the prior statute often resulted in postings being made on three telephone poles in the county. It was felt that that did little to provide interested parties with information about pending sales. So, it was replaced with a requirement that the notice be posted at the county recorders' offices, providing a clearly identified and fixed location where interested parties can find information about upcoming sales. In addition, the recommended language for the notice of sale was modified to require disclosure of the names of the current owners of the property being foreclosed, in addition to the names of the original borrowers, if different from the current owners.
Conducting Foreclosure Sales. The prior statute allowed only a single postponement of a scheduled foreclosure sale for a period not to exceed 72 hours. That often resulted, unnecessarily, in the trustee having to completely re-do the posting and publication in order to extend the time for the sale to allow a borrower to cure the default or work out some other arrangement with the lender. That frequently led to lenders' unwillingness to allow a postponement that could benefit the borrower. The revised statute now gives the trustee the flexibility to postpone the sale up to 45 days without the requirement of re-publication and re-posting.
S.B. 53 also affirmatively allows a trustee to "strike off" a foreclosure sale to the next highest bidder in the event that the highest bidder fails to produce the funds to pay the bid amount. Although some trustees had followed that practice, there was previously no specific statutory authority for that.
Additionally, at the request of the Utah Board of Realtors, the language of the statute governing the location of the sale was modified to allow the sale to occur at either the county courthouse or, subject to certain qualifications concerning the notice, at the location of the property being foreclosed.3
Requests for Notice. Title companies' input on S.B. 53 can be found in a change affecting the provision for requesting notice of foreclosure proceedings. Many lenders making 2nd mortgage loans on real property previously employed the practice of including a request for notice in the body of their 2nd deed of trust. To avoid the risk of overlooking such a request, the legislation now requires that a request for notice recorded by a junior lienholder or other interested party must now be set out in a separate recorded document.
Also, the requirement that a notice of default be published within 10 days if no address for the borrower is set out in the deed of trust and no request for notice has been recorded by the borrower was changed. In such an event, the statutes now give the trustee 15 days and allow the trustee to either post the notice on the property or mail the notice to the borrower at the property address.
Effective Time of Sale. Several bankruptcy court decisions previously held that the filing of a bankruptcy petition by a borrower, subsequent to the completion of a foreclosure sale, but prior to the recording of the trustee's deed, invalidated the foreclosure sale and subjected the property to the effects of the bankruptcy stay. Language was included in S.B. 53 that the issuance and recording of a trustee's deed are purely ministerial acts and that the foreclosure sale of property is final. However, a subsequent, unreported ruling of the bankruptcy court shows that the effort was only partially successful.4
Disposition of Excess Sale Proceeds. The provisions of section 57-1-29 were modified to incorporate and expand upon the procedures for handling excess sale proceeds previously found in Rule 4-507 of the Utah Rules of Judicial Administration. The new language clarifies the duties of the trustee and court personnel with respect to excess sale proceeds deposited with the court for disposition. It also sets out the procedure to be used by a person claiming entitlement to the excess proceeds.
Erroneous Release of Deed of Trust. Prior to the enactment of S.B. 53, the trust deed statutes contained no indication of the effect of an erroneous recording of a release or reconveyance of a trust deed. As a result, title insurance underwriters were reluctant to issue policies protecting lenders or third party purchasers of foreclosed property, if the trust deed had been released by mistake. That often led to litigation in order to resolve title questions. S.B. 53 added subsection (3) to section 57-1-33 to address that problem. The statute now allows the beneficiary of an erroneously released deed of trust to record a corrective affidavit. Such a recording gives the deed of trust its original priority, subject to any lien or interest that was recorded or attached between the time the erroneous reconveyance was recorded and the recording of the corrective affidavit.
H.B. 44 Changes
Trustee Qualification. Apparently responding to the Kleinsmith challenge to the residency requirement, H.B. 44 requires a member of the Bar to either reside in Utah or maintain a 'bona fide'5 office in the state in order to qualify as a trustee of a deed of trust. In addition, to address the distinction between a local title agent and a title insurance underwriter, section 57-1-21 was modified to allow either to serve as a trustee if holding a certificate of authority or license under the Insurance Code and maintaining a bona fide office in the state.
Trustee's Conduct. Section 57-1-21.5, enacted in 2001 to prohibit trustees from delegating certain core duties, was expanded to prohibit trustees from receiving compensation for referring title, publishing or posting business and from charging more than their actual costs in connection with a loan reinstatement or payoff or a foreclosure sale. Violation of the provision against charging more than actual costs subjects trustees to potential Class B misdemeanor charges and the greater of actual damages or $1,000.00. A provision was included in the expanded section to clarify that the bar on referral compensation does not preclude trustees from receiving non-preferred profits based upon ownership interests or franchise relationships.
Conducting Trustee's Sales. The provision allowing the trustee to conduct the foreclosure sale at the location of the property being foreclosed was removed by H.B. 44.
Requests for Notice. Section 57-1-26 was modified by H.B. 44 to require a trustee responding to a recorded request for notice to provide a 'signed copy'6 of the notice of default or notice of sale and, also, the following information: (I) the name of the trustee, (ii) the trustee's mailing address, (iii) the address of the trustee's bona fide office in the state (if one is maintained), (iv) the hours during which the trustee can be contacted regarding the notice, and (v) a telephone number that can be used to contact the trustee during business hours.
Delivery of Trustee's Deed. The trustee is now required by section 57-1-28(2) to deliver the trustee's deed to the purchaser within three business days of the day when the trustee receives payment of the bid price. Failure to do so subjects the trustee to liability for any loss suffered by the purchaser as a result of that failure.
Disclosures. Finally, new section 57-1-31.5 imposes disclosure requirements on a trustee providing reinstatement or payoff information to a requesting borrower. The trustee must provide, with the payoff or reinstatement statement, a detailed listing of any of the following items that the borrower is required to pay: attorney's fees, trustee fees, title fees, publication fees and posting fees. In addition, the trustee must disclose any relationship the trustee has with a third party that provides services related to the foreclosure.7
Together S.B. 53 and H. B. 44 have substantially modified Utah's Trust Deed foreclosure law. Utah attorneys acting as or advising trustees of Trust Deeds or involved in real property issues should carefully read and consider these changes and how they affect Trust Deeds and their foreclosure.
1. All section references are to the Utah Code Annotated, as amended.
2. The S.B. 53 residency requirement for members of the Bar was successfully challenged in federal court by Phillip Kleinsmith, a member of the Bar residing in Colorado. Pursuant to a summary judgment entered in federal court on August 13, 2001, a permanent injunction was entered barring the enforcement of the phrase 'residing in Utah' in section 57-1-21(1)(a)(I).
3. However, see H.B. 44 changes below where the ability to conduct the sale at the property location was removed.
4. In re Silcox, Bkrtcy. No. 01B-29216, December 11, 2001. Judge Judith Boulden ruled that the new language requires that the trustee's deed be executed before the deed is considered effective and relates back to the sale. She went on, though, to state that the effect of the conducted foreclosure sale was to leave the debtor with only bare legal title to the property and no right to cure the default through a chapter 13 plan. So relief from the automatic stay was granted to allow the trustee to execute and record the trustee's deed without further delay.
5. House Bill 44 defines a 'bona fide' office as one that is open to the public, is staffed during regular business hours and at which a trustor may in person request information regarding a trust deed or deliver reinstatement or payoff funds.
6. The language of the bill would appear to require that the trustee sign a copy of the Notice of Default or Notice of Sale that is sent to the requesting party. It is assumed that the actual intent was that a copy of the signed notice be provided.
7. Although the trustee is required to disclose any such relationship, he or she is not required to provide specific detail as to the nature of the interest or the amount of compensation the trustee may receive from that relationship.