Removing the lien on property when a secured loan has been repaid Law Offices of Fred M. Duman & Associates 2807 Castro Valley Boulevard     Castro Valley, California 94546 Tel: (510) 537-3388 Fax: (510) 889-1114

Several years ago, you wrote an article about what to do when you paid up your mortgage.

Well, soon, I will be paying off that mortgage and with that final mortgage payment.

Will I receive a "pink slip", like when someone pays off a vehicle?  What is the procedure?  What is the mortgage company's responsibility, in this state, California?

If you can respond to these questions, I would ever be so humble.

      J.L., Fremont 

You are prudent to inquire about this subject, since you may wish take specific measures to ensure that the proper records reflect your full repayment of your secured loan.

For purposes of this discussion, I will assume that your loan is secured with a "deed of trust", rather than a "mortgage".  Although both documents are a security instruments, and the latter is hardly ever used any more.

A "deed of trust" is a legal document typically executed by a property owner (the "trustor"), who is borrowing a sum of money and is using real property as "security" or collateral for the loan.  Along with the deed of trust, the borrower will usually execute a promissory note in favor of the lender (the "beneficiary"), which will set out the terms of repayment of the underlying loan.  Generally, at the inception of the loan, the deed of trust is recorded in the county where the property, used as security, is located.

The effect of the deed of trust, upon the borrower's ("trustor's") default of the terms of the promissory note, is to entitle the lender to satisfy the debt amount through a foreclosure sale of the  property, used as security.

The security instrument is called a "deed of trust", because language of the document appoints a "trustee", who is given the power to institute foreclosure proceedings in the event of the trustor's default, and to convey title to a buyer at a foreclosure sale.

Generally speaking, upon full repayment of a loan secured by real property, California Civil Code, Section 2941 requires the lender to return the original note to the trustee under the deed of trust and to instruct the trustee to execute a Deed of Reconveyance in favor of the trustor.   The borrower is generally required to also pay the appropriate statutory reconveyance and recording fees.  The Deed of Reconveyance is then recorded with the County Recorder's office in the county where the real property is located.   The effect of recording the "Deed of Reconveyance" imparts "constructive notice" to the public that the lien on the real property has been satisfied and effectively removed from the property.

Our readers should be aware that it is not uncommon, when dealing with an out of state lender, to experience difficulty in getting a deed of reconveyance, because the out of state lender may be unfamiliar with California law.

We recommend, prior to making your last payment, that you contact your lender to determine how it plans to arrange for the reconveyance of the deed of trust.  Unfortunately, our readers may find that dealing with a large corporate lender is not simple, and it may take patience and assertiveness to find the right department capable of dealing with the reconveyance of the deed of trust.

With business loans, where the balance of the debt is being fully paid, the borrower often establishes an escrow account (with a title insurance company or escrow company) to facilitate the simultaneous exchange of the promissory note and the instruction to the trustee to reconvey the deed of trust from the lender, for the borrower's full payment of the balance due on the loan.

By using an escrow, the borrower/trustor can ensure that the lender will prepare the necessary reconveyance documents as a condition to receiving the loan payoff.  Conversely, the lender is assured that the deed of trust will not be reconveyed until the lender has received the appropriate sums from the borrower.

Unfortunately, the use of an escrow can prove to be a rather expensive means to receive a deed of reconveyance upon the payment of the last installment of a home loan.  If your attempts to communicate with your lender, prior to making your last payment fails, you may wish to consult with your lawyer prior to actually opening an escrow.

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