Best Practices: Lender Liability for Failure to Satisfy a Mortgage

Most state statutes require that any lender who receives full payment of all sums due on a mortgage must satisfy said mortgage following a formal request from the borrower. Recently, there has been an alarming trend amongst even the most sophisticated lenders – said trend pertains to the failure of lenders to timely satisfy or release a mortgage or a deed of trust following the receipt of payment in full from the borrower. Since many states impose significant penalties on creditors who fail to timely release collateral, lenders should prioritize satisfaction or release of a mortgage or a deed of trust once it has been verified that the underlying loan obligation was paid in full.

The SBA specifically addresses this issue in SOP 50 57 2 (“SOP”) which dictates as follows: “[p]ayment in full (“PIF”) means payment of the total amount due on the loan, including principal, interest, and any applicable subsidy recoupment fee or Recoverable Expense. When a loan is verified as PIF, the Note should be cancelled and the collateral released in a timely manner.” Additionally, the SOP specifically notes that lenders should consult legal counsel for state-specific release requirements because, as previously mentioned, states may impose penalties on lenders who fail to release collateral in accordance with state law.
While each jurisdiction has different penalties for failure to satisfy or release a mortgage or a deed of trust, most require some of the following conditions precedent before a court can assess any kind of monetary damages: (1) the Borrower must make a written request to the lender requesting satisfaction; (2) said request must be in a form prescribed by the local statute; (3) said request must be mailed to the lender by way of certified mail, return receipt requested; and (4) the borrower must give the lender 30-60 days to record a satisfaction or release.

In the event a lender neglects, or otherwise fails, to record a satisfaction or release of mortgage or a deed of trust and the borrower complies with the general notice requirements, as identified above, the borrower may initiate a lawsuit against said lender where upon successful action the borrower may recover: (1) costs of the action; (2) reasonable attorney’s fees; (3) per diem monetary penalty ranging from $100 to $500; (4) fixed monetary penalty up to $5,000; (5) sum of the original loan amount; and/or (6) actual damages for economic loss.

It is important to keep in mind that the remedies available to the borrower are state specific dictated by local statutory authority. Accordingly, it is important for any special assets group to confer with local legal counsel to make sure that collateral is released in accordance with state law to avoid unnecessary fines, penalties, and protracted litigation.

For more information pertaining to creditors’ rights or mortgage satisfaction requirements, contact Demetri A. Braynin at (267) 470-1210 or via e-mail at  dbraynin@starfieldsmith.com.