Loans are Complex

Anybody who has borrowed money from a commercial lender knows that the stack of paper concerning such a loan is substantial.  There are often disclosures, Agreements, and all sorts of papers that accompany such a loan.  Most people seem to place them in a folder and tuck them somewhere deep in their filing system – the back of the garage, a tall filing cabinet, maybe a shelf in a closet somewhere.  Seems like most of the time the purpose for all of these papers isn’t really described in any detail – it’s just that the papers are there, they are part of the loan process, and they often must be signed or the lender won’t make the loan.  So at the end of the day, a borrower often ends up with a stack of paper, and often the borrower doesn’t have a good idea as to why these papers are necessary, or why the borrower has been asked to sign all of them.

Two of the most important documents in any real estate loan are the “loan document” and the “security instrument.”  The “loan document” evidences the loan, and is sometimes called an “Agreement”, a “Loan Agreement”, a  “Promissory Note” or something similar.  Borrowers might talk about receiving a “Mortgage” but in California most borrowers won’t be able to find a document called a “Mortgage” in their stack of loan papers.  That’s because Mortgages can be used, but common practice in California is to use something called a “Deed of Trust” instead of a Mortgage.  Such a “Deed of Trust” is a security instrument.  A “Deed of Trust” serves as “security” for a loan, which means that the lender can look to the “security” for payment if the borrower doesn’t repay the loan as agreed.   Most often the lender looks to the “security” for repayment through foreclosure.

Sometimes the relationship between the “Promissory Note” and the security instrument, or “Deed of Trust,” is not well understood.  Borrowers can mistakenly think that the “Deed of Trust” is the actual loan document.  But that is not the purpose nor the effect of a “Deed of Trust.”  In most cases, a Deed of Trust only serves as “security” for the loan in case the borrowed money is not repaid.

A Deed of Trust transfers a present interest in the property to the lender (the lender is typically the “beneficiary” under the Deed of Trust, which means that the lender is to receive the “benefit” of the Deed of Trust.)  When a loan is repaid, a Deed of Trust isn’t “canceled” or “terminated.”  Instead, the lender “reconveys” the property interest back to the borrower. In other words, the lender gives back to the borrower the property interest the lender received under the Deed of Trust.

Copyright 2017 ROBERT B. JACOBS