Total Real Estate Group

A Critical Change to Borrower Deficiency Liability

For anyone involved in the real estate finance industry in Oregon, one should be aware of a critical change in the definition of a “residential trust deed”, which occurred when Governor Kitzhaber signed HB 3389 this past Friday, July 19, 2013. This change is the third iteration of the definition in just the past three years.

Under HB 3389, a “residential trust deed” is now defined as “…a trust deed on property on which are situated four or fewer residential units, one of which the grantor, the grantor’s spouse or the grantor’s minor or dependent child occupies as a principal residence at the time the trust deed is recorded or, in the case of a purchase money loan, one of which is intended to be the principal residence of the grantor, the grantor’s spouse or the grantor’s minor or dependent child after the trust deed is recorded.” The focus is now on what the original purpose was of the loan, and any subsequent change of usage is irrelevant.

This change was attempted to be incorporated in SB 558, but was rejected, and what we know from the discussion in connection with that law is that the proponents sought to create some certainty in the process of the determination of what is or is not a “residential trust deed”, or, to put it a different way, to stop the perceived “gaming” of the system by the borrower. Note that there is no prospective effective date language in HB 3389, so the definition changed immediately on July 19, 2013 (if anyone disagrees with this, I would certainly appreciate your input).

Presumably, therefore, the change could apply to any trust deed in Oregon as to which no judicial foreclosure action has started, as well as to any judicial foreclosure action which has started but has not yet been concluded through a sheriff’s sale (I say this only because it is certainly possible for a lender to seek to amend the judgment to permit a deficiency claim as long as the sheriff’s sale has not yet occurred).

This may come as a significant shock to a borrower who had placed reliance upon the existing laws and was proceeding as if it was a certainty that no deficiency claim could be obtained (and also for any lawyer who had provided legal advice to such borrowers about their exposure (or lack of exposure) to deficiency claims.)

Here is just one example of the potential impact of the new law:

Borrower purchases the property initially as a rental property. The trust deed is recorded. Several years later, the renter moves out, the borrower moves in to the rental property and occupies it as the primary residence. The borrower then defaults under the loan, and the lender commences a judicial foreclosure action. Under the law just passed in 2012, SB 1552, in which a “residential trust deed” was defined as a trust deed which is occupied as the primary residence at the time a default occurs which leads to the foreclosure of the trust deed, this borrower was safe from having a deficiency claim made against the borrower, and may have obtained legal advice to this effect. Under the new law, that is not the case, and a deficiency judgment could be obtained against the borrower, without regard to whether the borrower was protected under prior law or not. On this point, if there is any basis for the borrower to assert that he/she should not be subject to the application of the new law under such circumstances, please let us all know of the potential available grounds for relief.

Finally, what about us lawyers who have advised our clients/borrowers of the existing laws, and what their exposure is to deficiency claims? I expect that we need to now follow up with every such client and advise that the law has changed dramatically, and to now look to the origin of the loan, and whether it was a loan for a rental/investment purpose, or if it was a loan intended for the refinance or purchase of a primary residence. It would now appear that it will be important for a borrower to retain copies of all initial loan documents, in order to be able to establish the initial purpose of the loan.

© David R. Ambrose and Ambrose Law Group LLC

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Disclaimer: this column does not constitute the giving of legal advice, and your reading this column does not create an attorney/client relationship. You are encouraged to consult a lawyer or accountant should you have questions about how this information may be applicable to your particular situation.