Reconveyances and releases.
In 1987, the California attorney general sponsored an amendment to the California Civil Code Section 2941, citing numerous complaints from the public on reconveyance matters. The revision provided ways for banks and title companies to cut through administrative snarls. It also made a lender who had not carried out reconveyances in a timely fashion liable for a substantial penalty for each instance.
Some banks and title companies took advantage of the administrative mechanisms in the law. Many beefed up their payoff departments, got new software or hired outside help to cope with their payoff backlogs.
Despite effective action by some lenders and good intentions by more, the current backlog of reconveyance paperwork is certainly huge. The complicated nature of payoff administration, the refinancing boom and the failure and reorganization of banks (with the multiple reassignment of loans) has left the U.S. real estate industry with between 1 million and 2 million paid-off trust deeds and mortgages that have not been cleared off the property titles.
The class-action factor
On June 3, 1994, a class-action suit was filed in Los Angeles Superior Court by Santa Barbara attorney Peter Bezek, formerly of the firm Capello, Foley and Bezek. The plaintiffs' class is described as "people who paid off loans secured by deeds of trust on real property located within the State of California and, in connection therewith, were charged and paid fees for services relating to th reconveyance of the deeds of trust on their property and/or the preparation and recording of releases with respect thereto, but whose deeds of trust were not timely reconveyed and/or were never released."
The suit, Kirksey v. Bank of America, was filed against the Bank of America, National Trust and Savings Association, Great Western Savings Bank, First Interstate Bank, five other named mortgage and title companies and "Does 1 through 100, inclusive."
The suit lists six causes of action:
* Breach of contract (defendants allegedly did not do the payoff paperwork as they had promised and been paid to do, but instead issued letters of indemnity to protect one another);
* Violation of the Consumers Legal Remedies Act (the defendants allegedly deceived and are likely to further deceive the public about their services);
* Violation of Civil Code Section 2941 (if the defendants are in noncomplianc with this section of the civil code dealing with releases, as the suit alleges, they could be required to pay a penalty of $300 for each violation of the statute);
* Violation of the Unfair Practices Act (by acting as alleged, the defendants are accused of engaging in false advertising and unfair competition and should have to give up all the fees paid for reconveyances and releases not done);
* Conspiracy (the various defendants, it is argued, agreed to use the system of indemnity letters to conceal the fact that reconveyances were not being done);
* Declaratory relief (the suit asks the court to declare the actions of the defendants who are themselves lenders, illegal).
If the suit prevails against a defendant, the cost could include the amount of reconveyance fees and other fees collected, plus $300 for each unreconveyed trust deed, plus damages, plus criminal charges.
Publicly, hardly anyone wants to comment on the suit. Almost no one is returnin calls asking for such comment, which is perhaps to be expected at this stage of development.
Jim Maher, executive director of the American Land Title Association, tagged mortgage lenders for not being more forthcoming with reconveyances and said tha without the use of letters of indemnity, "real estate would essentially come to a screeching halt."
And privately, the suit is being taken very seriously among both defendants and those who could be added to the suit as defendants in the future.
How can one ensure that one's own institution does not fit into the latter category?
An independent survey last year of the payoff departments of 42 mortgage servicing organizations found that only 38 percent of the payoff departments said they had a backlog.
But one expert who has inspected the reconveyance situation in dozens of banks and title companies says, "Typically, the payoff department grossly underestimates the backlog, sometimes because they just have no way to know the numbers. When you get in and look, though, the vast majority have more than a 3 percent backlog, though they vigorously deny it."
Furthermore, he says, "I've seen otherwise responsible institutions, because of personnel and expertise problems, with fully 90 percent of their satisfactions backlogged." This, however, is difficult to confirm.
Some industry people have said in their defense that title insurance and letter of indemnity ensure that even if there is a huge backlog in reconveyances (and there doesn't seem be anyone who denies this), the consumer is still protected.
Indeed, although there has been some press on the homeowner problems caused, it would certainly take some research to prove whether or not any widespread damag to individuals has occurred.
Unfortunately for lenders, California Civil Code Section 2941 does not require proof of damage to make the beneficiary liable for the $300 penalty for each undone or overdue reconveyance. If Bezek is able to recover only $300 for each undone reconveyance, simple arithmetic places the total in the hundreds of millions of dollars. Return of fees, damages and criminal penalties and fines could raise the costs significantly if the plaintiffs are successful.
What can a lending institution do to prevent being a party to such legal action
It suddenly becomes crucial to take a thorough and honest look at what sort of backlogs exist in your payoff department. It may be that complaints, individual lawsuits, fines and executive time spent on the results of such backlogs are already costing significant sums.
You may already be aware of backlogs that need to be dealt with and may even have a plan to deal with them. Now is the time to plan and effectively execute such action. Should you wait until you are named in a class-action suit on the subject, it will already be too late.
If you have an in-house system for handling the payoffs, and still have a dangerous backlog, reconveyance experts argue that rather than trying to go shore up a system that has already failed, you should choose the best outsource reconveyance handler you can find.
The alternatives are new software packages (none of which are really suitable for a large organization); hiring already trained experts to beef up the payoff area, and bringing in temporary personnel to deal with the backlog on a project-type basis.
More and more banks have become convinced that no matter how many extra people you throw into a system that has already failed, the result will simply not improve. Unfortunately for the reconveyance outsourcing industry, which has grown exponentially during the past five years, some of the newer entrants have been unable to deliver all that they promise.
After all, there are 3,300 counties in the United States where releases and reconveyances can be filed, each with their separate filing requirements, regulations, fee schedules and timetables. It is easy for an executive looking at reconveyance services to underestimate the complexity of the job. He or she should investigate a number of services and ask for proof that any service bein considered can actually do the job.
Given the cost of fines and suits, accuracy and dependability should be factore in when evaluating costs for such a service. Get the input of corporate counsel as to which firm makes more sense from his or her perspective. The cheapest may not be the most cost-effective in the long run.
Look before leaping
William Bowen, president of Title Recon Tracking and the originator of comprehensive outsourcing of releases and reconveyances, has this further advic for mortgage executives looking for a reconveyance firm:
* Treat the hiring of a reconveyance company with the same circumspection you would in planning to do business otherwise. Ask for financials from the firm, b certain the firm is insured and assure yourself that its assets are substantial enough to fall back on, in case it fails to deliver.
* The firm you choose should be able to let you see in your mortgage service center the status of each order, day by day. If it takes 60 days for the compan to tell you what has happened to an order, you can be liable by statute before you even find out about a problem.
* Your contract with the reconveyance firm can and should include its keeping your reconveyance traffic current. This is the performance standard required by law of you, and it is the level of performance that a competent reconveyance firm can provide.
The broader picture
It should be noted that the Kirksey case has not been the only force encouragin swift handling of payoff backlogs. Legislation passed in Massachusetts, Arizona and, most recently, Texas has also aimed at giving lending institutions and title companies easier ways to clear titles, while providing penalties for nonperformance.
It seems unlikely the Kirksey case will go away without some costs. The factors it deals with are too widely acknowledged as being real.
In the long run, some reforms that would encourage prompt attention to reconveyances, but prevent class-action attorneys from collecting huge judgments, may be desirable.
Meanwhile, each institution will need to examine its own situation and ensure its practices do not leave it vulnerable.
John Carter is a freelance writer who writes on various financial topics.