Posted By USFN,
Wednesday, July 21, 2021
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by Robert R. Michael, Esq.
BWW Law Group, LLC
USFN Member (DC, MD, VA)
In its 2021 sessions, Virginia’s General Assembly passed HB1882, which was approved by Governor Northam on February 25, 2021 and became effective July 1, 2021. It is a dual-purpose statute which: (1) clarifies the requirements to refinance secured loans into priority positions over subordinate loans; and (2) implies that most modifications of secured loans in Virginia must be recorded and may affect the priority of the secured loan.
New Requirement for Refinances
Since codified in 2000, Virginia’s auto-subordination statute has allowed lenders to refinance secured home loans, while retaining the priority of the loans being refinanced. HB1882 amends VA Code §55.1-319, requiring the language on the first page of the refinance mortgage to provide the interest rate of the loan being refinanced. The following is the new “auto-subordination statement” from amended VA Code §55.1-319:
THIS IS A REFINANCE OF A (DEED OF TRUST, MORTGAGE OR OTHER SECURITY INTEREST) RECORDED IN THE CLERK’S OFFICE, CIRCUIT COURT OF (NAME OF COUNTY OR CITY), VIRGINIA, IN DEED BOOK ______, PAGE _____, IN THE ORIGINAL PRINCIPAL AMOUNT OF ______, AND WITH THE OUTSTANDING PRINCIPAL BALANCE WHICH IS ______ WHICH HAD AN INTEREST RATE OF _____% PER ANNUM.
Unless this statement is included in bold or capitalized letters on the first page of a refinance mortgage originated after July 1, 2021, the auto-subordination will fail and the refinance mortgage will be subject to any prior mortgages. The remaining requirements to auto-subordinate inferior loans were not modified by HB1882.
Implications for Modifications
HB1882 also creates new VA Code §55.1-318.1, titled “Effect of amendment to loan document on deed of trust.” Facially, this new provision does not apply to loans secured by residential property containing a single dwelling unit, or to loan modifications which: (1) increase the aggregate principal debt; (2) change the identity of the lender; or (3) extend the maturity date of the debt (if the maturity was stated in the original instrument). The reverse implications of §55.1-318.1 are far more consequential.
There are few reported cases addressing loan modifications in Virginia. Until now, the Virginia Code has provided no guidance on modifications of secured loans (e.g., must they be recorded or will they affect the priority of the modified instrument?). By exempting recordation requirements for a subset of modifications of a subset of secured loans, the statute appears to imply that modifications of all other loans must be recorded to become effective.
Although this implication potentially invites litigation between competing lienholders, from borrowers who may seek to avoid enforcement of deeds of trust, or from successors-in-interest to borrowers (possibly including Chapter 13 trustees); borrowers, having signed the modification, should be estopped from asserting such claims.
Because it is not retroactive, VA Code §55.1-318.1 will only affect modifications completed after July 1, 2021. The following recommendations should minimize the risks associated with its adverse implications:
i. Modification agreements executed after July 1, 2021 should be in recordable form and promptly be recorded after execution (Note: recordation requirements vary between Virginia’s jurisdictions, consult local counsel).
ii. Care should be taken to avoid any modification terms which will adversely impact subordinate lienholders. Specifically, it would be a best practice to avoid: a. Capitalized sums which will accrue more interest than is offset by a reduced interest rate. b. Adjustable interest rates which could exceed the rate of the original loan. c. Balloon payments which could substantially delay advancement in position of a subordinate deed of trust. d. Extended maturity dates substantially delaying the advancement in position of a subordinate deed of trust.
iii. Obtaining a title commitment and policy with the modification is the best protection from any adverse implications of VA Code §55.1-318.1.
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Summer 2021 USFN Report
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