Perfection of Ownership Interests in Promissory Notes and Deeds of Trust

Prior and subsequent to the enactment of Business & Professions Code § 10233.2 in July of 1992, I served as the Chair of the Real Estate Finance Advisory Committee (“REFAC”) established by the DRE as a joint regulator and industry committee to advise the Commissioner and the Executive Staff of the DRE regarding matters affecting the mortgage brokerage and lending industries.

The language for Business and Professions Code § 10233.2 was developed by REFAC under my direction. Two industry counsel were assigned to draft the proposed language to be submitted to REFAC. These legal counsel were Bruce Newman, representing the California Independent Mortgage Brokers Association (“CIMBA”) and (Wise Man) N. Mitchell Feinstein representing the Mortgage Institute of California (“MIC”). Each counsel have been long recognized as experts in real property secured transactions, as well as in real property transactions in connection with issuance and sale of securities. Mr. Feinstein remains active in the practice of law; Mr. Newman has retired.

Upon the recommendation of REFAC and my concurrence as Chair, the language was submitted to the Real Estate Commissioner, the General or Chief Counsel, and to the Executive Staff of the DRE. Subsequent to the approval of the proposed language by the DRE, this language was included in legislation introduced in the 1992 California Legislative Session, SB 1520 (Johnston). The legislation was sponsored by the industry and supported by the DRE as a means of protecting the Real Estate Recovery Fund from claims of private investors/lenders determined to be unsecured creditors in bankruptcy proceedings involving the estates of mortgage brokers.

The language of the legislation as enacted by the California Legislature states:

“For the purposes of Division 3 (commencing with Section 3101) and Division 9 (commencing with Section 9101) of the Commercial Code, when a broker, acting within the meaning of subdivision (d) or (e) of Section 10131 or Section 10131.1, has arranged a loan or sold a promissory note or any interest therein, and thereafter undertakes to service the promissory note on behalf of the lender or purchaser in accordance with Section 10233, delivery, transfer, and perfection shall be deemed complete even if the broker retains possession of the note or collateral instruments and documents, provided that the deed of trust or an assignment of the deed of trust or collateral documents in favor of the lender or purchaser is recorded in the office of the county recorder in the county in which the security property is located, and the note is made payable to the lender or is endorsed or assigned to the purchaser.”

The enactment of SB 1520 (Johnston); 1992 Stat. Ch. 158; codified as Business and Professions Code § 10233.2 was intended to accomplish four purposes: (1) enhanced regulation of the activities of real estate brokers acting as mortgage brokers, (2) reducing claims against the Real Estate Recovery Fund, (3) perfection as to third parties when the original promissory notes and deeds of trust were not delivered to the intended holder(s), and (4) protection of the interests of fractionalized investors/lenders in deeds of trust or mortgages or other forms of security interests when real estate brokers (acting as mortgage brokers) retained the original promissory note and deed of trust for loan servicing.

Prior to the enactment of Business and Professions Code § 10233.2, delivery of a promissory note to a lender or purchaser as a holder was necessary to effect transfer of the negotiable instrument. [See, Cal. Comm. Code § 3202; also See, In re Staff Mortgage & Inv., 625 F.2d 281, 283 (9th Cir.1980)] Chapter 158 (i.e., the legislative measure) was intended to provide where a real estate broker acting as a mortgage broker negotiates a loan or sells a promissory note, the deed of trust or other instrument (including an endorsement and/or assignment of the promissory note and deed of trust) evidencing the debt and the secured interest in the security property may be perfected upon recordation of the deed of trust or other instrument (including an assignment thereof), regardless of whether the broker retains possession of the instrument for loan servicing.

Thus, the wording of this statute, “For the purposes of Division 3 (commencing with Section 3101) and Division 9 (commencing with Section 9101) of the Commercial Code …” and the use of the words “… even if …”, were intended to supplement the rights of the lender or purchaser, not to limit them. Nor was Business and Professions Code § 10232.2 intended to “supersede” the rights of a lender or purchaser under the Commercial Code, as the lender or purchaser retained the right to qualify (depending upon the facts) as a transferee or holder under the Commercial Code without the recording of the assignment of the deed of trust previously recorded.

Division 9 of the Commercial Code applies to transactions, which, among others, do not deal with the ability of a transferee to become a “holder” of a promissory note. Section 9109 defines the scope of the division, and states that it applies to promissory notes [Comm. Code § 9109(a)(3)], and is not affected by the fact that the obligation is itself secured by an interest to which this division does not apply [Comm. Code § 9109(b)]. The division is specifically applicable to the creation or transfer of an interest in or lien on real property [Comm. Code § 9109(d)(11)(A)].

The actions taken by REFAC and the history of the legislation show that the intention of the addition of Business and Professions Code Section 10232.2 was to add an additional alternative method of perfection of delivery and that compliance with the new code section OR the California Commercial Code achieved the same end.

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