Virginia Lending Laws

Overview and Structure of the Law

Virginia is a “common law” state, i.e., most of its law is based on pronouncements contained published judicial opinions rather than statutes or legislation. Most of the law affecting lending and credit, however, is statutory and is found in Virginia Code. The following Titles of the Code may be particularly relevant:

• Title 6.2 Financial Institutions and Services
• Title 8.01 Civil Remedies and Procedure
• Title 8.1A – 8.10 Virginia’s Uniform Commercial Code
• Title 11 Contracts
• Title 13.1 Corporations
• Title 17.1 Courts of Record (includes requirements for acceptance of documents into land records by the Clerk)
• Title 43 Mechanic’s and Certain Other Liens
• Title 49 Oaths, Affirmations and Bonds
• Title 55 Property and Conveyances
• Title 59.1 Trade and Commerce (includes Virginia Consumer Protection Act)

Contracts

Virginia’s contract law is based common law and its principles. As most states, Virginia has also adopted a version of the Uniform Commercial Code (“UCC”), which governs the areas of the sale and leasing of goods (as opposed to services) and so-called secured transactions (where property is given as collateral to ensure repayment of debt).

Promissory Notes

Promissory notes in Virginia are governed by Article 3 of Virginia’s UCC (Code §§ 8.3A-101 et seq.). Virginia promissory notes usually include provisions regarding the recovery of reasonable attorney’s fees, late charges, delinquency fees, default interest, prepayment penalties, etc., since those must be expressly provided for in a contract to be recoverable. Virginia allows pre-payment penalties and follows the common law rule that a lender may strictly enforce a loan contract and need not allow prepayment.

Married Borrowers

Real Property held by married person as “tenants by the entireties” cannot be reached by a creditor of only one of the spouses. Accordingly, if an interest in such property represents a significant asset of an individual borrower or guarantor, then either both spouses must be obligated to repay unsecured indebtedness in order for a creditor to reach the property in the event of default, or both spouses must have conveyed the property to secure the indebtedness.

Certain assets of individuals in Virginia are exempt from claims by unsecured creditors. These include any real or personal property up to the value of $5,000 per individual. (Va. Code Ann. § 34-4), as well as a car (up to $6000; or up to $10,000 if needed for work or education), certain heirlooms, certain ordinary household items, tools of the trade, and medically prescribed health aids (Code § 34-26 et seq.). Virginia has “opted out” of the federal exemptions scheme under the Bankruptcy Code, so that only Virginia exemptions exist and can be used in bankruptcy.

Real Property

Rights in real property in Virginia are governed by Title 55 Property and Conveyances (starting at Code § 55-1), as well as Virginia case law.  Some aspects of property law that are particularly relevant in foreclosure cases are discussed below.

Deeds of Trust

Virginia is a deed of trust state.  Although mortgages remain valid, they are rarely used, and the primary instrument for placing a lien on real property is the deed of trust. Deed of trust is a three-party instrument with Borrower on one side, Lender on the other, and Trustee as a neutral intermediary in the middle.

A deed of trust must be in writing (Code § 11-1) and, to be effective against third parties, it must be recorded in the county/city in which the property is located.  Code § 55-96.  Trustees that are individuals must be residents of Virginia, whether or not there are Virginia co-trustees.  A corporate trustee must (a) be a Virginia corporation or a corporation chartered under the laws of the United States and (b) maintain its principal office within Virginia, again regardless of wether there is a Virginia co-trustee.  Code § 55-58.1(2).

Placing a deed of trust on property is a conveyance and the legal title to the property conveyed is vested in the trustee.

A deed of trust is a contract and is construed according to its terms to the extent that those are not in conflict with the law.  Thus, parties to a deed of trust are not free to insert provisions that conflict with existing statutory or common law.  For instance, naming as beneficiary an entity that does not and cannot meet the legal definition of “beneficiary” is arguably in conflict with the requirements of the law.

Recording Requirements

There are, however, a number of formal requirements with which deed of trusts should comply in Virginia.  A deed of trust must name in the first clause each (i) grantor (borrower), (ii) trustee and (iii) grantee (lender) under whose names the deed of trust is to be indexed.  Code § 55-58.  It is common practice in Virginia to describe each beneficiary under a deed of trust as a “grantee” for indexing purposes.

Acknowledgment/notarization is necessary.  Code § 55-106.  Every notarization must include the date of the act, the county or city where the act was performed; the notary’s official seal must be affixed to the notarial certificate.  Va. Code Ann. § 47.1-16.  The notarial certificate must appear on the same page as the signature which has been notarized unless the notarial certificate includes the names of the persons whose signatures are being notarized.  Code § 47.1-15.  The notarial certificate must recite the date that the notary’s commission expires and the notary’s registration number.  Code § 47.1-2.  Virginia has adopted the Uniform Recognition of Acknowledgments Act (Code §§ 55-118.1 et seq.) which generally validates “notarial acts” performed outside of Virginia as if performed by a notary public of Virginia.

Each deed of trust must include the full street address of each trustee named therein.  Code Ann. § 55-58.1(3).  By implication, an instrument of appointment of a substitute trustee (“deed of appointment”) must also contain the full street address of the appointed substitute trustee.

Any deed of trust relating to real property located in a locality with a unique parcel identification system must also bear, on the first page thereof, the tax map reference number or numbers, or the parcel identification number (PIN) or numbers, of the affected parcel or parcels.  Code § 17.1-252.  In addition, a deed of trust must meet certain general requirements applicable to all documents submitted for recordation.  For example, the clerk may refuse to accept any document for recordation unless (i) each individual’s surname only, where it first appears in the document, is underscored or written entirely in capital letters, (ii) each page of the writing is numbered, (iii) the Virginia Code section under which any exemption from recordation taxes is claimed is clearly stated on the face of the document, (iv) the names of all grantors and grantees are listed as required by Virginia law (as discussed above with respect to deeds of trust), and (v) the first page of the document shows the name of either the person or entity that drafted the document, except that documents prepared outside of Virginia may be recorded without such information.  Code Ann. § 17.1-223.  The clerk may refuse to record any document that includes the social security number of any grantor, grantee or trustee, and the attorney or other party who prepares the document “has responsibility for ensuring” that any social security number is removed prior to recordation.  Code Ann. § 17.1-227.

Lastly, deeds of trust must meet certain archival standards contained in Code Ann. § 55-108 and § 42.1-82, and Administrative Code §§ 17VAC15-70-10 et seq.  Such standards include requirements of: only white paper, size no less than 8-½ x 11 and no more than 8-½ x 14 inches, signatures in only dark blue or black ink, print size no less than 9 points, and margins no less than one (1) inch on the top, bottom and left margins and no less than ½ inch on the right margin.  Administrative Code §§ 17VAC15-70-10 et seq.

Assignments

An assignment is a transfer of a legal document, such as a contract or deed of trust, from one party to another.  Virginia follows the common law rule that the security “follows” the debt upon assignment or transfer.  Under Virginia Code, instruments of assignments may, but need not be recorded.  Code § 55-66.01.

Once the debt referenced in a deed of trust has been fully satisfied, (or, under certain circumstances, partially satisfied), the creditor must issue a certificate of satisfaction (or certificate of partial satisfaction) in recordable form.  The creditor must either record the certificate of satisfaction with the appropriate clerk’s office, or, if requested to do so by the settlement agent before such recordation has occurred, deliver to the settlement agent such certificate of satisfaction, in either case within ninety (90) days after payment of the debt.  Failure to do so within the 90-day period could result in a $500 forfeiture by the creditor to the debtor.  Code Ann. §§ 55-66.3(A)(1)).  Assignees of debt are subject to the same requirements.  The settlement agent, subject to certain requirements (and the risk of liability for a wrongful or erroneous release), also may release the creditor’s lien by recording a certificate of satisfaction.  Code § 55-66.3(E).

Deed-of-Trust Trustees (Foreclosure Trustees)

A trustee is defined as “one who, having the legal title to property, holds it in trust for the benefit of another,” who “owes a fiduciary duty to [the trust] beneficiary,” and ”who stands in a fiduciary or confidential relationship to another”  Black’s Law Dictionary 1656 (9th ed. 2009).  Earlier Virginia decisions have stated that a foreclosure trustee is the agent of both debtor and creditor, and it is incumbent upon him to act toward each with perfect fairness and impartiality.  A trustee “ought not to permit the urgency of the creditor to force the sale under circumstances injurious to the debtor.”

A foreclosure trustee’s fiduciary duties and responsibilities stem from the nature of a trustee’s position and for the common law definition of a trustee.  As a neutral fiduciary, a trustee must refrain from placing himself in a position where his personal interest conflicts with the interests of those for whom he acts as fiduciary.

By contrast, a trustee’s powers and obligations to the parties stem from the deed of trust under which the trustee acts.  The trustee can only do with the trust property what the deed, either in express terms or by necessary implication, authorizes him to do.  Both Trustee and Lender under a deed of trust must act in strict compliance with the terms of the deed of trust.

A foreclosure trustee sells only such title as is vested in him, and in the absence of fraud incurs no liability to the purchaser of the property at the foreclosure sale.  The purchaser obtains a deed from the trustee with only a special warranty of title, where the trustee is absolved of the responsibility for conveying good title.

Trustees that are individuals must be residents of Virginia, whether or not there are Virginia co-trustees.  A corporate trustee must (a) be a Virginia corporation or a corporation chartered under the laws of the United States and (b) maintain its principal office within Virginia, again regardless of wether there is a Virginia co-trustee.  Code § 55-58.1(2).

In addition to trustee sales (foreclosure sales), a lender may use the judicial foreclosure process by filing an action to collect on the debt by taking the collateral.  Whether foreclosure is judicial or nonjudicial, a deficiency judgment is allowed to be obtained by the lender against the borrower.  As a practical matter, however, lenders rarely pursue deficiency judgment because most individuals going through foreclosure hardly have any assets, making chances of collecting on a deficiency judgment very low and not justified by the cost of litigation to obtain a deficiency judgment.

 

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