Chapter 6 State Regulation of Lending

The 10th Amendment to the U.S. Constitution reserved all powers not specifically enumerated (listed) in the Constitution to the states. The U.S. Constitution and the first 10 amendments do not specifically address the issues of banking, finance, real estate law, or consumer legislation. It was left up to the states to develop laws that would protect consumers from usury, develop mortgage and real estate laws, and charter local banking institutions.

I. Real Estate Laws

Real Estate Laws The United States, for the most part, adopted the British common law systems of legal Real Property and Real Estate ownership. The United States, for the most part, adopted the British common law systems of legal Real Property and Real Estate ownership. REAL ESTATE is the ownership of the physical land itself. REAL PROPERTY consists of those rights that come with the ownership of the real estate. Real property rights are often stated as: 1. The right to possess. 2. The right to use. 3. The right to borrow money against. 4. The right to rent to others. 5. The right to dispose of (by, sale, will, or transfer). 6. The right to quiet enjoyment. 7. The right to exclude others. 8. The right to do nothing at all. An individual in control of all those rights is said to own the property in FEE SIMPLE.

A. ESTATES An ESTATE is a possessory interest in real estate or real property. FEE SIMPLE is the highest form of possessory interest. There are several estates that have less than the full possessory rights. LEASED FEE ESTATE REVERSION LEASEHOLD ESTATE

B. DEEDS TITLE is a term that signifies the proof of ownership. The title to a property is based on the legal chain of documents that show ownership interests and transfers from owner to owner. Title to real estate and real property is transferred from one person to another by use of a legal document called a DEED. GRANTOR GRANTEE A deed must be in writing in all jurisdictions and must meet all requirements of the state in which the property is located. TITLE INSURANCE

1. General Warranty Deeds In most states, general warranty deeds are the most commonly used deeds in real estate transactions. A GENERAL WARRANTY DEED offers the most complete warranty regarding the quality of the title. The grantor warrants that the title he or she is conveying is free and clear of all claims except those specifically listed in the deed.

2. Special Warranty Deeds A SPECIAL WARRANTY DEED makes the same warranties as a general warranty deed except it limits the application of defects to the title to those discovered while under ownership of the grantor. It does not apply to title problems caused by owners previous to the current grantor. It does not apply to title problems caused by owners previous to the current grantor.

3. Grant Deeds The grant deed is very popular in the western states. A GRANT DEED transfers absolute legal title to a property. It is sometimes called a “naked title deed.” A grant deed carries only two implied warranties: 1) that the grantor has not transferred title to anyone else at the same time; and 2) that the grantor is transferring the estate free of any encumbrances made by the grantor other than those disclosed to the grantee. The interesting thing about this form of transfer is that the deed does not state that the grantor is the owner of the property or that the property is not encumbered by debt or liens not made by the grantor.

Figure 6-1

4. Quitclaim Deed The quitclaim deed is most often used to remove items from the public record, such as easements or recorded restrictions. It merely says that the grantor is relinquishing any interest that he or she has in the property. A quitclaim deed contains no warranties, written or implied.

Figure 6-2

5. Gift Deed A GIFT DEED is often used to transfer real estate to children or other loved ones. Generally, no monetary legal consideration is required to transfer the property. A gift deed can be invalidated if it is discovered that it was used to defraud creditors.

6. Sheriff’s Deed/Commissioner’s Deed A SHERIFF’S DEED is used to transfer property that has been ordered to be sold by a court of law. This can happen as a result of a monetary judgment against the owner. In some states this is known as a commissioner’s sale and a commissioner’s deed. A sheriff’s deed or commissioner’s deed carries no warranties.

7. Tax Deed A TAX DEED is issued by a tax collector after the sale of property that has been seized by the state, county, or local municipality for nonpayment of taxes due. A TAX DEED is issued by a tax collector after the sale of property that has been seized by the state, county, or local municipality for nonpayment of taxes due. Again, no warranty of the deed is expressed or implied.

8. Deed of Trust/Deed of Reconveyance These deeds are types of financing instruments. These deeds are types of financing instruments. All states have laws that require legal delivery of a deed from the grantor to the grantee. In general, all states have laws that will invalidate a deed if the grantor is incompetent at the time the deed is made, if the deed is never delivered, or if the deed is a forgery or fraudulently altered.

C. MORTGAGES A MORTGAGE is a legal document that pledges the property of the borrower to a lender as security for a loan(lien). Mortgage law has traditionally been within the jurisdiction of state law. The federal government has overturned state laws restricting the “due on sale” clause, some usury laws, established conditions that allow prepayment of mortgages, and set ceilings on prepayment penalties.

D. RECORDING All the states have enacted laws known as recording acts. The general intent of recording is to create a publicly available record that establishes the chain of ownership of any individual property. Virtually all states require recording to protect an ownership claim.

E. STATE-CHARTED BANKS The states established banking laws and regulations at a very early period to protect the public. While state laws still govern state-chartered institutions, the effect of their regulation has been tempered by the fact that most real estate lending is now governed by federal laws and regulations.

F. USURY LAWS Beginning in the 1830s, many states, in an effort to limit predatory lending practices, passed laws to limit the interest charges that individual lenders and banks operating within their states could charge a borrower. The establishment of the Federal Reserve and the secondary markets put the federal government in the rate-setting business. To insure that the system works smoothly and provides reasonable rates to all, the federal courts overturned many state usury laws, or at least those sections dealing with federally related real estate transactions. Most states still have usury laws that deal with other types of consumer credit.

II. The Rise of Federalism

The Rise of Federalism Over the last century, the federal government has gradually extended its control of lending within the United States. Federal authorities have virtually taken over the entire banking system. The adverse effect of federal regulation has been that federal incursion has come at the expense of the states and property owners. The adverse effect of federal regulation has been that federal incursion has come at the expense of the states and property owners. The demise of usury laws has created a system in which the federal government sets interest rates. Garn-St. Germaine Act in 1982 DUE ON SALE CLAUSE ASSUMABLE LOAN

III. The Modern Role of the States

The Modern Role of the States The modern role of the state remains that of a protector of the interests of its citizens. States still control deeds and recording laws. In addition, they regulate appraisers, real estate agents, and loan brokers. In the areas of anti-discrimination, consumer law, and anti-redlining, many state laws are actually more severe than federal law.

IV. CHAPTER SUMMARY The 10th Amendment to the U.S. Constitution reserves all powers to the states that are not specifically given to the federal government. The highest and most common form of property ownership is fee simple, which has with it a bundle of rights. This bundle of rights consists of real property rights. Title to real estate is generally transferred by a deed. The most common form of deed used in the United States is the general warranty deed. In the western states, the grant deed is popular. This deed, when used in conjunction with title insurance, shifts any title liability to the title insurance company. In the western states, the grant deed is popular. This deed, when used in conjunction with title insurance, shifts any title liability to the title insurance company. States have also carried out the very important function of publicly recording all documents relating to real estate, such as deeds and mortgages.