Deeds of trust and assignments of rents are both legal documents that give a lender a lien or security interest in land belonging to a borrower. The borrower's land identified in the documents is the loan collateral, which is critical to the value of the loan because the collateral reduces the lender's risks. Lenders must take care to comply with all applicable federal, state, and local laws relating to deeds of trust and assignments of rents because failure to comply with a small detail in the law could result in the lender forfeiting any rights in the collateral.
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Generally, the purpose of related federal laws is to protect borrowers from predatory lending practices. Accordingly, such federal laws as the Truth In Lending Act, Real Estate Settlement Procedures Act, and other federal consumer protection laws all require specific disclosures from mortgage brokers, services, and lenders who may be connected to a loan involving a deed of trust or assignment of rents. While the details of these various federal laws are complex and varied, the general thrust of the laws is to require lenders to provide full disclosure of all terms related to the loan, including terms that make up the deed of trust and assignment of rents.
The laws of each state relating to deeds of trust and assignments of rents vary. State laws typically specify required terms in the deeds of trust and assignments of rents, and they also provide restrictions on the lender's rights under the same documents. Some state statutes even provide a specific form that lenders must use when implementing a deed of trust or assignment of rents. State laws also closely regulate how lenders enforce their rights under deeds of trust and assignments of rents. State statutes, for example, tightly define the required steps a lender must take to exercise foreclosure rights under a trust deed or rent collection rights under an assignment of rents.
Most state laws either require lenders to record deeds of trust and assignments of rents or provide lenders with added legal benefit for recording the same documents. Recording simply means the lender files a copy of the deed of trust or assignment of rents in the public county property records. Local ordinances provide specific regulations for the process and requirements lenders must observe to record their collateral security documents. Some county recorders, for example, require original signatures on the documents, and require payment of a small recording fee.
A lender that fails to follow all applicable legal requirements relating to a deed of trust or assignment of rents can suffer several types of adverse consequences. Under federal law, a violating lender may be liable to the borrower for money damages. Under state law and local ordinance, a lender who violates legal requirements may lose its lien in the collateral, which means the lender will have no right to collect rents or foreclose on the collateral. Borrowers looking to protect their collateral will make every effort to find flaws in the lender's observance of each level of legal regulation.