Recent Changes to Ohio Mortgage Lending Laws
by: Emily Ross, Esq., Associate Counsel
Changes to Ohio Law under House Bill 479
With Substitute House Bill 479 (“HB 479”) the Ohio Legislature amended and enacted large sections of the Ohio Code. Some important changes cover such varied topics as the recording of personal property transfers, the intersection of non recourse loans and post solvency covenants, the modification of the homestead exemption, significant changes to trust administration and the transfer of real property from trusts for the purpose of acting as loan collateral.
Recording of Personal Property Transfers
In addition to the established recording laws for real property, the changes to ORC §317.08 enacted by HB 479 add a significant section to the current recording laws relating to the transfer of personal property. Each county is now required to provide a mechanism for those individuals who would like to record the transfer of personal property. Applicable transfers include conveyances or assignments and can be either tangible or intangible personal property. The instrument of transfer must be acknowledged by a notary public before is recorded. The law includes specifics as to where recording should take place for natural persons and entities not falling into this category. (ORC §317.08.E)
Non-Recourse Loans and Post Solvency Covenants
HB 479 made substantial additions to ORC §1319 dealing with non-recourse loans and the use of post-solvency covenants. In general terms a non recourse loan is a loan given in exchange for a lien on real property with the real property acting as the sole collateral for that loan. The borrower is not personally liable for the debt and in the event of default only the named property can be taken as a result of that default. ORC §1319.07 further defines a non recourse loan as a commercial loan in the state of Ohio that is secured by real property and that includes explicit language in the loan document ensuring that the lender will not attempt to pursue any recourse against the borrower in the case of default beyond the specific collateral stated within the loan document itself. To be considered a non recourse loan under this definition the document must provide explicitly that the lender will not pursue any judgments and that there is no recourse personally against the borrower. ORC §1319.07 defines a post-closing solvency covenant as a provision in a loan document that requires a borrower to remain solvent by maintaining adequate capital or having the ability to pay their debts for a specified period of time past the initial funding of the loan.
The new ORC §1319.08 prevents a post-closing covenant from being used as a “nonrecourse carveout.” ORC §1319.07 defines a “nonrecourse carveout” as an exception to a nonrecourse loan in which the loan document creates an exemption to the nonrecourse law by stating that if any specified action or event occurs then the borrower, or guarantor, can become personally liable for the loan in question. Under the new law, a lender cannot require a loan provision stating that the borrower must remain solvent for a certain period of time or the lender will treat the loan as a recourse debt and the lender will be able to come after the borrower personally for the debt. The law furthers this protection by stating that any provision creating a nonrecourse carveout using a post-closing covenant is invalid and unenforceable. However, this law does not prevent a loan from being considered fully a recourse debt if the loan documents do not contain a nonrecourse loan provision. (ORC §1319.09)
Changes in Limits to the Homestead Exemption
HB 479 made a small but important change to the Homestead Exemption under ORC §2329.66 dealing with executions against property. This section creates a homestead exemption against execution, garnishment, attachment or sale of an item of real or personal property that is used as a personal residence. Prior to this change the amount of equity in a piece of property that is safe from execution was capped at $20,200. With the passing of HB 479 this changed to $125,000.
In addition to the exception from this protection already in existence, the new law added an exception for taxes or debts owed to the state. They also added an exception for debts incurred by judgment resulting from the tortious operation of a motor vehicle resulting in death or injury to a person or property where the debtor failed to maintain the minimum required financial responsibility through insurance.
Changes in Trust Administration
ORC §5808 regulating trust administration was significantly amended and added to by HB 479. One such modification states that a person granted the power to direct the modification or termination of a trust, who is not the beneficiary, is presumptively a fiduciary and must act in the good faith interest of the purposes of the trust and the interests of the beneficiaries. This presumption comes with all the duties and benefits associated with a fiduciary relationship.
A new section was also added to the Ohio code in relation to the liability and duties of an “Administrative Fiduciary.” These new provisions limit the responsibilities and duties of a fiduciary appointed “to handle only the administrative duties and responsibilities of a trust.” These administrative duties are restricted to the parameters laid out in the trust document and may include any of the provisions articulated in ORC §5815.25.
Trust Property used as Collateral for Loans
ORC S§5815.37 was added to the trust code to regulate the conveyance of real property from a trustee to a beneficiary for the sole purpose of that property acting as collateral in a loan transaction. Property that is transferred under this circumstance is then transferred back to the trust following the closure of the loan. ORC §5815.37 codifies the rights and obligations of both the borrower and the lender following the reconveyence of said property back to the trustee following the closing of the loan. In order to fall under this law, the conveyed property must be reconveyed back to the trustee within a reasonable time and the loan proceeds must be delivered to the trustee or must be principally used to benefit the beneficiaries of the trust. The new law ensures that lenders granting loans based on this property later have access to it in the case of the loan in question going into default.
About the Author:
Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.
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