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Washington: Note Holder can Modify and Enforce the Note

Posted By USFN, Tuesday, November 24, 2015
Updated: Tuesday, January 19, 2016

November 24, 2015


by Joshua Schaer
RCO Legal, P.S. – USFN Member (Oregon, Washington)

On October 22, 2015 the Supreme Court of the State of Washington issued its decision in Brown v. Washington State Department of Commerce, unanimously concluding that a note holder is legally entitled to modify and enforce the obligation under state law. The court rejected Brown’s claim that only a note “owner” could be a proper beneficiary.

Brown demanded statutory mediation with M&T Bank. In response to a notice from the Washington Department of Commerce (Commerce), which oversees the mediation program, M&T produced a declaration stating that it was the actual holder of Brown’s note. M&T also asserted a mediation exemption based on a statute excluding beneficiaries with a low volume of secured mortgage loans in the state. Brown’s lawsuit arose after Commerce denied her an opportunity to mediate with M&T.

Brown contended that Freddie Mac (the owner of the loan) should be compelled to mediate because the Washington Deed of Trust Act (DTA) requires a beneficiary to also be the note’s owner, and Freddie Mac would not qualify for the same exemption as M&T.

The Supreme Court analyzed a statute that allows “[a] declaration by the beneficiary made under the penalty of perjury stating that the beneficiary is the actual holder of the promissory note or other obligation secured by the deed of trust” to establish sufficient proof of the note’s “ownership.” The court decided that the legislature intended for the party holding authority to modify a loan to act as the beneficiary under the mediation law. The court also reaffirmed its holding in Bain v. Metropolitan Mortgage Company — i.e., that a beneficiary is strictly defined in Washington as the note holder.

The court limited the recent decisions of Lyons v. US Bank and Trujillo v. NW Trustee Services to situations where a beneficiary’s declaration contains alternative language concerning non-holder authority under the state law equivalent to UCC 3-301 (which governs a “Person Entitled to Enforce” negotiable instruments).

In summation, the court found that “a party satisfies the proof of beneficiary provisions” in the DTA when “it submits an undisputed declaration under penalty of perjury that it is the actual holder of the promissory note.” Thus, Commerce acted properly to deny Brown’s request for mediation.

The Brown case resolves a longstanding question concerning authority to foreclose in light of the “proof of ownership” requirement. The law is now clear in Washington that loan owners such as Freddie Mac or Fannie Mae need not initiate nonjudicial foreclosures in their own names or directly participate in mediation, and loan servicers can execute declarations of note holder status in order to satisfy the DTA. Brown is a significant victory that supports the legal position of servicers, investors, and trustees.

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