QUESTION
We have a loan where the husband is buying the property as his sole and separate property. His wife is signing the Deed of Trust as to her homestead interest, but she is not on the loan and she will quit claim all other interest in the property. I have two questions: (1) Does it matter if her name is on the purchase contract? (2) Do we have to have her sign the Closing Disclosure?
ANSWER
First, since ownership of property means that a person holds a “bundle of rights,” a spouse who is not a “party” to the loan can sign a deed of trust encumbering less than all of the rights they may have in the property, including their homestead interest, and can also quit claim to the other spouse any and all other rights they may have in the property. The spouse who is not a “party” to the loan need not, and should not, sign the promissory note.
Likewise, since the property is being purchased by only the husband as his sole and separate property, his wife need not sign the purchase contract.
However, the better practice would be for the respective roles in the transaction of each of the spouses to be spelled out clearly in the purchase contract and to have both of them sign the contract; for instance, reciting the fact that they are husband and wife, but specifying that the property is being purchased only by the husband as his sole and separate property and that this is all acceptable and agreed to by the wife. That way, it is clear what the parties’ intentions are. This is particularly important in community property states, such as California, where property acquired during marriage is legally presumed to be held jointly by husband and wife unless the parties clearly express a contrary intention.
In the transaction you describe, depending on the laws of the state in which the transaction takes place, and the requirements of the title company, this may also eliminate the need for the wife to sign a deed of trust encumbering her “homestead interest,” since the contract would make it clear that she has no interest whatsoever in the property being acquired and, hence, no interest to encumber by a deed of trust.
Second, with respect to your question about the Closing Disclosure, if a person encumbers all or part of any interest they may have in a parcel of real property by signing a deed of trust, that person is usually deemed by the laws of most states to be a “guarantor” or “surety” of the loan obligation, even if they do not sign the promissory note. Thus, for example, California Civil Code §2787 provides in pertinent part:
“The distinction between sureties and guarantors is hereby abolished. The terms and their derivatives, wherever used in this code or in any other statute or law of this state now in force or hereafter enacted, shall have the same meaning as defined in this section. A surety or guarantor is one who promises to answer for the debt, default, or miscarriage of another, or hypothecates property as security therefor. …” (Emphasis added.)
Here, on the facts given, the wife is not supposed to be an “obligor” on the loan and title is supposed to be held only by the husband as his sole and separate property. But the facts also specify that the wife will be signing a deed of trust encumbering her homestead interest. To the extent that makes her a “guarantor” or “surety,” the determination of whether or not she is entitled to receive a Closing Disclosure depends on whether the transaction is or is not “rescindable.”
In that regard, Section 1026.17(d) of Regulation Z provides in pertinent part:
“…If there is more than one consumer, the disclosures may be made to any consumer who is primarily liable on the obligation. If the transaction is rescindable under § 1026.23, however, the disclosures shall be made to each consumer who has the right to rescind.” (Emphasis added.)
Section 1026.23 of Regulation Z provides in pertinent part:
“In a credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction, except for transactions described in paragraph (f) of this section. …”
The official interpretation § 1026.23 states:
“Multiple consumers. When two consumers are joint obligors with primary liability on an obligation, the disclosures may be given to either one of them. If one consumer is merely a surety or guarantor, the disclosures must be given to the principal debtor. In rescindable transactions, however, separate disclosures must be given to each consumer who has the right to rescind under § 1026.23, although the disclosures required under § 1026.19(b) need only be provided to the consumer who expresses an interest in a variable rate loan program. When two consumers are joint obligors with primary liability on an obligation, the early disclosures required by § 1026.19(a), (e), or (g), as applicable, may be provided to any one of them. In rescindable transactions, the disclosures required by § 1026.19(f) must be given separately to each consumer who has the right to rescind under § 1026.23. In transactions that are not rescindable, the disclosures required by § 1026.19(f) may be provided to any consumer with primary liability on the obligation. See §§ 1026.2(a)(11), 1026.17(b), 1026.19(a), 1026.19(f), and 1026.23(b).” (Emphasis added.)
Here, since only the husband is acquiring title as his sole and separate property, and the wife is not “on the loan,” but at most a surety or guarantor, and since this is not a “rescindable” transaction under §1026.23 because it is a purchase money loan, which is exempt as a “residential mortgage transaction” under §1026.23(f)(1) and 1026.2(a)(24), the Closing Disclosure need only be given to the husband, who is the consumer “primarily liable” on the loan and the “principal debtor.”
Michael R. Pfeifer
Director/Legal & Regulatory Compliance
Lenders Compliance Group
