If we purchase a bank’s assets as part of a merger, what do we need to file for mortgages that we purchased from the bank to protect our mortgage liens? Should we record assignments of the mortgages to ensure that we can foreclose?

Ideally, we believe that a purchasing bank should record assignments of the mortgages it acquires. Although recording assignments reflecting the acquisition of mortgage notes is unnecessary to preserve your mortgage lien and priority position as to third parties, recording an assignment could protect your bank from having its lien extinguished as a non-record claimant in a foreclosure action brought by another party with a security interest in the mortgaged real estate.

Under Illinois case law, “[t]he assignment of a mortgage note carries with it an equitable assignment of the mortgage by which it was secured.” This means “the assignment of the mortgage note is sufficient to transfer the underlying mortgage,” assuming that the underlying mortgage had been recorded, and “recording the assignment is unnecessary to preserve the security for the debt.” Consequently, if you have been assigned the mortgage notes, filing assignments of the underlying mortgages is unnecessary to preserve your lien and priority position.

However, if another party has a lien on the mortgaged property and forecloses its lien, it may be able to extinguish your bank’s lien in the foreclosure action — unless your bank has recorded its assignment of the mortgage securing the mortgage note. A court also may require your bank to produce a recorded assignment to show standing to foreclose the mortgage should your bank need to do so. Accordingly, we believe that a best practice would be to record assignments of your bank’s mortgages.

Additionally, we note that your bank is required to send servicing transfer notices for residential mortgage financing transactions under the Illinois Banking Act, and your bank may also be required to send mortgage servicing transfer notices under Regulation X and Regulation Z, as well as initial notice of your privacy policies under Regulation P.

For resources related to our guidance, please see:

Fed. Nat. Mortg. Ass’n v. Kuipers, 314 Ill.App.3d 631, 636 (2d Dist. 2000) (“We disagree . . . that an assignment of a mortgage must be recorded in order to preserve a mortgage lien that has already been perfected and its corresponding priority position.”)

Fed. Nat. Mortg. Ass’n v. Kuipers, 314 Ill.App.3d 631, 635, 639–40 (2d Dist. 2000) (“The assignment of a mortgage note carries with it an equitable assignment of the mortgage by which it was secured. . . . in Illinois, the assignment of the mortgage note is sufficient to transfer the underlying mortgage. . . . Because the assignment of the debt, with nothing more, is sufficient to preserve the mortgage lien, it cannot follow that the lien is somehow extinguished for the failure to record the assignment. Therefore, we are persuaded that the mortgage lien and priority position inured to the benefit of the assignee and that recording the assignment is unnecessary to preserve the security for the debt.”)

Fed. Nat. Mortg. Ass’n v. Kuipers, 314 Ill.App.3d 631, 638 (2d Dist. 2000) (“We hold that, absent the recording of a release of lien . . . the assignee of a mortgage is entitled to any priority position established by the original mortgagee, up to the principal amount that the mortgage secured at the time of perfection.”)

Fed. Nat. Mortg. Ass’n v. Kuipers, 314 Ill.App.3d 631, 638 (2d Dist. 2000) (“While an assignee that fails to record an assignment may find itself in the unenviable situation of having its lien extinguished as an ‘unknown owner and nonrecord claimant’ in a mortgage foreclosure, the mere failure to record the assignment does not, by itself, extinguish the mortgage lien or negate the priority position.”)

Illinois Code of Civil Procedure, Illinois Mortgage Foreclosure Law, 735 ILCS 5/15-1502(b) (“Rights of Nonrecord Claimants After Notice. The interest in the mortgaged real estate of a nonrecord claimant who is given notice of the foreclosure . . . shall be barred and terminated by any judgment of foreclosure to the same extent as if such claimant had been a party.”)

Illinois Banking Act, 205 ILCS 5/48.2(e) (“Any bank, affiliate or subsidiary of such bank which shall engage in making residential mortgage financing transactions, shall with respect to each such transaction, provide the following: . . . (2) if the servicing of a residential mortgage shall be transferred from the original mortgagee, within 45 days of such transfer, written notice sent by certified mail, return receipt requested, to the mortgagor at the address of the property . . . which notice shall set forth: the name and address of the transferee; the name, address and telephone number to which inquiries by the residential mortgagor should be address; and the name and address to which the next 3 monthly installments are to be submitted to the transferee and the amount of each of such monthly installment.”)

Regulation X, 12 CFR 1024.33(b)(1) (“Except as provided in paragraph (b)(2) of this section, each transferor servicer and transferee servicer of any mortgage loan shall provide to the borrower a notice of transfer for any assignment, sale, or transfer of the servicing of the mortgage loan. The notice must contain the information described in paragraph (b)(4) of this section. Appendix Ms-2 of this part contains a model form for the disclosures required under the paragraph (b).”)

Regulation X, 12 CFR 1024.33(b)(2) (“(i) The following transfers are not assignments, sales, or transfers of mortgage loan servicing for purposes of this section if there is no change in the payee, address to which payment must be deliver, account number, or amount of payment due:

(A) A transfer between affiliates;

(B) A transfer that results from mergers or acquisitions of servicers or subservicers;

(C) A transfer that occurs between master servicers without changing the subservicer;

(ii) The Federal Housing Administration (FHA) is not required to provide to the borrower a notice of transfer where a mortgage insured under the National Housing Act is assigned to the FHA.

Regulation X, 12 CFR 1024.33(b)(3)(i) (Except as provided in paragraphs (b)(3)(ii) and (iii) of this section, the transferor servicer shall provide the notice of transfer to the borrower not less than 15 days before the effective date of the transfer of the servicing of the mortgage loan. The transferee servicer shall provide the notice of transfer to the borrower not more than 15 days after the effective date of the transfer. The transferor and transferee servicers may provide a single notice, in which case the notice shall be provided not less than 15 days before the effective date of the transfer of the servicing of the mortgage loan.”)

Regulation Z, 12 CFR 1026.39(a)(1) (“A ‘covered person’ means any person, as defined in § 1026.2(a)(22), that becomes the owner of an existing mortgage loan by acquiring legal title to the debt obligation, whether through a purchase, assignment or other transfer, and who acquires more than one mortgage loan in any twelve-month period. For purposes of this section, a servicer of a mortgage loan shall not be treated as the owner of the obligation if the servicer holds title to the loan, or title is assigned to the servicer, solely for the administrative convenience of the servicer in servicing the obligation.”)

Regulation Z, Official Interpretations, Paragraph 39(a)(1), Comment 4 (“Disclosures are required under this section when, as a result of a merger, corporate acquisition, or reorganization, the ownership of a mortgage loan is transferred to a different legal entity.)

Regulation Z, 12 CFR 1026.39(b) (“Except as provided in paragraph (c) of this section, each covered person is subject to the requirements of this section and shall mail or deliver the disclosures required by this section to the consumer on or before the 30th calendar day following the date of transfer.”)

Regulation Z, Official Interpretations, Paragraph 39(b)(1), Comment 1 (The disclosures under this section can be combined with other materials or disclosures, including the transfer of servicing notices required by the Real Estate Settlement Procedure Act (12 U.S.C. 2601 et seq.) so long as the combined disclosure satisfied the timing and other requirements of this section.”)

Regulation P, 12 CFR 1016.4(a) (“You must provide a clear and conspicuous notice that accurately reflects your privacy policies and practices to: (1) Customer. An individual who becomes your customer, not later than when you establish a customer relationship, except as provided in paragraph (e) of this section.”)

Regulation P, 12 CFR 1016.4(c)(2) (“You establish a customer relationship with a consumer when you originate or acquire the servicing rights to a loan to the consumer for personal, family, or household purposes. If you subsequently transfer the servicing rights to that loan to another financial institution, the customer relationship transfers with the servicing rights.”)

Regulation P, 12 CFR 1016.4(e)(1) (“You may provide the initial notice required by paragraph (a)(1) of this section within a reasonable time after you establish a customer relationship if: (i) Establishing the customer relationship is not at the customer’s election.”)

Regulation P, 12 CFR 1016.4(e)(2)(i)(A) (“In the case of financial institutions other than credit unions and financial institutions described in § 1016.3(l)(3), establishing a customer relationship is not at the customer’s election if you acquire a customer’s deposit liability or the servicing rights to a customer’s loan from another financial institution and the customer does not have a choice about your acquisition.”)