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Commercial Lending Guide
Commercial Lenders’ Guide to Oregon Law
McEwen Gisvold LLP has represented lenders in Oregon for over 125 years, and is one of a select few law firms on the west coast to be home to multiple members of the American College of Real Estate Lawyers (ACREL). This guide provides a basic outline of legal considerations in making commercial loans in the state of Oregon. This guide is not legal advice and does not create an attorney-client relationship. If you have questions about a specific transaction or area of Oregon law, please contact a McEwen Gisvold attorney by clicking the Real Estate/Business Team link above or calling 503-226-7321.
Download this guide in Word by clicking here. Last Updated: 5/8/12
Note: this guide addresses only commercial lending not involving loans for personal, family, or household use, and not involving residential real property as security. Such transactions are governed by ever more complex State and Federal statutes and administrative rules, and should only be entered into upon consultation with Oregon counsel.
Table of Contents:
A.Secured Transactions – Real Estate - Mortgages and Deed of Trust
B.Secured Transactions – Uniform Commercial Code – Personal Property and Crops
C.Defaulted Loans – Servicing Considerations and Modifications
D.Defaulted Loans – Real Property Foreclosures
A. Secured Transactions – Real Estate - Mortgages and Deed of Trust
1) Deed of Trust Preferred. The security instrument of choice in Oregon is the Deed of Trust, although Mortgages are available but rarely, if ever, used.
2) Statutory Requirements. ORS 205.234 and other statutes require that certain information appear on the face page of a recorded instrument. Thus, we would customarily place on the face or first page of the Trust Deed the following:
1. "The address of the entity holding the lien created by the instrument is: [Name and address of the lender]."
2. "The tax account numbers for the property subject to the lien of this instrument are: [the necessary information to complete this requirement will be found in the preliminary title report]."
3. The name of the instrument (i.e. "Deed of Trust").
4. The names of the grantor, trustee, and beneficiary and each of their addresses.
5. "After recording, return to: [name], [address]."
3) Fixtures. If the lender wishes to perfect a security interest in fixtures, we suggest: (a) the following notice be placed on the face page of the Trust Deed or (b) the recording of an Oregon UCC financing statement with the County Recorder for the county where the real property is located. ORS 79.0502(3).
"Notice to Recorder:
THIS DOCUMENT CONSTITUTES A FIXTURE FILING THAT SHALL HAVE AN EFFECTIVE PERIOD UNTIL THIS DEED OF TRUST IS RECONVEYED OR SATISFIED OF RECORD OR ITS EFFECTIVENESS OTHERWISE TERMINATES AS TO THE REAL PROPERTY."
Moreover, if you put the recommended notice on the trust deed's face page, this should alert the recording office of this fact. Nonetheless, out of an abundance of caution, you may wish to record an Oregon form UCC as well, though such recording should merely duplicate the trust deed recording as a fixture filing.
4) Maturity Date; Statute of Limitations. The maturity date should be specified in the Deed of Trust. When no maturity date is specified in the document, a deed of trust/mortgage remains a lien upon real property for ten years from the date of execution. ORS 88.110. If a maturity date is specified, the ten year period runs from the maturity date.
5) Trustee. The custom and practice in Oregon is to use one of the major title insurance companies as trustee, usually the company issuing the lender's title policy. Should a default occur, the lender would file an Appointment of Successor Trustee, usually naming one of the attorneys in the law firm handling the collection and/or foreclosure of the trust deed as the successor trustee. If the obligations are fully performed, ORS 86.720 requires the beneficiary to deliver a written request to the trustee to reconvey the real property described in the trust deed to the grantor within 30 days after performance of the obligations.
6) Disclaimer. ORS 93.040 requires a land use notice in instruments transferring or contracting to transfer fee title to real property. Although a deed of trust merely creates a lien on real property, foreclosure of such lien will cause a transfer in title. Thus, we believe it is prudent to include in the deed of trust the following notice:
BEFORE SIGNING OR ACCEPTING THIS INSTRUMENT, THE PERSON TRANSFERRING FEE TITLE SHOULD INQUIRE ABOUT THE PERSON’S RIGHTS, IF ANY, UNDER ORS 195.300, 195.301 AND 195.305 TO 195.336 AND SECTIONS 5 TO 11, CHAPTER 424, OREGON LAWS 2007, SECTIONS 2 TO 9 AND 17, CHAPTER 855, OREGON LAWS 2009, AND SECTIONS 2 TO 7, CHAPTER 8, OREGON LAWS 2010. THIS INSTRUMENT DOES NOT ALLOW USE OF THE PROPERTY DESCRIBED IN THIS INSTRUMENT IN VIOLATION OF APPLICABLE LAND USE LAWS AND REGULATIONS. BEFORE SIGNING OR ACCEPTING THIS INSTRUMENT, THE PERSON ACQUIRING FEE TITLE TO THE PROPERTY SHOULD CHECK WITH THE APPROPRIATE CITY OR COUNTY PLANNING DEPARTMENT TO VERIFY THAT THE UNIT OF LAND BEING TRANSFERRED IS A LAWFULLY ESTABLISHED LOT OR PARCEL, AS DEFINED IN ORS 92.010 OR 215.010, TO VERIFY THE APPROVED USES OF THE LOT OR PARCEL, TO DETERMINE ANY LIMITS ON LAWSUITS AGAINST FARMING OR FOREST PRACTICES, AS DEFINED IN ORS 30.930, AND TO INQUIRE ABOUT THE RIGHTS OF NEIGHBORING PROPERTY OWNERS, IF ANY, UNDER ORS 195.300, 195.301 AND 195.305 TO 195.336 AND SECTIONS 5 TO 11, CHAPTER 424, OREGON LAWS 2007, SECTIONS 2 TO 9 AND 17, CHAPTER 855, OREGON LAWS 2009, AND SECTIONS 2 TO 7, CHAPTER 8, OREGON LAWS 2010.
7) Attorneys' Fees. Oregon courts have held that recovery of attorney fees and costs on appeal or discretionary review may occur only if expressly provided for in the contract. It is not enough to refer generally to the recovery of attorney fees. Consequently, we recommend the addition of the following language in those provisions dealing with attorneys fees:
". . . , whether or not incurred in connection with litigation, and if incurred in connection with litigation, including such fees, expenses, and costs as are incurred at trial and on appeal or discretionary review."
8) Statute of Frauds. In 1989, Oregon amended its statute of frauds to provide that a financial institution's loan and loan modification agreements must generally be in writing to be enforceable. ORS 41.580. Further, the amended statute mandates that commercial loan documents contain notice to the borrower of this law. The notice statement must be underlined or in at least 10-point bold type:
"UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY [BENEFICIARY]/US CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY GRANTOR'S/BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY [AN AUTHORIZED REPRESENTATIVE OF BENEFICIARY]/US TO BE ENFORCEABLE."
You may incorporate this notice into the Trust Deed, or you may use a single page separate notice document if you prefer, so long as the separate document adequately identifies the loan, is signed by the borrower, and is given when the loan is made.
9) Insurance Obtained by Lender. Pursuant to ORS 746.201 if a loan document authorizes the lender to place insurance on the property when the borrower fails to maintain the insurance as required by the loan document, a warning in substantially the following form shall be set forth in the loan document in 10pt. type:
UNLESS YOU PROVIDE US WITH EVIDENCE OF THE INSURANCE COVERAGE AS REQUIRED BY OUR CONTRACT OR LOAN AGREEMENT, WE MAY PURCHASE INSURANCE AT YOUR EXPENSE TO PROTECT OUR INTEREST. THIS INSURANCE MAY, BUT NEED NOT, ALSO PROTECT YOUR INTEREST. IF THE COLLATERAL BECOMES DAMAGED, THE COVERAGE WE PURCHASE MAY NOT PAY ANY CLAIM YOU MAKE OR ANY CLAIM MADE AGAINST YOU. YOU MAY LATER CANCEL THIS COVERAGE BY PROVIDING EVIDENCE THAT YOU HAVE OBTAINED PROPERTY COVERAGE ELSEWHERE.
YOU ARE RESPONSIBLE FOR THE COST OF ANY INSURANCE PURCHASED BY US. THE COST OF THIS INSURANCE MAY BE ADDED TO YOUR CONTRACT OR LOAN BALANCE. IF THE COST IS ADDED TO YOUR CONTRACT OR LOAN BALANCE, THE INTEREST RATE ON THE UNDERLYING CONTRACT OR LOAN WILL APPLY TO THIS ADDED AMOUNT. THE EFFECTIVE DATE OF COVERAGE MAY BE THE DATE YOUR PRIOR COVERAGE LAPSED OR THE DATE YOU FAILED TO PROVIDE PROOF OF COVERAGE.
THE COVERAGE WE PURCHASE MAY BE CONSIDERABLY MORE EXPENSIVE THAN INSURANCE YOU CAN OBTAIN ON YOUR OWN AND MAY NOT SATISFY ANY NEED FOR PROPERTY DAMAGE COVERAGE OR ANY MANDATORY LIABILITY INSURANCE REQUIREMENTS IMPOSED BY APPLICABLE LAW.
Placing the warning in the loan document will constitute a complete defense to any claim arising under Oregon law challenging the lender's placement of insurance on the collateral in which the lender has a security interest for the protection of the lender's interest in the property.
10) Recording. County recording officers can refuse to record a document if it is not legible. ORS 205.130(2). Proper notarial acknowledgments are essential for recorded documents. ORS 205.130(2)(a). If the notary blocks comply with Oregon law or the law of the state in which the notary is taken, it will be sufficient for recording in Oregon.
For purposes of recording with Oregon county clerks, all instruments must be typed, written, or printed in 8-point type or larger on paper that is not larger than 14 inches long and 8-1/2 inches wide and which paper is of sufficient quality for recording photographically. The first page of each instrument must contain a description of the transaction to be recorded; the names and addresses of the grantor and grantee; the name of the person and address to whom the instrument will be delivered after recording; for instruments conveying or contracting to convey fee title to any real estate and all memoranda of such instruments, the consideration paid for such transfer; and for instruments conveying or contracting to convey fee title to real estate, the statement that “until a change is requested, all tax statements shall be sent to the following address:” and then listing the address. We also recommend placing the tax parcel number for the property on the first page.
11) Usury. If a loan is over $50,000.00 and/or is secured by a first lien on real property, there is no limitation on the rate of interest that may be charged. ORS 82.010, et seq.
12) Variable Rate. The priority of trust deeds securing obligations with variable interest rates are protected under ORS 86.095. We recommend that the Trust Deed reflect the fact that the indebtedness has a variable interest rate using the following language:
"The [Note,] the [Credit Agreement], and the other loan documents secured by this Deed of Trust contain provisions allowing for changes in the interest rate from time to time during the term of the indebtedness."
We suggest obtaining a Variable Rate endorsement from the title insurance company at closing.
13) Assignment of Rents. We believe that the assignment of rents provisions can be set forth in the Trust Deed and do not need to be set forth in a separate document. We believe that most lenders making loans in Oregon follow this practice. However, some lenders prefer to have a separate assignment of rents for practical purposes. It is a much shorter document to copy and use in the event of the appointment of a receiver or if it is necessary to distribute to tenants to show the authority of the lender and/or the receiver to collect the rents.
14) Mortgage Lenders Law. Certain lenders are required to be licensed as "mortgage bankers" or "mortgage brokers" before making loans that are directly or indirectly secured by a deed of trust on real estate located in Oregon if the loan is a "residential mortgage transaction". A residential mortgage transaction is one involving property upon which four or fewer residential dwelling units are planned or situated.
15) Priority of Advances/Construction Loans. To assure priority of future advances, whether optional or obligatory, construction lenders in Oregon follow the requirements of the so-called "Line of Credit Instrument" statute, ORS 86.155. In summary, a line of credit instrument is a deed of trust that provides on the front or first page of the document the following:
a.the document legend must contain "LINE OF CREDIT DEED OF TRUST" in capital letters above the body of the deed of trust;
b.the maximum principal amount to be advanced pursuant to the Credit Agreement; and
c.the maturity date of the Credit Agreement, exclusive of any option to renew or extend.
Thus, we recommend that the following sentences be added, to wit: "The maximum principal amount to be advanced pursuant to the Promissory Note (or the Construction Loan Agreement, if there is one) secured by this Line of Credit Deed of Trust is $_______________________. The maximum principal amount to be advanced pursuant to the credit agreement may be exceeded by advances to complete construction pursuant to ORS 86.155(2)(c). The maturity date of this Line of Credit Deed of Trust is ___________________."
See ORS Chapter 87 generally for requirements and time lines governing the assertion and foreclosure of construction liens and other types of liens, as a complete summary of lien law and resolution of priorities as between competing liens and other interests in real property is beyond the scope of this Guide. Generally, for priority purposes all construction lien claims for which required pre-lien notices have been properly given: 1) have the same relative priority as between themselves, 2) relate back to the date of commencement of construction of new improvements (generally, the first actual preparation or construction on site or the first delivery to the site of materials) and 3) are usually senior to previously recorded construction financing mortgages or trust deeds, at least as to the portion of the property occupied by the new improvements together with the portion of the property the court upon foreclosure determines is reasonably necessary for the use and occupancy of those new improvements. However, a construction lien for repair or alterations to an existing improvement will generally not be senior to a pre-existing mortgage or trust deed unless the mortgage or trust deed secures financing for the repairs or alterations.
A construction lien must be filed within the earlier of (a) 75 days after the claimant ceases to provide labor, equipment, or materials or (b) 75 days after completion of construction. A completion notice may be posted and recorded to fix the commencement of the statutory time period for recording claims of construction lien. Unless timely foreclosed by lawsuit filed within 120 days after the date the lien was recorded, the claim of construction lien becomes "stale" and cannot thereafter be foreclosed, subject to certain exceptions involving extended payment provisions.
A construction mortgage has priority over a security interest in fixtures (with some exceptions) if a record of the mortgage is recorded before the goods become fixtures and the goods become fixtures before the completion of construction. ORS 79.0334(8). To be a construction mortgage, the mortgage must state that it secures an obligation incurred for the construction of an improvement on land, including the acquisition cost of the land. Id.
As a practical matter, in Oregon both construction and permanent lenders work closely with title companies to obtain lien waivers and title endorsements to protect against losses associated with construction liens.
16) Environmental and Other Indemnities. Deficiency judgments are not available after nonjudicial foreclosure in Oregon. We recommend that our Oregon lender clients should obtain a separate environmental guaranty and to structure such document with completely separate and independent obligations from those described in the Trust Deed. Thus, we recommend that the environmental obligations under the Trust Deed terminate upon foreclosure and the obligations under a separate environmental guaranty would commence at that point. We are aware of lenders in this State who do not sever the obligations under the deed of trust. However, because of the consequences in the event ORS 86.770(2) is strictly applied, we recommend that the obligations be separate. We are not aware of any Oregon court case that has considered the continued validity of an environmental guaranty after nonjudicial foreclosure. However, we are aware of legislative history regarding the 1997 legislation that suggests it was not the intent of the drafters to allow recovery against a guarantor for a deficiency after a nonjudicial foreclosure. Of course, we would argue that the separate environmental indemnities are not secured by the deed of trust. It is also common for Oregon lenders to obtain a separate indemnity agreement covering ADA and building violation issues.
B. Secured Transactions – Uniform Commercial Code – Personal Property and Crops
17) Oregon Uniform Commercial Code - Chattel / Personal Property Search. Oregon’s UCC substantially follows Revised Article 9 with some additional revisions and permutations. UCC forms may be obtained directly from the Secretary of State at http://www.filinginoregon.com/pages/ucc/ucc_forms/index.html. If personal property is a part of the security, we recommend that lenders in Oregon obtain a UCC search. This can be done through either the Oregon Secretary of State or a private service. Free searches may be performed at https://secure.sos.state.or.us/ucc/searchHome.action.
18) Crops and Agricultural Transactions. In Oregon, to perfect a security interest in growing crops and farm products, a secured party must file an Effective Financing Statement (EFS). See ORS Chapter 80 - http://www.filinginoregon.com/pages/ucc/ucc_filing/laws_rules.html. Oregon law is not entirely clear whether this needs to be done in addition to or as a replacement for a UCC-1 financing statement. Thus, as there is no prejudice in doing so, we recommend our clients file both the EFS and UCC-1 financing statement.
Upon default under an agricultural loan, the federal Food Service Act also authorizes directly sending potential competing secured parties (i.e. buyers of the farm products) a Notice of Security Interest (which, because of Oregon law, cannot include any SSNs or EINs). However, this last step is not necessary, since Oregon has the Central Filing System/EFS in place. Secured parties sometimes choose to send them in anticipation of foreclosure once a borrower defaults, to make sure buyers of the farm products have actual knowledge of the security interest (and, in practice, to stop buyers from buying the lender's collateral, which of course complicates foreclosure).
C. Defaulted Loans – Servicing Considerations and Modifications
19) Modification of Deeds of Trust and Mortgages. Modifications of an existing loan involving only the following changes, pursuant to ORS 86.095, does not affect the priority of the Deed of Trust and therefore does not require recording a modification of the Deed of Trust or obtaining a modification endorsement:
(i) Modification of the interest rate;
(ii) An increase in the underlying obligation secured by the credit instrument during any part of the term of the credit instrument as a result of deferment of all or a portion of the interest payments and the addition of such payments to the outstanding balance of the obligation;
(iii) Execution of new notes at designated intervals during the term of the credit instrument that reflect changes made pursuant to (i) or (ii) above;
(iv) Extension of the term of the credit instrument;
(v) Substitution of a note if there is no increase in the principal amount to be paid under the note;
(vi) Modification of periodic payments required under the note if there is no increase in the principal amount due under the note; or
(vii) Advances made under “line of credit” trust deeds and financing instruments.
20) Late Charges, Default Interest, Prepayment Charges, Liquidated Damages. Except for residential loans, Oregon law imposes no limitations on late charges or default interest rates. However, the custom and practice is 5% of the delinquent amount for late charges and 4% above the note rate for default interest charges. If challenged and if the particular provision in the Note or Security Agreement contains liquidated damage language, an Oregon court may apply a UCC liquidated damages analysis to late charges and default interest rates. ORS 72.7180; Illingworth v. Bushong, 297 Or 675, 688 P2d 379 (1984); DiTommaso Realty, Inc. v. Moak Motorcycles, Inc., 309 Or 190, 785 P2d 243 (1990). Prepayment charges and late fees are allowed under Oregon law. Wells Fargo Bank, N.A. v. Ash Org., 2010 U.S. Dist. LEXIS 66542, 28-29 (D. Or. July 1, 2010) (holding a commercial prepayment penalty fee to be a liquidated damages clause, but upholding it based on the loss-of-interest damages from the lender having to reinvest the loan principal at a lower interest rate than the fixed rate of the original loan); Illingworth v. Bushong, 297 Or 675, 688 P.2d 379 (1984). Such analysis will require a reasonable relationship between the amounts set forth in the agreement and the actual loss caused by the breach, difficulties of proving the loss, and ability to obtain an adequate remedy.
With respect to prepayment charges on residential loans, the loan agreement and note must state the maximum prepayment charge applicable for prepayment during the first year of the loan period and for each year thereafter. ORS 86.150.
21) Interest on Interest. Whether interest may be charged on interest is unclear in Oregon. An old case, Levens v. Briggs, 21 Or 333, 28 P 15 (1891) indicated that "compounding" interest is void as against public policy. However, Union Central Life Ins. Co. v. LaFollette, 150 Or 455, 44 P2d 165 (1935), distinguished Levens and held that increased interest on maturity does not constitute "compounding." Negative amortization loans (which may constitute compounding) are commonly made in Oregon. Moreover, loans made in Oregon often provide that on default unpaid interest will be added to principal and bear interest. Because of the age of these cases and the changes in the usury laws, we believe that interest may be charged on interest. Clearly, even according to Union, interest may be charged after default or after maturity, which covers most of the interest-on-interest situations.
D. Defaulted Loans – Real Property Foreclosures
22) Nonjudicial Foreclosure. Nonjudicial foreclosure (foreclosure by publication and sale) is available in Oregon and may be completed, absent complications, in as few as 120 days, although 180 days is a more typical timeframe. If contested, a nonjudicial foreclosure can take over one year. There is no redemption period following nonjudicial foreclosure, but the borrower has until five days prior to the foreclosure sale to reinstate the loan. The timeline is generally as follows for commercial deeds of trust. First, a notice of default must be recorded in the county where the property is located and the borrower and/or occupant of the property must be served with a copy of the notice at least 120 days before the scheduled foreclosure sale date. Second, a copy of the notice must be published once a week for four (4) successive weeks, with the last notice being published at least twenty (20) days prior to the foreclosure sale. The borrower may cure the default at any time prior to five days before the sale by paying all past due amounts, plus costs. The sale must be at auction to the highest bidder for cash. Any person, except the trustee, may bid at the sale, which take place between 9:00 am and 4:00 pm at the location stated in the notice of record. The sale may be postponed for up to 180 days from the original sale date if at least twenty (20) days advance notice is given, by mail, to the original recipients of the notice.
23) Judicial Foreclosure. Judicial foreclosure is available in Oregon and can take as little as 90 days (if uncontested and a default judgment is obtained) to more than eighteen months to complete. Deficiency judgments are available as part of the judicial foreclosure. For the mortgagor, there is a 180-day redemption period following judicial sale and this redemption period may not be waived. For junior lienors, there is a 60-day redemption period following judicial sale. Unlike nonjudicial foreclosure, there is no right to reinstate the loan once the judicial foreclosure has been filed.
24) Deficiency Judgments. The general rule in Oregon is that deficiency judgments may not be obtained after a nonjudicial foreclosure, but may be obtained after a judicial foreclosure.
25) Real Estate Tax Deficiency and Foreclosure. Under Oregon law, real estate taxes become delinquent if not paid in full by May 15 of the tax year. In Oregon, the tax year is July 1 through June 30. Taxes can be paid with a discount on November 15. Otherwise, taxes are paid in three equal installments on November 15, February 15, and May 15. If taxes become delinquent, they are subject to foreclosure by the county tax collector on the third anniversary of such delinquency. We recommend that the lender use a tax reporting service to monitor tax payments, delinquencies, and possible foreclosures. This is routinely done in Oregon and the minimal cost is usually paid by borrower at closing.
26) Appointment of Receiver. Notice and hearing are required for the appointment of a receiver under Oregon law. See ORS 86.010 and Rule 80, Receivers, Oregon Rules of Civil Procedure. Receivers may be appointed, usually as of right (if provided for in the loan documents) although some judges require a showing of equity (e.g. that rents or profits are in danger of being lost or materially injured or impaired) regardless of the language in the loan documents.