Beneficiary

Key Takeaways

• Under a deed of trust the beneficiary is the lender, the party entitled to be repaid and the party who directs a sale of the property if the borrower defaults.
• A deed of trust has three roles: the grantor who pledges the property, the trustee who holds the power of sale, and the beneficiary who holds the debt.
• In Washington, RCW 61.24.005 defines the beneficiary as the holder of the instrument or document evidencing the obligations secured by the deed of trust.
• The beneficiary does not conduct the foreclosure sale. The trustee does, and in Washington RCW 61.24.010(4) gives that trustee a duty of good faith to the borrower, beneficiary, and grantor.

What It Means

In a Deed Of Trust, the beneficiary is the lender. The name comes from the shape of the instrument. The borrower conveys an interest in the property to a neutral third party, and that interest is held for the benefit of whoever holds the debt. So the beneficiary is the party entitled to repayment, and the party who instructs the trustee to act when the loan falls into default.

Three roles fill a deed of trust, and each one does a different job. The grantor is the borrower who pledges the property. The Trustee holds the power of sale and, on a default, conducts that sale. The beneficiary holds the Promissory Note or other obligation the deed of trust secures, and collects the proceeds.

The role travels with the debt rather than with the recorded paperwork. When a loan is sold on the secondary market, the party that buys the obligation becomes the beneficiary. That is why a homeowner who signed with a local credit union can end up dealing with an unfamiliar company named as beneficiary on a default notice years later, without ever having signed anything new.

How It Works in Washington

In Washington the deed of trust is the standard security instrument for residential loans, and chapter 61.24 RCW, the Deeds of Trust Act, supplies the rules. RCW 61.24.005 defines the beneficiary as the holder of the instrument or document evidencing the obligations secured by the deed of trust, excluding a person holding it as security for a different obligation. The practical effect is that whoever currently holds the note is the beneficiary, no matter whose name was typed on the original loan documents.

That definition carries real weight at foreclosure. For residential real property of up to four units, RCW 61.24.030(7)(a) requires the trustee to have proof that the beneficiary is the holder of the promissory note before a notice of trustee's sale is recorded, transmitted, or served, and a declaration by the beneficiary made under penalty of perjury is sufficient proof. RCW 61.24.030(8) then requires that the written notice of default and that beneficiary declaration be transmitted to the borrower and grantor at least 30 days before the notice of sale is recorded. A successor trustee gains the powers of an original trustee only once the appointment is recorded in each county where the deed of trust is recorded (RCW 61.24.010(2)), and under RCW 61.24.010(4) that trustee owes a duty of good faith to the borrower, beneficiary, and grantor alike.

Example

Owen buys a house in Olympia for $525,000 with $105,000 down and a $420,000 loan from Sound Community Bank. At closing he signs a promissory note for $420,000 and a deed of trust. Owen is the grantor, a title company subsidiary is named trustee, and Sound Community Bank is the beneficiary.

Eighteen months later the bank sells the loan, and Cascade Servicing Trust becomes the holder of the note. Cascade is now the beneficiary, even though its name appears nowhere on the deed of trust Owen signed and nothing was re-recorded. Owen then misses six payments and falls $12,400 behind. Before any notice of trustee's sale can be recorded, the trustee must hold proof that Cascade holds the note, which Cascade supplies as a declaration signed under penalty of perjury. The notice of default and that declaration go to Owen at least 30 days before the notice of sale. Cascade, not Sound Community Bank, is the party the trustee takes direction from, and Cascade is the party entitled to the proceeds of any sale.

Common Mistakes and Exam Traps

• In a deed of trust the beneficiary is the lender, not the borrower. The borrower is the grantor. Life insurance vocabulary, where a beneficiary receives a payout, does not carry over to real estate finance.
• The beneficiary does not sell the property at foreclosure. The trustee holds the power of sale and conducts it, acting on the beneficiary's direction.
• A mortgage and a deed of trust name different parties. A mortgage runs between a mortgagor and a mortgagee, two parties. A deed of trust runs among a grantor, a trustee, and a beneficiary, three parties.
• The beneficiary is whoever currently holds the secured obligation. The original lender named in the recorded deed of trust may no longer be the beneficiary by the time a default occurs.