Trustee

Key Takeaways

• In a deed of trust the trustee is the neutral third party who holds the power of sale for the lender's benefit until the loan is paid off.
• Washington limits who may serve as trustee of a deed of trust, including title insurance companies authorized to insure title in Washington, licensed title insurance agents, active members of the Washington State Bar Association, and nationally chartered banks (RCW 61.24.010(1)).
• The trustee or successor trustee has a duty of good faith to the borrower, the beneficiary, and the grantor (RCW 61.24.010(4)).
• The trustee is not a fiduciary. RCW 61.24.010(3) states the trustee has no fiduciary duty or fiduciary obligation to the grantor or to others holding an interest in the property.

What It Means

A trustee is a neutral third party who holds something for someone else's benefit rather than for the trustee's own account. The word turns up in several corners of real estate, and the one that matters most in Washington is the trustee named in a Deed Of Trust.

Washington secures most residential purchase loans with a deed of trust, and a deed of trust has three parties where a mortgage has two. The borrower is the grantor, the lender is the Beneficiary, and the trustee holds the power of sale. While payments are current the trustee does nothing at all. If the loan is paid in full, the trustee releases the security interest back to the borrower. If the loan defaults, the trustee is the party who conducts the sale, which is the whole reason the role has to sit with someone who has no stake in the outcome.

The other use students meet is the bankruptcy trustee, appointed by a court to administer a debtor's assets. Same underlying idea of holding property for others, a different body of law and a different set of powers.

How It Works in Washington

In Washington, chapter 61.24 RCW sets both who the trustee may be and what the trustee owes. RCW 61.24.010(1) limits the role to a defined list: a domestic corporation or domestic limited liability company of which at least one officer is a Washington resident, a title insurance company authorized to insure title to real property in Washington or a title insurance agent licensed under chapter 48.17 RCW, an attorney who is an active member of the Washington State Bar Association, certain professional entities whose members are licensed attorneys, an agency or instrumentality of the United States government, and a national bank, savings bank, or savings and loan association chartered under federal law.

The duty side is split in a way worth noticing. RCW 61.24.010(3) provides that the trustee or successor trustee has no fiduciary duty or fiduciary obligation to the grantor or other persons having an interest in the property subject to the deed of trust. RCW 61.24.010(4) then provides that the trustee or successor trustee has a duty of good faith to the borrower, beneficiary, and grantor. Both are true at the same time. The trustee is nobody's agent and owes nobody the loyalty a fiduciary owes, yet still has to deal fairly with every side while running a Non Judicial Foreclosure or issuing a Reconveyance.

Example

Dominic Reyes buys a house in Everett for $612,000 with a $489,600 loan from Cascade Mutual, which is 80 percent of the price. At closing he signs two documents for the lender: a promissory note promising to repay, and a deed of trust naming himself as grantor, Cascade Mutual as beneficiary, and Evergreen Title Insurance Company as trustee. Evergreen qualifies under RCW 61.24.010(1) as a title insurance company authorized to insure title to real property in Washington.

For seven years nothing happens. Evergreen holds the power of sale, files nothing, and collects nothing, because Dominic pays on time.

In year eight Dominic misses six payments. Cascade Mutual instructs Evergreen to begin a nonjudicial foreclosure, and it is Evergreen, not Cascade, that issues the notices and conducts the trustee's sale. Evergreen has to run that process in good faith toward Dominic as well as toward Cascade under RCW 61.24.010(4), even though Cascade is the party paying its fee. Had Dominic paid the $489,600 off instead, Cascade would have asked Evergreen to record a deed of reconveyance releasing the security interest, and the trustee's job would have ended quietly.

Common Mistakes and Exam Traps

• The trustee is not the lender. On a deed of trust the lender is the beneficiary, and the trustee is a separate neutral party holding the power of sale.
• The trustee is not a fiduciary in Washington, yet still owes good faith. RCW 61.24.010(3) removes any fiduciary duty to the grantor and RCW 61.24.010(4) imposes a duty of good faith to the borrower, beneficiary, and grantor. Both statements are correct.
• A mortgage has two parties and a deed of trust has three. A question that places a trustee inside a plain mortgage is describing a deed of trust.
• The deed of trust trustee and a bankruptcy or trust-law trustee are separate roles. Only the deed of trust trustee holds a power of sale over the secured property.