New Illinois Mortgage Requirements

May 17, 2012 at 2:53 pm Leave a comment

 A recent ruling in the U.S. Bankruptcy Court for the Central District of Illinois has created some concern for lenders with mortgage-secured loans secured in the State of Illinois.

The case In re Gary M. Crane and Marsa S. Crane, (Bankruptcy No. 11-90592), held that if a mortgage does not contain all the requirements set forth in 765 ILCS 5/11, the mortgage would not be valid as to provide constructive notice to any potential lienholders. 765 ILCS 5/11 requires a mortgage to include the maturity date and interest rate along with the amount of the underlying debt. The court stated that 765 ILCS 5/11 is mandatory and not permissive; thus any failure to follow the statute makes a mortgage that lacks the 765 ILCS 5/11 requirements as failing to provide constructive notice. In Crane, a mortgage that did not contain the interest rate or the maturity date was held unenforceable against the bankruptcy trustee and resulted in the obligation secured by the mortgage becoming an unsecured claim rather than a secured claim. The court further held that a reference to the promissory note is not sufficient to satisfy the requirements of 765 ILCS 5/11. The Draconian result is that every mortgage recorded in Illinois must have the amount of the debt, the interest rate charged on such amount and the maturity date for the loan specifically referenced in the text of the recorded mortgage.

Not surprisingly, this decision is contrary to general practice in Illinois. For a variety of reasons, many Illinois mortgages do not describe the interest rate on the underlying loan amount. Currently, the case is being appealed and the Illinois House of Representatives has proposed legislation that would provide that the failure to list the interest rate or maturity date specifically in the mortgage would not nullify the recording of the mortgage as constructive notice and thus would not lose priority in bankruptcy or otherwise. Until this case is overturned or legislation is passed, it is unclear what the effects of this ruling will be.

While the Crane case is limited to the bankruptcy courts in Illinois, it could be persuasive in other courts and also could result in title insurance claims that may or may not be excluded from coverage. We will continue to monitor the case and send a follow-up regarding the results of the pending legislation and appeal.

Illinois lenders should review all form mortgages and revise them to comply with 765 ILCS 5/11, and, when modifying any mortgage, include the provisions required under 765 ILCS 5/11 in such modification. Stinson Morrison Hecker LLP has lawyers licensed in Illinois to assist in performing these tasks or advising on any other issues related to the Crane case.

For more information on this alert please contact Michael Campbell or any of the attorneys in Stinson’s Banking & Financial Services Division.

This article is designed to give general information on developments actually covered. It is not intended to be a comprehensive summary of the law or to treat exhaustively the subject covered. It does not constitute legal advice or opinion. Such advice and opinion is provided by the firm only upon engagement with respect to specific factual situations.


Entry filed under: Uncategorized.

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