There are two ways to affect a change to the loan documents after they have been executed and the loan has been closed: a corrective addendum or a modification agreement. Each serves a unique purpose and requires careful consideration before making the choice.
When would I choose one over the other?
The proper use of a corrective addendum is in the name. It is meant to correct a mistake in the loan documents that the parties had already agreed to, but for one reason or another, the provision was incorrectly entered or did not make its way into the final signed documents. This could be anything from a simple transposed date, (e.g. January 31, 2023 instead of January 13, 2023), to an entire clause or paragraph that had been missing from the original document. Furthermore, because a corrective addendum is fixing a mutual mistake or a mistake in drafting, there will usually be no fee owed by the borrower.
A modification agreement is meant for all changes to the loan which represent a new agreement between the parties different from the initial agreement. Typically, this will be used for material terms such as the maturity date, interest rate, an increase or decrease in the loan amount, or an adjustment to holdbacks. In other words, the modification agreement should be used for any change in terms. Lenders will usually charge the borrower a fee for a modification or require the borrower to cover the legal and recording costs.
Additional considerations
A lender can obtain a modification endorsement to the title policy when a modification agreement is used. This endorsement, the ALTA 11, provides coverage against the invalidity, unenforceability, or lack of priority of the security instrument as of the date of the endorsement, over defects on title, (except for those already excepted and any new items found in the subsequent search), as a result of the recorded modification agreement. Different endorsements may be needed as well depending upon the changes made to the terms.
Modification agreements come in either 1 or 2 parts: first, a main agreement to modify the loan documents, and second, (only if the security instrument is affected by the change), a separate modification of the security instrument. This is signed by both the borrower and the lender, recites only the changes made, and is recorded.
Corrective addenda, on the other hand, will also have a main agreement, and if the security instrument is affected, then a separate recordable document too – but this document will be a re-recorded (replacement) security instrument, signed only by the borrower. Title companies may be willing to issue an ALTA 11 endorsement for corrective addenda too but may require further documentation to support it.Â
Concluding thoughts
There are many choices to consider, and no two loans should be treated the same. Geraci’s Banking and Finance attorneys have many years of experience to be able to guide lenders through the decision process. They are able to create various agreements, review updated title, and negotiate with the title company to produce the necessary endorsements. Please reach out with any questions, concerns, or comments.
