It has already been a long closing, several versions of your loan documents have circulated, but the borrower has finally signed! The signed documents arrive, but you realize a term from an earlier set of documents snuck its way into the final documents. The good news here is, depending on the severity of the mistake, the borrower may not have to re-sign the entire document set. Corrective addendums are a common way to fix simple mistakes like the one described above. They can be used to correct a variety of mistakes in a loan document set.
Properly identifying parties can be difficult, and we recommend having an attorney sort through entity documents or trusts since they are often dense and difficult to interpret but misidentifying a party does not mean your loan documents are useless. Often, an entity is incorrectly identified in the loan documents as an “LLC” when it should be an “Inc.” or a trustee is not properly identified in the name of the trust. A corrective addendum can be used to appropriately identify the parties and get the proper naming scheme added throughout the loan documents.
Corrective addendums are effective when changing “a California limited liability company” to a “Wyoming limited liability company,” but a lender may run into trouble if the borrower itself is the wrong party. For example, the borrower was incorrectly named in the loan documents as the guarantor and only signed the guaranty. Here, the parties have been given the wrong title or label and the entire document set must, unfortunately, be redrafted and re-signed.
Documents Incorrectly Identify Terms
A corrective addendum can be used to correct certain terms appearing throughout the loan documents. This issue arises frequently and generally applies to documents like the promissory note, but the issue can also apply to any documents containing important loan repayment terms such as dates or payment amounts. Generally, these terms do not appear on the security instrument, and a re-record package may be required if they do. Terms appearing on the note or loan agreement, such as interest rates, payment amounts, and payment dates, can be corrected by a corrective addendum.
Another common mistake, and often one that is particularly important to correct, are general typos. These should be corrected with a corrective addendum when they are caught. You certainly did not intend to make the interest rate one hundred percent—that extra zero snuck its way in there—but the rate should be corrected to avoid ambiguity down the road. Similarly, the extra vowel that made its way into the borrower’s name—when the entity documents clearly state otherwise—can create problems later, so it is best to correct it early and give yourself peace of mind. Corrective addendums are a great method of amending those annoying typos that always seem to pop up after the borrower has signed.
What About the Security Instrument?
Security instruments are slightly different than the other loan documents when it comes to correcting errors. Unlike the rest of your loan documents, the security instrument likely does not contain terms like interest rates and payment amounts. Instead, the security instrument will contain information like the borrower’s vesting and the property’s identification numbers or legal description. Additionally, the security instrument must be recorded by the county recorder to secure the lender’s interest in the property. Often, corrective addendums get misinterpreted or even lost at the county recorder’s office, so a corrective addendum is not recommended for correcting errors in the security instrument. Here, the best way to secure your interest is to correct the security instrument and have it re-executed, but errors to the security instrument should always be analyzed by an attorney.
What if the Security Instrument is Already Recorded?
Occasionally, things go so quickly that you do not realize the mistake until you have the recorded security instrument on your desk. In this case, a re-record is necessary. A re-record will include a cover letter—which should be recorded—that addresses the corrections being made to the security instrument. A re-record will also include a corrected copy of the security instrument to be recorded. Re-records may be expensive, due to the extra legal and recording fees, but they are worth it in the end to guarantee your interest is secured. Of course, if you believe a re-record is necessary, you should always reach out to an attorney with knowledge in the area.
It is not always possible to catch every mistake, especially in a rush, but you can rest assured that a corrective addendum will correct many mistakes that do not involve the security instrument. While it can be costly, correcting the security instrument with a revised security instrument is the proper way to correct errors in the security instrument. However, a re-record package is the best way to correct a security instrument that has already been recorded.
Corrective addendums are a helpful tool, but they cannot correct documents that are seriously flawed. It is best to consult counsel before determining whether a corrective addendum can be used to correct a party’s identification.
The Banking & Finance team is well-versed in all closing documents and procedures. Contact us with questions about your documents.