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Recent Missouri Loan Modification Reminders Decision

The Missouri Court of Appeals for the Western District recently issued an opinion that reminds banks in Missouri, and elsewhere, of several important points when modifying loans. In the case of Central Bank of Kansas City v. Perry, the bank’s initial loan to the borrower was secured by a deed of trust granted by the plaintiffs. The loan went through four modifications. Plaintiff first argued that the deed of trust was essentially a guarantee, and as a guarantee it was no longer valid because the plaintiffs had not consented to the various modifications. The Court held that the deed of trust was not a guarantee because a guarantee requires that the guarantor agrees to assume personal liability for the guaranteed debt. Thus, the Court held that while a loan modification will release a guarantor if the guarantor does not consent to the modification, a modification does not release a deed of trust.

Plaintiffs also argued that the loan modifications were new loans that effectively released the deed of trust. The Court held that the modifications were not new loans, and, accordingly, were covered by language in the deed of trust applying to “extensions, renewals, modifications, or substitutions.” In its finding, the Court also relied on the fact that the original loan number was used on the modifications, and the fact that the borrowers also executed documents agreeing that the existing loan was being modified, rather than extinguished.

Although the case only applies to Missouri law, the points made by the Court provide good direction for banks in other states. First, the Court recommends that banks obtain the consent of guarantors on all loan modifications.  Without consent, the guarantors may be inadvertently released. Although not required, to the extent the deed of trust’s grantors’ consent is readily available, it may be a good idea to obtain their consent on loan modifications.  Likewise, if there is any question as to whether the grantor has personally guaranteed the underlying debt in the deed of trust, we also recommend obtaining consent from the grantor. Finally, if your bank intends for a deed of trust to cover modifications, it should include explicit language in the deed of trust covering such modifications, renewals, extensions, and replacements. Based on the Court’s ruling, it is advisable to use consistent loan numbers and to recite in the modification documents that the modification is a continuation of an existing loan. Keep in mind, however, that all situations are different, and there may be some situations where it is also appropriate to modify the applicable mortgage or take other action.