By providing a loan to a borrower, the lender bears certain risks, which are especially high in the following cases:

  • A large loan amount;
  • A low credit rating of the borrower;
  • The borrower does not have a stable source of income;
  • The borrower is elderly.

Various methods are used to ensure the return of money to the lender as a risk mitigation mechanism. Collateral, guarantor, and trustee are among the most common. The latter two use a third party as an intermediary who facilitates compliance with the contractual relationship between the borrower and the lender.

Who Is a Trustee in the Structure of the Borrower-Lender Relationship?

A trustee is an impartial third party with legal title to some property of the borrower until they repay the debt to the lender.

Thus, the trustee ensures that the borrower complies with all obligations towards the lender but, at the same time, protects the borrower’s property. In the structure of the relationship between the borrower and the lender, the trustee acts as a guarantor for both:

  • The lender can be sure that they will receive either the borrowed money back or the borrower’s property in case of non-repayment of the loan.
  • The borrower can be sure that the lender will not appropriate the property they put up as collateral without sufficient reason.

How Trust Deed Works?

  1. The borrower establishes a trust and transfers legal title to the mortgaged property to the trustee.
  2. The borrower makes payments to the lender as provided in the repayment plan.
  3. Once the loan is repaid, all rights to the property revert to the borrower.
  4. If the borrower does not comply with the loan repayment agreement and does not respond to all measures taken by the lender, ownership of the mortgaged property passes to the trustee, who has the right to dispose of it in favor of the lender.

Who Can Be a Trustee?

The choice of a trustee must be agreed upon by both the lender and the borrower. As a rule, a reliable escrow company, professional trustee services, a title company, or a bank is chosen as a third party acting as an intermediary in the loan agreement. The trustee’s reputation is vital for large loans and a long loan repayment period. Both the lender and the borrower want to be sure that the guarantor of their deal will fulfill this role throughout the entire period of the agreement.

Why Lenders Prefer Trust Deeds to Collateral?

To get the borrower’s property in case of a default on the debt, the lender must initiate a foreclosure proceeding. However, if there is a trustee, it will be easier and cheaper for them to do this. The collateral mechanism does not provide for an intermediary in the relationship between the lender and the borrower. Therefore, to obtain ownership of the pledged property, the creditor must go through a judicial foreclosure. This implies significant costs for pursuing a lawsuit. If there is a trust, a foreclosure proceeding does not require a court decision and is more beneficial for the creditor.