DOMESTIC PARTNERS AND LENDING
As the popularity of “domestic partnerships” increases, and more states enact domestic partnership legislation, lenders grow more concerned with how these developments will affect their business.
While there are only a limited number of states which currently have laws regarding domestic partnerships (the District of Columbia being one of the more recent), several states are examining the issue and considering adopting legislation. These laws are generally thought of as methods to extend legal rights to same-sex couples. But these laws may also impact opposite-sex couples who choose not to become married.
Some states, such as Michigan, have specifically abolished the possibility of any type of state-recognized civil union other than marriage. Michigan recently amended its Constitution to add Article I § 25, which holds that “the union of one man and one woman in marriage shall be the only agreement recognized as a marriage or similar union for any purpose.” This constitutional amendment clearly establishes that Michigan will not extend legal partnership rights to any unmarried couple, regardless of gender.
Other states, such as California, have taken the opposite approach. California first recognized domestic partnerships in 1999 when it enacted a statute recognizing as domestic partners “two adults who have chosen to share one another’s lives in an intimate and committed relationship of mutual caring.” [1999 Cal ALS 588 § 297(a)]
California later extended its recognition of domestic partnerships to permit domestic partners to adopt each others’ children, make medical decisions for each other, mandate benefits offered by employers, and grant property rights similar to marriage, among other rights. [2001 Cal ALS 893] Governor Gray Davis, in enacting the law, praised it as “one of the strongest domestic partner laws in the nation.” [Id., at Preamble]
States such as Maine and Minnesota have stopped short of fully recognizing domestic partnerships, but recognize the rights of a domestic partner, as defined by statute, to participate in medical decisions.
These developments require lenders to be fully aware of their state’s domestic partnership laws, and how they affect property rights. In every state, unmarried individuals are permitted to purchase property together. But, in states such as California and the District of Columbia that have domestic partnership laws granting property rights to domestic partners, those domestic partners must sign any mortgage or deed of trust in order for it to be valid and binding.
Certain questions still exist as to what effect a registered domestic partnership will have in foreign states. For example, what would happen if an individual purchased a house in the District of Columbia without the consent of his/her registered domestic partner, they both moved to Michigan, then the buyer defaulted on the loan? Would Michigan apply District of Columbia law with regard to the validity of the mortgage and deed of trust? Or would Michigan apply its own law? This could make the difference between whether or not the lender could foreclose on the property.
In that situation, the lender would likely have recourse against the individual borrower—regardless of which law was applied. But the lender could very well lose its secured interest in the home, rendering the debt virtually uncollectible. This could have enormous repercussions for lenders across the country.
As the area of domestic partnership law continues to evolve, these questions will be answered. For now, however, it is important for lenders to be aware of the potential dangers of lending to an individual without the consent of his/her registered domestic partner. In states where domestic partnerships are registered, lenders must ensure that both domestic partners have consented to a mortgage or deed of trust. In California and Vermont, we provide the VMP-964VT ( Vermont) and VMP-964CA ( California) Addendum to Loan Application for domestic partnerships. The VMP-21NCA also contains some language required for domestic partnerships. We will offer any additional state-specific forms as required. In the meantime, Wolters Kluwer Financial Services will continue to monitor these developments to help keep you informed and compliant.
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