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“Silent Seconds”

By Beau Brincefield
The NVAR Update
August 1994

The term “silent second” is normally used to describe a second or third trust note which is prepared and executed simultaneously with a first trust note but which is not shown on the settlement sheet and is not disclosed to the first trust lender. Although there is nothing wrong with creating second or third trust financing simultaneously with a first trust, when it is done without disclosing it to the first trust lender and reflecting it on the settlement sheet, it almost always constitutes a violation of both federal and state law.

Title 18, § 1001 and 1010 of the United States Code make it a federal crime to intentionally misrepresent or falsify any material fact, either orally or in writing, in connection with any federally related mortgage loan. A conviction for violating either one of these sections of the U.S. Code carries stiff penalties: fines of $2,000 to $5,000 plus two to five years in prison for each offense.

§ 18.2-203 of the Code of Virginia, 1950, as amended, makes it a violation of Virginia law to knowingly make any false statement to influence any action of any lending institution authorized to do business in Virginia. Violation of this section of the Virginia Code is a Class III misdemeanor.

In addition to these federal and state laws, the written closing instructions issued by almost all first trust lenders to the settlement agents closing their loans prohibit the creation of any subordinate financing which is not disclosed to, and approved by, the lender in writing before settlement.

Realtors® who recommend or cooperate in the creation of “silent seconds” may find themselves not only on the wrong end of a civil lawsuit but defendants in a criminal prosecution as well.

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