What Is a Termination Statement?

A termination statement is a legal document signed by a lending institution. The purpose of the document is to confirm that a loan, previously extended by that lender, has since been repaid by the borrower.

For example, mortgage lenders are required to provide termination statements once the balance of the mortgage has been paid off by the homeowner. Obtaining this statement is important because it allows the homeowner to prove that they now own their home free and clear.

Key Takeaways

  • A termination statement is a document issued by a lending institution, which establishes that a particular secured loan has been fully repaid.
  • They are commonly used in association with home mortgages, once the mortgage has been paid off.
  • Termination statements are important legal documents because they allow the owner of the asset to prove that it is not encumbered by any claims from third parties. However, its importance also makes termination statements targets for fraud through counterfeiting.

Understanding Termination Statements

Typically, in order to obtain a secured loan, borrowers must first prove that the property they plan to use as collateral is free and clear of any liens, judgments, or other claims by third parties. When a loan is repaid, those claims must be removed from the property so that the borrower is free to reuse that property as collateral for future loans.

Termination statements are legal documents that are required to clear a borrower of any liens applied against their property. The statement is recorded in the public records office along with other documents, such as the property's title. Today, secured lenders are required to provide these termination statements under the rules of the Uniform Commercial Code. Although there is some delay in filing and processing the papers, termination statements are generally provided promptly once a loan has been repaid.

Secured vs. Unsecured Loans

Termination statements are only applicable to secured loans, which have specific assets pledged as collateral. For unsecured loans, such as credit cards or personal lines of credit, termination statements are not required.

Once a termination statement has been signed by the lender, that lender will no longer have any legal recourse to the assets that were previously held as collateral. Instead, if a new loan is approved involving those assets, a new loan agreement will need to be signed in which those assets are re-established as collateral for the loan.

Because of their significance, termination statements are targets for financial fraud. Unscrupulous borrowers might seek to counterfeit termination statements in order to fool a new lender into believing that a particular asset is held free and clear, and it is therefore eligible to be used as collateral. If the lender is not sufficiently thorough in researching the title and liens of the property, they may be fooled into approving the loan. In that scenario, the lender will effectively be underestimating the risk of their loan, since their risk-reward calculations will be relying on collateral that does not in fact exist. The borrower, meanwhile, would of course be exposing themselves to substantial legal and reputational risk by perpetrating fraud.

Real World Example of a Termination Statement

Michaela is a 50-year-old real estate investor who owns a portfolio of rental properties. Her first property was purchased 20 years ago using a 20-year mortgage. As such, she recently finished making her last mortgage payment.

In response to this final payment, Michaela's bank issued a termination statement confirming that the mortgage for that property is now officially paid off. Because of this, Michaela owns the house free and clear, meaning that it is no longer held as collateral. If Michaela wishes to sell the house or use it as collateral for a future loan, she can use this termination statement as proof of its unencumbered status.